Are the days of credit cards numbered?

  • Cards are not 100% secure, but I would say they are a lot more secure than a smartphone at the moment. - Chang

  • Credit card customers will continue to increase as the economy grows and people want access to secure payment methods and related credit. - Fan

  • For the younger generation, the amalgamation of credit and debit cards with mobile applications brings even greater convenience of going cashless and possibly cardless. - Agrawal

  • What banks are trying to do is transform the concept of a credit card, from a plastic card into something people can easily carry on their phones. - Foong
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on August 1 - 7, 2016.

IN a busy wet market in China, a shopper picks up two packets of chillies, whips out her smartphone to scan the quick response (QR) code on them and walks away with the goods. She has already paid for them, without the hassle of looking for cash or a card to pay.

This is a common scene all over China. Transactions are made using this cashless/cardless mobile payment method — a market dominated by Alipay, an affiliate of Alibaba Group Holding Ltd, and Tenpay, owned by Tencent Holdings Ltd.

What’s more interesting is that, from the look of things, these companies are not going to stop at just being third-party mobile payment providers. If these companies start providing credit lines to customers, which could eat into banks’ credit card business, will credit cards still be relevant?

From a broader perspective, what will happen to the credit card industry when mobile payment systems become prevalent globally? Given how fast technology is advancing, it is only a matter of time before this happens. How will credit card players respond to this disruptor or have they already responded?

Soft Space Sdn Bhd founder and CEO Chang Chew Soon says while the mobile payment method is a success story in China, credit cards will continue to be relevant in Malaysia, mainly due to the behavioural patterns of consumers in the country. Soft Space, a homegrown financial technology (fintech) company, makes affordable EMVCo-certified card readers. It is currently working on an innovative mobile payment solution.

“The third-party mobile payment method did not only take off in China. It also took off in Africa and other countries in Asia. What these countries have in common is a high percentage of unbanked population — many people there do not have a bank account. But they have smartphones, and this is exactly where the providers have tapped into and have been successful,” says Chang.

Companies such as Tencent and Alibaba want to replicate their success in other countries, including in Malaysia, but have not been successful.

“Alipay and Tenpay have similar business models, which are very smart. While banks charge their customers for each money transfer, they do not charge consumers who transfer money via their applications. They utilise various sets of data captured from users and take profit from advertisements,” says Chang

“But when they come to countries like Malaysia, we have regulators such as Bank Negara Malaysia to safeguard our financial ecosystem. It is a completely different scenario in this country, where most people have at least one debit card before they apply for a credit card. As they are used to carrying cards, it will be more difficult for them to switch to a mobile payment method.”

Credit cards — and even debit cards — are not going away anytime soon, he adds, just as cash has not been replaced by cards. Consumers need to have a fallback plan because even in countries where the mobile payment method is huge, there might be merchants who still only accept cash or cards.

Chang says credit card companies such as Visa and MasterCard provide consumers with a sense of security. But they are also tech companies coming up with secure and innovative payment solutions. For example, the “selfie pay” technology introduced by MasterCard requires customers to take a photo of themselves for authentication before they make payments.

“Cards are not 100% secure, but I would say they are a lot more secure than a smartphone at the moment. Organisations such as EMVCo, which facilitates worldwide interoperability and acceptance of secure payment transactions, is safeguarding the card payment industry,” says Chang.

“EMVCo continually comes out with new specifications to enhance security. I think we have to go through a card evolution before we can move to the next stage, which could be a human-implanted chip for payment, if you want to be imaginative about it.”


Banks respond to digital revolution

Banks that have a strong credit card business see the cards evolving from a physical card to a virtual one. But they do not anticipate these cards becoming irrelevant anytime soon. Banks are also responding to the fintech disruption and challenges.

Maybank Group chief strategy officer Michael Foong, for one, opines that credit cards and mobile payment methods are complementary. A credit card, he says, allows people to do things such as obtaining a credit line, and what banks are trying to do is transform the concept of a credit card, from a plastic card into something people can easily carry on their phones.

Maybank has risen to the challenge. On July 21, it launched MaybankPay — the nation’s first mobile wallet. It allows customers to use their smartphones to make payments, which will then be charged to their Visa cards, without having to carry the physical card. Foong says this is one of the bank’s strategies to strengthen its digital offering.

With fintech companies coming into the picture, he points out that Maybank has two advantages — a base of customers who have strong affinity with the brand and a host of functionalities as well as products that offer a bundling effect.

“I think the other thing about the mobile wallet is to store cash in the wallet, for example, so people can transfer money from bank accounts to their wallet via the phone and start to transact. We are looking into offering this kind of service as well,” says Foong.

On whether the bank’s profit is shrinking due to the emergence of fintech start-ups, he notes that a certain and limited part of the business may be “at risk”, but says most of the fintech start-ups are partnering banks as opposed to competing head on with them.

Ravintharan Balakrishnan, head of cards at Maybank’s Community Financial Services, says the bank has slightly more than one million credit card customers, with 1.8 million credit cards issued. In terms of credit card terminals, it has 75,000 in the market. And 5,000 of them are equipped with near-field communication, which can be used for the newly launched MaybankPay.

In the first half of the year, Maybank saw 14% credit card base growth while the number of credit card applications has been consistent for the past three years.

“We plan to enlarge our credit card customer base by having more partnerships with various key merchants to create value and offering more innovative products to attract customers,” says Ravintharan.

