Over the last years, the issuing processing market welcomed several new players that brought a new reality to card issuing and processing. Traditionally, this market has been dominated by a number of large organisations focused on processing large portfolios of cards for the traditional banks. As the migration of a card portfolio from one processor to another was a long, complex and costly process, most processing contracts were long-term and extended multiple times. Also, most of the banks were not focused on card payments and therefore not interested in new card products and innovations. For them, cost control and reliability of service were key. The result is that traditional processors today are complex organisations with costly IT departments, business operations and cardholder support teams.
With the rise of fintechs and digital banks, new business requirements were identified. Flexibility became key, digital self-service a must, and time to market became weeks instead of months. The new issuing processors responded to these market demands with shorter customer onboarding cycles, a large set of APIs for card controls and cardholder management. Overall, issuing processers have made an evolution from static operations to a dynamic business partner.
WHAT IS THE MINIMAL OFFERING?
So, what is needed to be competitive in this market? First of all, the way issuing processors are organised shifted over time. Fintechs and digital banks stepped away from complex processes and heavyweight compliance and governance processes. These are replaced by agile organisations for defining, building and operating their offerings. The modern issuer processor runs its organisation in the same way, starting with a fully automated cloud infrastructure to support the automated cloud operating model, through agile design teams, to automated DevOps pipelines to deploy the working, tested code into production.
The modern issuing platform still contains the basic modules, like authorisation, fraud detection and a card management system, but more and more components and services are being offered. To avoid long integration cycles, the modern issuer processor provides sandboxes and developer portals with an extensive set of APIs over an API integration layer that allows the card issuers to do an easy and rapid integration. This Build Your Own Card (BYOC) strategy supports the digital-first strategy and provides API services for cardholder onboarding, card controls, cardholder self-servicing, etc. It also allows issuers to build card programmes tailored to a specific consumer segment.
The digital players in the market even step away from manual dispute management processes and instead rely on chatbots to guide the cardholder through the data capturing process. Also, integrations with core banking systems are becoming easier as issuing processors and core banking vendors cooperate to offer standardised connectors via their partner ecosystems.
In this digital economy, the most sophisticated and fast risk scoring and management tools are required. This does not only mean real-time fraud scoring using AI techniques but also 3-D Secure (3DS) with Strong Customer Authentication (SCA) and getting more data from other sources, like merchants and acquirers, to make a better-informed decision for transaction authorisation. Additionally, organisations will make use of real-time notifications and geolocation data, not only for risk management but also as a business tool to provide additional services.
Card issuers and programme managers are not only looking to financial data but want to manage their business based on the data generated during transactions. Therefore, a data management layer has to be available where the business department may monitor the profitability of the offered card products, business operations can support their cardholders based on detailed and accurate data, and the compliance department can prepare regulatory reporting and generally monitor cardholder behaviour.
Card issuers expect to have the choice between issuing physical, virtual and tokenised cards. At the entry level, they will usually start with a virtual card, potentially tokenised in digital wallets like Apple Pay, Google Pay and other X-Pays. Once the cardholder shows loyalty and regularly uses the card, the card issuer can decide to issue and deliver a physical card.
On top of the services described above, the new card issuer can offer additional services based on their vision or target markets. For example, one of the new issuer processors offers a carbon footprint calculator based on the purchases done by the cardholder.
CARDS IN EMBEDDED FINANCE
The next big thing for issuer processors is to support embedded finance/payments. This means that other, non-financial services players can start issuing cards as part of their pay-out strategies. Issuance of virtual cards is in most cases the quickest way of pay-out, supports spending controls and is part of a digitalisation strategy.
The BYOC concepts support the development of new business cases that are mainly build around digital cards issued for specific applications:
- Issuance of cards for lenders that provide small business lending, together with the necessary APIs that support the risk analysis based on spending behaviour.
- Expense management companies and solutions issue their own card products to enable a better experience for their customers who use the software to track, manage and report on company and employee spendings.
- Travel agencies issue one-time-use virtual cards for enterprise T&E (travel and entertainment) expenses like hotels and transportation. It reduces the risk of fraud and human errors, and the companies also do not need to prefund prepaid cards or issue physical credit cards.
- Insurance companies issue virtual cards to pay claims directly without manual overhead and in a digital way. At the same time, controls can be set on spending behaviour so that the pay-out is used to resolve the claims.
- Marketplaces issue cards to facilitate rapid pay-out to sellers.
In the years to come, many other embedded finance/payment business cases will be developed where the issuing or processing of virtual and/or physical cards is required.
WHAT’S NEXT?
Besides the embedded finance/payments business cases, it will be interesting to see what the next steps of the traditional banks are. Do they want to be part of the new financial services reality? Do they see the agility, performance and potential commercial success of these new card programmes? In any case, they will push their traditional processors to change at least their business model, or they will move to the newcomers on the market so that they can take part once the business is ready to offer such products. For the traditional processors, this means extensive transformation in business, IT and operations. On the other hand, the new issuer processors need to get their organisations ready to support the traditional banks.
Interesting times are ahead, and we will see who will be the leaders in this area and who the followers. Card issuing is no longer a boring and static activity – it has become one of the cornerstones of a successful fintech strategy.