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Andrew Davidson 
Susan Menke 
Susan Wolfe 
Lisa Hronek Credit Cards
The All-purpose Credit Card
Now that my bank has eliminated its debit card rewards program my debit card is really just an ATM card. It serves no other purpose. Like millions of consumers, I use rewards credit cards for my spending, but I still have to carry a debit card in case I am forced to use cash. The time has come for an all-purpose credit card where I can get cash from an ATM at little or no additional cost. Then I can choose to leave my debit card at home and manage my spending on a single payments platform.
Debit card rewards are difficult to find these days. Many banks have been forced to eliminate rewards programs after debit card interchange revenue was slashed by the Durbin Amendment in 2011. At the same time credit card rewards have become easier to find (rewards cards accounted for 74% of acquisition offers in Q2 2012 according to Mintel Comperemedia). Some credit card issuers have even been promoting the benefits of credit over debit by touting not only the rewards but the additional security and the flexibility of being able to pay over time. The result is that debit is becoming redundant for heavy credit card users.
Even though debit functionality is becoming less useful, consumers still need to get access to cash and, currently, credit cards are not the answer. I would never consider using my credit card to make a cash withdrawal from an ATM. Aside from the ATM fees, most issuers charge a minimum cash advance fee of $10 per transaction (up from $5 pre-CARD Act) accompanied by a prohibitively high APR and, most importantly, no interest-free grace period. It would be crazy me for me to withdraw money this way when I can do it for free using my debit card. As such, cash advances are typically used by consumers in desperate circumstances with an urgent need to access cash.
In 2011, Fifth Third launched its DUO Card that potentially solves the problem. DUO is a hybrid card that operates as both a debit card and a credit card. Cardholders swipe their card, press “debit” and enter their PIN for a debit transaction or they swipe, press “credit” and sign for a credit transaction. Cardholders can access cash from an ATM using the same piece of plastic. DUO is a wonderfully innovative product but the debit component means that it is restricted to Fifth Third banking customers.
Technology also potentially solves the problem. ATM manufacturer, NCR, can now facilitate card-less cash withdrawals with new software that enables consumers to access ATMs with their smartphones. Consumers need to enter a PIN number and a dollar amount into their smartphones and then scan a QR code at the ATM to make the transaction. This is another wonderful innovation but, assuming a debit transaction, it doesn’t consolidate my spending on a single payments platform.
If credit card issuers were to change their cash advance fee structure for ATM withdrawals then the problem would be solved. Remove the cash advance fee, add a grace period and waive the ATM fee (for consumers with a banking relationship) and you have a product that allows consumers to leave their debit cards at home and manage their spending on one card. If targeted to the right segment there would be little or no lost revenue – I have never used my credit card to withdraw cash – but there would be increased loyalty. It would also streamline the industry and pave the way for the anticipated adoption of mobile payments.
Millions of consumers still prefer to use debit cards so an all-purpose credit card would not be for everyone. But there are consumers who will value the additional convenience of being able to carry just one card without having to switch to a hybrid.
Make Way for the Smart Chip
The U.S. payments industry is probably the most advanced on the planet when you consider the size of the market, card penetration, the extent of innovation and many other factors. Yet, one development where the U.S. has been seemingly lagging is in the technology required to authenticate credit and debit card transactions. In an effort to reduce card fraud, more than 50 countries have now migrated to EMV enabled cards (named after the developers Europay, MasterCard and Visa) incorporating smart chip technology. In comparison, the U.S. payments industry still relies on the magnetic stripe, invented by IBM back in 1960, to authenticate payments.
The reality is that EMV didn’t catch on in the U.S. because there wasn’t the same need to address fraud as there was in other countries. Factor in the huge cost of changing card terminals at millions of merchants and there has been little justification to make the switch. However, recently, both Visa and MasterCard have outlined their plans to implement EMV enabled terminals by April, 2013. The initiative is being motivated by a desire to usher in the age of mobile payments by equipping merchants with terminals that can accommodate both EMV and NFC (Near Field Communications). NFC facilitates payment at the point-of-sale with a smartphone and is the platform used by two of the leading innovators in mobile payments – Google Wallet and Isis.