Elaine Fan, consumer business manager at Citibank Bhd, says credit cards will continue to be a relevant payment system in Malaysia and globally. “Credit card customers will continue to increase as the economy grows and people want access to secure payment methods and related credit. Hence, we will focus on simplifying and strengthening our credit card value propositions.”

However, Fan recognises that the use of credit cards is changing fast as mobile wallets open up greater opportunities for smart marketing and card utilisation. Citibank is embracing the digital revolution in the banking industry by transforming its cards business in Malaysia and across Asia to deliver a better client experience and improved value propositions and rewards programmes.

“Citibank has introduced mobile wallets, such as Samsung Pay, in a few markets in Asia and will continue to roll this out. Touch ID on mobile devices is also being piloted for Citibank’s customers to enjoy the convenience of providing authentication via fingerprint recognition for high-security functions,” says Fan.

In addition, the bank is working with fintech companies and using some of their applications with its mobile offerings to further improve its value proposition to card holders. “We are incorporating some fintech applications into our mobile banking platform applications. A recent one is EZTable in Taiwan that allows us to integrate Citibank’s bespoke dining offers and privileges, and enables reservations and payments for exclusive restaurant promotions,” says Fan.

Earlier this year, Citibank went live with the much anticipated straight-through cards on-boarding experience in Malaysia, which enables customers to receive an instant in-principal approval and indicative credit line on cards and ready-credit products. “As mobility continues to be a key trend, we have plans to roll out a pipeline of enhanced features that will transform the way consumers bank with us through the mobile channel,” she says.

Fan stresses that Citibank is the critical backbone in the entire e-commerce ecosystem and this includes mobile commerce, e-commerce via mobile phones, mobile wallets and mobile payment platforms.

Vipin Agrawal, CIMB Group’s regional head of cards, retail assets and deposits, says the credit card is still relevant as it provides credit lines that allow customers to settle their payments at a later date. However, the change is that it will be used in a more digital or mobile form in the future.

He says the digital wallet has a different meaning for different people. There are not many success stories for the digital “cash” wallet around the globe. The most commonly talked about is the “non-cash” wallet such as Apple Pay and Samsung Pay.

“For the younger generation, the amalgamation of credit and debit cards with mobile applications brings even greater convenience of going cashless and possibly cardless. Such solutions typically use credit or debit cards as a source of funds, therefore, we think both [mobile payment solutions and cards] will grow together,” he adds.

Nevertheless, in recent years, although the industry’s total credit card billing continues to grow, there has been a moderation in growth rates, partly due to the faster growth of debit cards. Agrawal says this trend may continue in the future.

CIMB is already working on digital or mobile payment solutions; in some cases, in partnership with fintech companies. The bank is mindful of the potential threat of fintech companies, but it is also excited about the potential opportunities of more innovative offerings and solutions that could be created, says Agrawal.

“By identifying suitable fintech partners, we seek to ensure a seamless integration with the business segments where their expertise can generate the most value for our customers, be it in terms of cost savings or innovative/enhanced products. There will be instances where internal restructuring or realignment is necessary to facilitate the integration without vastly affecting our existing operations. The end goal is to achieve operational efficiency, maintain customer data security and enhance customer experience, with minimal disruption to customers.”

With the credit card evolving from a physical to a virtual one, and with the mobile payment method going strong, what does the banking regulator say?


Bank Negara’s view

In an email response to Personal Wealth, Bank Negara Malaysia says it is positive on mobile payment transactions and expects the growth to continue with further advancements in mobile technology and greater consumer awareness as well as confidence.

“Some banks have enhanced their security features such as biometric authentication and introduced new value-added features, including the ability to make fund transfers by entering the recipient’s mobile phone number, email address or Facebook ID,” it says.

For the past three years, subscriptions to mobile banking services have had a strong growth of about 45.6% per year, according to the central bank. The number of subscribers increased more than threefold to 7.3 million in 2015 from 2.4 million subscribers in 2012, of which 1.6 million are active users who make transactions at least once a month.

Meanwhile, the number of mobile banking financial transactions has grown stronger at about 60% per year over the past three years. The volume and value of these transactions have increased more than four times to 31.6 million transactions valued at RM20.6 billion in 2015 from 7.1 million transactions valued at RM4.2 billion in 2013. Mobile payment services offered by non-banking players such as telecommunications companies saw 0.3 million transactions worth RM23.7 million in 2015.

“To promote greater efficiency and innovation in the payment landscape, a key focus for Bank Negara is to foster greater collaboration between the banks and non-banks — which include telecommunications and fintech companies — to drive infrastructure development, network expansion and enhanced customer experience,” says the central bank.

Bank Negara says it recently transformed the National Payments Advisory Council — a strategy setting, industry coordination and collaboration body — to be more effective and inclusive. The council, chaired by the central bank governor, now comprises representatives from both the supply (providers of payment services) and demand (users of payment services) sides of the payment market to serve as an important platform to drive industry collaboration and enhance the country’s payments landscape.

The mobile payment industry is regulated under the Financial Services Act 2013 and the Islamic Financial Services Act 2013, under which providers of mobile banking and payment services are subject to various regulatory requirements, including in the areas of risk management, security and consumer protection.

A dipstick survey on how many credit cards Malaysians hold was conducted and the results spell relief for the banks. Of the 20 respondents within the 25 to 35 age group, eight said they had more than two credit cards while six said they only had one. The other six respondents said they do not have a credit card at the moment, but half of them said they are planning to apply for one within three months.

From the look of things, credit cards may be around for some time. But perhaps not in their current physical form as the industry transitions to virtual cards.