August 14, 2023
The best path forward for banks to modernize their card processing and expand payment choices for consumers.
The last few years have been among the most disruptive for the consumer credit card industry. After a long period of growth post-Great Recession, credit card issuers enjoyed a sustained period of consumer spending growth, stable interest rates and manageable credit risk. Dire warnings about credit quality during Covid never materialized and resulted in only short-term drops in spending.
Shopping habits and consumer preferences prompted by Covid mobility restrictions became permanent, including card payment features such as mobile contactless, card not present, buy now, pay later (BNPL) and recurring payments.
Yet these recent consumer digital payment trends have been challenging for many credit card issuers. A primary obstacle has been the technology that supports credit card operations, principally the card processing systems.
For many card issuers, these systems haven’t been able to keep pace with consumer demand for card features and capabilities, limiting what issuers can do to stay competitive. As a result, issuers should closely examine how their card payments are processed and whether they’re leveraging the best partners and technology to offer their current and future cardholders the most compelling payment solutions.
We look at some of the technology trends driving modern card processing and what consumer card issuers should consider when choosing technology.
First, we start with the current state of card processing and the challenges card issuers face.
Legacy banking systems are hard to replace and struggle to keep pace with consumer demand
For decades, the broad array of services surrounding core payments processing were table stakes for issuers. They didn’t provide any particular competitive advantage and were required to meet a set of baseline business needs – process transactions safely and securely, generate routine MIS/reports, and feed other systems of record or CRM databases in batch form. We certainly don’t mean to diminish the importance of core processing systems – the payments industry wouldn’t exist without them!
Yet all this changed with the need for advanced digital banking and real-time mobile payments services. As a result, during Covid lockdowns, issuers faced a daunting technology challenge for which many were caught unprepared.
Fortunately, their card processing partners and some fintech companies stepped in to fill some of the void, providing solutions that could be implemented relatively quickly. Perhaps more importantly, they typically integrated seamlessly with other processing and back-end systems. The solutions ensured issuers didn’t fall too far behind other industries or the leading fintech companies and competitors.
Even still, many legacy systems struggle to keep pace with consumer demand for more digital engagement, streamlined payment options and touchless transactions. Many issuers need to catch up on customer expectations across several areas, including virtual issuance, mobile integration, personalization and real-time offers. Many of these opportunities are limited by legacy core systems, which lack necessary functionality, such as:
Simple, scalable APIs
Integration with customer-facing platforms
Greater configurability, ideally self-serve
Short development lead times
Innovative platforms that foster new feature development
As anyone involved in a core technology project can attest, replacing these systems is challenging, not to mention costly. Understanding the elements that make it difficult can help better manage necessary change.
The simple reality of card processing systems is that they are sticky. They are extremely difficult to replace given long implementation timelines and even longer contract cycles, not to mention the potential disruption for customers. Much of this is expected given the age of many of these core systems – some were built on virtually obsolete programming languages or include components that are no longer supported.
Most banking executives see card processing systems as “fixed” technology assets, only to be changed if no other options exist. Issuers, therefore, rely on other systems and short-term patches to fix gaps in aging processing systems. As a result, layers of quick fixes pile up over time, making updates to related tech systems (such as loan origination, core banking and digital banking systems) even more challenging.
The result is tremendous inertia that has effectively stalled some parts of the consumer card industry.
Three technologies are bringing card processing forward
Fortunately, technological advances and innovative program management business models are opening the door for card issuers of all sizes. The confluence of these two trends provides a unique opportunity for consumer credit card issuers to transform the customer experience and day-to-day operations, leverage invaluable data assets, move money, work with their regulators, and even define their brands. We point to three primary technology changes bringing card processing forward.
Public cloud. The exponential growth of public cloud services over the past decade is no accident, though adoption in financial services has been mixed. Large issuers have mostly embraced public cloud, better known as Infrastructure-as-a-Service (IaaS). In fact, some have publicly announced with great fanfare their migration strategies and even pressured processing vendors to better leverage cloud services. However, some large issuers have been more tentative, while most smaller banks are at the beginning of their journeys, unsure of how or where to begin.