One of the first countries to adopt EMV was the United Kingdom – my homeland – which embraced a system branded as “Chip and PIN” back in 2004. As a frequent visitor to the U.K., I have experienced firsthand the blank stares of waiters and sales assistants as I have handed over my U.S. credit card and explained that “I need to swipe” backed up with “I don’t have a PIN” (the machines that accept chip cards can also accept a mag stripe). Usually we get through it, eventually, although occasionally a similarly bemused manager has to be called and the additional delay and uncertainty can be frustrating. The issue will only get worse for travelers given that, in just 4 years, anyone in the U.K. below the age of 30 is unlikely to have any concept of signing a credit card receipt unless they have been specifically trained in how to handle visitors from America.
Recently there has been some movement toward EMV here in the U.S. specifically for cards targeted at international travelers. A handful of issuers now offer EMV enabled cards including Chase and U.S. Bank. As an existing Chase British Airways Visa Signature cardholder I recently received my replacement card with “smart chip technology.” A customer communication followed, encouraging me to “shop like a local everywhere” and explaining that the chip will “avoid inconveniences at the point of purchase when traveling abroad.” To add a little urgency to the situation the communication provided an interesting fact posed as a question: “Did you know that chip cards are required at unattended kiosks on the London Underground?” Next to this question a phone number was provided in case I wanted them to “rush” one to me “for no additional charge.”
U.S. Bank has been communicating to its FlexPerks Travel Rewards Visa Signature cardholders promoting the card as “one of the first ‘smart cards’ in the U.S. that features a traditional magnetic stripe and EMV technology.” The communication highlighted the fact that Forbes recently named the card to its list of “10 Financial Innovations That Make Your Life Easier in 2012” siting “smarter travel-friendly spending.” (Source: Comperemedia)
U.S. card issuers can learn from the experience of their neighbors north of the border when it comes to EMV cardholder communications. Canada began migrating to EMV in 2008 and there is still work to do. Canadian banks continue to educate their customers through statement inserts and other cardholder communications suggesting that it is an on-going effort. RBC mailed customers in May setting expectations that “for several years to come you will experience two types of transactions” and to reassure them that transactions are “just as secure as ever.” The bank also provided a step-by-step guide to using the card. (Source: Comperemedia)
It seems that cards with smart chips are finally on their way to the U.S. International travelers will understand the benefits, but the bulk of consumers will need to be convinced through on-going communication. The U.S. payments industry is gearing up to accommodate multiple transaction methods as it begins the migration towards mobile payments.
A Smarter Credit Card Coming to Your Wallet Soon?
In a few months, a new and innovative credit card will likely be tested in the United Kingdom. This “smarter” credit card will allow customers to manage all of their accounts via one card, including personal and business credit accounts, as well as bank accounts. The card is the same size as a regular credit card, but it has buttons and a screen allowing customers to choose the credit account to charge against. Once the customer has selected the account, the process for charging is exactly the same. Dynamics Inc. manufactures the cards, which contain a miniature, flexible circuit board, a battery that lasts up to three years, and a programmable magnetic stripe – very much like a miniature computer. The technology from Dynamics is currently being utilized and tested by Citibank in the United States, but Dynamics appears to be in advanced talks with other United Kingdom banks regarding trials with this technology.
Dynamics currently manufactures several different innovative types of credit cards, such as a hidden card, a multi-account card, and a dynamic card. The hidden card hides account number information until the cardholders enters a PIN to reveal the full information necessary to complete a transaction. The multi-account card is fairly straight forward in that there are two accounts on the card and the user selects which account to utilize. In addition, the dynamic card helps to prevent fraud by automatically writing a new and unique security code onto its magnetic strip for every purchase, which could cause a problem for stored purchasing options, such as iTunes or a re-occurring Netflix subscription.
The company also manufactures a redemption card that allows the user to use points or credit at the point of sale by pressing the respective button. Comperemedia observed this card back in September 2011 from Citibank, called the Citi ThankYou Preferred 2G Card with Request Rewards (Media ID: 20110920-01191). Citibank employees started testing this card back in May 2011.
One of the most interesting things regarding all of the cards is that they all can utilize the existing magnetic strip technology and infrastructure already in use in the United States. Thus, merchants would not have to upgrade or change point-of-sale machines, as they would have to do so if chip and PIN technology or EMV (Euro MC/Visa) were implemented. However, Dynamics has developed versions of the card that utilize chip and PIN technology if we ever switch to this technology in the United States.
I have not seen any of these credit cards yet and there might be some kinks to work out prior to widespread usage, such as re-occurring purchases. However, anything that increases convenience and security is a plus in my book. The multi-card is an interesting product in that it would eliminate cards (and clutter) within my wallet. Likewise, it would be interesting to see if you could put accounts from different financial institutions on the same card – that would be cool. But let’s see how the trials go first in the UK.