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Premiumisation of Credit Cards and Consumer Payments Becoming a Necessity

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The influence of premiumisation will continue to expand. Harnessing this demand is crucial for financial service providers; however, as consumers grow to expect premium features, it becomes harder for providers to separate themselves from the pack. Resources which rate and review card offerings are growing, and are accelerating competition within the space. Consumers increasingly have access to in-depth guides detailing not only the best credit cards, but also how to best utilise the various features and offers. This sheds light on both the strengths and shortcomings of the market offerings.  Compounding this issue is growing commoditisation of certain reward types.

Features such as insurance coverage, lounge access and price matching have become standard (often underwritten by a global card operator depending on the card prestige level). Personalisation and tailored experiences offer one avenue for card issuers and operators to reach their target consumers. One important question which should enter the discussion when revamping or bringing a card to market is if fewer, targeted rewards might make a card more attractive to consumers than a bevy of unused offerings.  Card issuers cannot afford to take a generic approach with cardholders. Premiumisation is perception-based, and it is crucial to study the types of features that are most valued by various consumer demographics, both within a market and across geographies.

Credit cards: Gateway to experience and savings

Credit cards stand out as the quintessential example of payment premiumisation.  Loyalty programmes and ancillary benefits exist in debit and pre-paid cards, but credit cards are typically among the most profitable products offered by an issuer, due to their potential combination of higher interchange, annual fees and interest revenue, making them a natural vehicle for higher value benefits.  Payment cards themselves can also be an example of tailored options, whether this is through attractive design, allowing consumers to customise their card, or in the growing trend toward issuing metal cards.

The market is evolving from a simple percentage cashback to a litany of points, rotating category, tiered reward and multiplier cards, with significant variation from one market to the next. Savvy consumers look to maximise the value of these schemes, and many are not easily satisfied with a simple 1:1 cashback model.  Issuers must walk a fine line in remaining competitive without leaving themselves open to losses from overly generous schemes. The complexities of building a successful reward programme often necessitate a dedicated team or a partnership with a third party programme designer.

It is very common for co-branded credit cards to feature significant premium benefits that are highly attractive to consumers who travel frequently. These experiences, such as lounge access, parking and check-in privileges, also capture an element of a second megatrend recently identified by Euromonitor International: “Experience More.”  As such features become more common, they begin to lose their marginal value over competitors with similar offerings. New points of differentiation become important in order to stand out from the competition and maintain relevance.

The flagship tier: Sustainable new frontier or impending bubble?

Tiering practices in the credit card industry have led to a growing number of flagship premium plus credit cards that offer a substantial number of rewards at a relatively steep annual fee (frequently USD400-550). This phenomenon is particularly apparent in the US, as issuers devise top-flight programmes that push the boundaries of rewards and benefits.  Chase Sapphire Reserve (CSR), launched by Chase Bank in 2016, helped to touch off a flagship battle. Despite a USD450 annual fee, the card was an immediate hit due to an exceptionally generous sign-up bonus worth in excess of USD1,000, and a comprehensive suite of features and benefits backed in part by Visa’s premium Infinite card platform. The card was so popular that the company quickly exhausted its metal supplies necessary to produce the card. The card was also heavily lauded by reviewing sites and blogs, which focused on its travel benefits and lucrative points structure.

The value proposition of the CSR has made it a premiere payment method. The launch of the CSR accelerated an arms race in premium credit cards in the US that mirrors the longstanding completion between smartphone manufacturers. The new card pushed the company into direct competition with American Express’s Platinum charge card, which responded with adjustments to its rewards programme. US Bank soon entered the ultra premium cards space, followed by UBS.  

The emergence of a well defined premium plus tier has transformed the face of premiumisation in the market, but may be approaching an unsustainable peak. Chase slashed its sign-up bonus in half after less than a year. Beleaguered retailers, meanwhile, already fighting margin compression from internet retailing are pushing back against higher interchange fees, seeking fee limits or surcharging privileges that could eventually undercut the funding necessary to sustain high-end rewards programmes.

Looking forward: Impact of premiumisation on payments

Premium features are typically funded with interchange fees. Efforts to cap interchange fees can thus significantly hinder the availability of premium features. Markets, such as the EU, have seen many premium features curtailed as a result of recent interchange fee caps.As loyalty and rewards programmes grow, the penalty for failing to keep pace becomes more acute, as consumers acclimatise to a certain baseline level of features and offerings.Payments are not immune to the smartphone revolution. Well-functioning banking apps are now a prerequisite not only of the premium experience but also a standard expectation.

Customer interaction is also critical. Cutting through phone trees is a valuable feature. Discover (US issuer) emphasises live customer support. Other cards offer dedicated lines for premium customers. Card networks are well positioned to support issuers as they jockey for market share. Issuers are not required to approach rewards and premiumisation from scratch.  APIs and tech advancements help to improve the customer experience, while offering faster integration of new features.  

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