The benefits of IaaS include:
Quick and easy setup and minimal capital investment
Infinite and immediate scalability (up and down)
Cost-effectiveness (no infrastructure maintenance plus instant scalability)
Maximum uptime, reliability and flexibility
Stability, visibility into system performance, and zero risk failure (immediate disaster recovery)
Better cyber and physical security protocols
Of course, there are also some downsides to public cloud, including the inability of issuers of all sizes to find and pay developers and engineering talent. Other known challenges include the ability to accurately predict usage fees, vendors locked into one platform and a perceived loss of control over infrastructure technology.
Application Programming Interfaces (APIs). An API is a set of functions and procedures that allow systems to interface and communicate by facilitating data exchanges between different types of software. APIs can be automated, allowing for easier integrations and virtually real-time data transfers. Other technical benefits of APIs include:
Lighter developer workloads
Standardized and simplified procedures
Lower IT costs
Scalability
Flexibility
Ultimately, leveraging the power of APIs provides primarily easier digital transformation, leading to better customer experiences through personalization and real-time, relevant interactions.
APIs are sometimes seen as a solution for legacy systems. This is both a bane and a boon in credit card processing. They have, of course, helped prolong the life of legacy core card processing systems by enabling communication with other systems - though often with significant limitations that prevent issuers from leveraging the full potential of more modern platforms. But unfortunately, it has also enabled delays in much-needed core platform upgrades at the expense of the customer experience and employee satisfaction, given that card operations staff struggle daily with antiquated back-office systems requiring manual workarounds.
The new breed of processing solutions are cloud-native and built on API foundations that provide many benefits for card issuers, large and small. They enable much easier, faster integration with other critical systems, including core banking, digital banking, loan origination, and risk decisioning engines. Moreover, they provide a more convenient means of pulling data out of the card processing environment – greatly simplifying database managers’ ability to maintain the enterprise data lake. Transaction, fraud and other card performance data can be used to power better customer experiences.
Microservices development. Microservices is an architectural style that breaks up the development of large, complex software platforms into individual components called services. Microservices architecture has several technical and business advantages over monolithic development, such as:
Modules can be deployed independently
Promotion of code reuse for better, faster development
Solutions are easier to test and maintain
Development focused on business capabilities
Implemented by smaller, more agile dev teams
Stronger data security and compliance standards
Program language and technology agnostic
Easier to scale and evolve
These features have critical implications for processing environments built on this architecture. The platforms are simpler to develop and manage, which means generally lower costs for card issuers. They also provide a degree of solution configuration that is not easily available in legacy systems. Put another way, card issuers can choose which elements of the card processing platform best suit their needs rather than a complex one-size-fits-all solution that provides more functionality than is needed.
New processing solutions are built to integrate, scale, be configurable. As such, they are easier to set up and manage since the SaaS model means the bank’s IT teams do not have to manage the software code or the infrastructure.
Program management business models are also helping drive innovation in card programs
Issuers and cardholders demand near-perfect business operations from the core processor. Regulatory scrutiny is ever-increasing. Security requirements are even higher due to constant threats from hackers and fraudsters.
Card processing is also technically demanding. Managing thousands or millions of transactions per minute with sub-second latency requires vast computational power and sophisticated networking.
Yet managing a complex ecosystem spanning technology, business, legal/regulatory and operations requires a vast team of expert resources that is beyond the reach of many issuers. Fortunately, card program managers are stepping in to fill gaps. Program managers typically fill business, operational and technology voids such as product management, MIS/reporting, loan originations, customer support, and fraud/collections strategy. These incremental services enable card issuers to focus on their core business.
A number of program managers are leveraging the power of modern processing platforms to round out their value propositions. Specifically, they promise a speed-to-market and levels of configurability that were previously unknown in the market. The flexibility enabled by a combination of modern platform and new program management business models have the potential to drive tremendous innovation in retail and commercial card programs.
Only a decade ago, card issuers had two choices - work with an agent bank or a full-service card processor. Outsource everything or manage everything. Standardized card programs or fully customizable complexity. Razor-thin margins or high costs.
Now, card issuers can choose fully outsourced, fully insourced, or everything in between. A menu of options results in a solution customized for every issuer but at a price point and effort level within reach for everyone. The implications for the industry are profound as it provides even the smallest banks with affordable access to more capabilities.
To learn how issuers can choose the best migration path, read the full report.
