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The Year of Living Digitally – Transformation, IDs and Credit Trends for 2018 – by Kris Carrera
January 18, 2018
Kris Carrera, Business Line Executive, Credit
2017 showed us that the drive to omnichannel is far more than just hype. In fact, despite widespread geopolitical and financial uncertainty, mobile devices helped connect many consumers to strong economies and active movement of money, whether banking, saving, shopping or investing.
As we look ahead at the new year, it’s a good bet that we will see much of the same. All forms of transactions are accelerating as Gen Xers and baby boomers join millennials in using smartphones for banking and payments and the demand for instant gratification continues to drive faster payments around the globe.
Here’s a look at a few of the most relevant trends we can expect to see in 2018.
The promise of making payments “anytime, anyplace, anywhere” has long been touted as the end-game, and now consumers expect it. However, most bank infrastructure remains a complex array of legacy systems that cannot match such service levels. While middleware solutions and payment hubs can insulate the more lethargic back-office environments, banks will ultimately have to commit to a fully digital future in 2018.
The digital transformation of any financial institution, both in their supporting core systems as well as their automation of internal processes, is not simply a project for each line of business. Rather, it must be a complete change in the mindset. Many institutions have made significant progress toward the fully-digital world, but 2018 is likely to see this process accelerate as larger percentages of IT budgets are allocated to wholesale upgrades that feed an always-on banking environment. While larger financial institutions will continue their strategy of launching digital-only, subsidiary banks to jumpstart their online- and mobile-only business models, many other banks will partner with FinTech companies as they seek to gain the technological know-how needed to grow business.
Tokenized Identity for Anonymity
The long-term promise of true digital identities is now reaching critical mass as consumers finally accept the improved assurances offered. While useful for client onboarding and KYC requirements, stronger identity is applicable across many areas and product portfolios throughout the value chain. Managing digital identity is pivotal for financial services as banks need to be assured of a customer’s identity in real-time, while also minimizing friction in a transaction. Static authenticators, such as passwords, are vulnerable to fraud and are being replaced by more dynamic factors that better represent an individual’s digital identity and transactional behavior. Most interestingly, in 2018 it will become possible to establish a customers’ identity with near certainty while protecting their anonymity and ensuring their personal data is less exposed to data breaches. All this can be achieved without the need for time-consuming and intrusive manual reviews of numerous official documents.
The response is to build a digital identity that is dynamically linked to the customer’s digital life. Various technologies are making this a reality by leveraging the vast amount of data connected to customers’ transactional history, their device use and their online behavior. It works because such a combination of static elements is nearly impossible to fake.
However, building detailed profiles of each consumer can raise concerns about privacy and data protection. Fortunately, the elements constituting the digital identity can be tokenized, replacing personal data with randomized strings of characters that are meaningless to fraudsters. This way, it becomes possible to authenticate a person with high accuracy without knowing their true identity. Dynamic digital identities are highly reliable, and their use will become ubiquitous in securing transactions in the financial services and digital commerce businesses.
Rebirth of Credit and Loyalty
In the 10 years since the credit-led crash of 2007, when bad debt write-offs surged and portfolio growth came to a halt, the U.S. credit market has recently started to show strong signs of recovery; by the end of 2017, revolving debt exceeded the pre-recession peak of more than $1 trillion. The number of accounts is on the rise and issuers are getting back into the market with strong and appealing offers intended to kickstart growth. Overall, retail credit products are trending upwards with growth in personal and consolidation loans, credit card issuance and installment loans. However, there are signs of increasing risk with delinquency slowly rising.
In 2018, many issuers will continue to increase the loan loss reserves the banks accumulate to offset the bad debt expense associated with nonpayment. To drive customer acquisition in a competitive market, issuers have been offering a combination of large sign-up bonus points and/or rewards, waiving the first annual fee, and/or zero percent APR, and the marketing strategy appears to be working. However, while these offers certainly promote card usage in the short term, there could be long-term retention risk with these new customers, who may simply be gaming the schemes before switching. Therefore, leveraging a strong card rewards program to maintain cardholder retention will be critical in 2018.
As contactless wallet transactions continue to grow, consumers’ expectations of real-time redemptions will too. Therefore, having an integrated loyalty/rewards payment option will be critical to success. The ability for a consumer to convert loyalty or rewards currency and then redeem in real-time at the POS will address some of the process friction for the customer, and increase the potential for the merchant to see higher transaction volume and/or increased spending.
Boomtime in 2018
A recent U.S. Federal Reserve survey reported that card usage across the United States is growing. Credit card usage was cited as the biggest driver (transaction values growing by seven percent) as people spent more on credit cards more frequently, but debit usage is rising too as consumers gain confidence. However, the prepaid market looks relatively stagnant. Most interestingly, it is digital payments that is propelling growth in both the credit and debit market. Remote payments, where consumers enter their card details into a website or mobile app, grew at 15.6 percent, while in-store payments increased just 5.7 percent.
The credit card boom is certainly not over, in fact, card usage is higher than ever. Consequently, players must continue to work to capitalize on the momentum by giving customers reasons to spend on credit and make their cards top-of-wallet. Leading the charge and compelling reward offerings, which have resurfaced over the past two years, will remain the major ways that card players differentiate and remain relevant.