Do we need credit card rewards?

This topic may resonate more with North American readers than with Europeans, the latter being not quite so obsessed with credit card rewards. I came across an article in Forbes by Alan McIntyre on this topic, which made me pause to think about the future of cards and rewards, and whether this rather old-fashioned system will survive in a more fintech-led financial system.

For some time Americans have been receiving bonuses for spending on their cards. They have come to expect these ‘gifts’. Of course all this comes at a cost to the credit card companies. According to new research from Accenture, rewards spending by the top five credit card issuers grew to $31 billion in 2018, up from $11 billion in 2015.

McIntyre suggests that the cash-back Apple card might be “the peak of card rewards” and that this entire system is on its way out. As he also mentions, card companies are having to figure out how to deal “with a less attractive volume-value trade-off.”

At the moment the payments industry is still on the winning side with the trade-off, as its revenue has grown by $50 over the last three years. It’s worth somewhere around $300 billion and it is expected to grow 4% by 2025.

However, the American payments industry is lagging a bit behind the rest of the world in this respect. In Europe and Asia, the consumer payments sector is moving to “high-volume, low-margin payments,” and “many of those are moving over account-to-account payment rails rather than over the card networks.” Here’s why it’s changing. In Asia, for example, it costs a merchant only 0.5% on average to accept an Alipay payment, while credit card payments in the U.S. can still be over 2% for many merchants.

The pressure on the North American payments industry to shift over to this model will come from the merchants. The consumer is less likely to change, because they love getting those rewards when they spend with their card. But that significant percentage difference in cost to the merchant is a big deal.

McIntyre says that recent research shows, “We are already seeing merchants begin to favoor debit over credit as a lower-cost payment mechanism, and favouring their own loyalty schemes rather than relying on those run by the card-issuing banks.”

And he says there are two other factors that will end rewards: “The first is the belated development of real-time payments in the U.S. and the opportunity it provides for merchants to have lower-cost payments that will be even cheaper than debit transactions.”

The second major driver of change will be “the continued internalization of payments by major retailers to avoid having to pay merchant acceptance fees at all.” Starbucks, Walmart, Uber and Amazon are the frontrunners in this system.

It seems unlikely to me, thinking over all this, that the old North American credit card rewards model will last for much longer. But I do think that whilst the merchants may be the driving force of this change, there will also be a need for consumer education, so that they understand why their rewards have been taken away.

Is Motion Code the answer to card fraud?

On the back of your debit or credit card there is a three-or four-digit number called a ‘card verification value’ or CVV for short. It’s one of the last things you enter when making an online purchase. Its purpose is to act as an added security feature and prevent fraud during ‘card-not-present’ transactions.

However, it isn’t foolproof, because scammers can often discover a CVV, or even guess it, without too many problems. Indeed, researchers have shownthat Web bots making random guesses on legitimate websites can often come up with the appropriate CVV and expiration date to pair with a card number.

Refresh the CVV

Is there an answer to this? Well, the US-based PNC Bank believes there is and it is conducting a pilot test of cards with CVVs that refresh the number every 30 to 60 minutes.

The technology behind what could become an important leap forward for banks and other card issuers, such as neobanks, is something called Motion Code. It has been designed by Idemia and provides an extra layer of security for Card-Not-Present (CNP) transactions and against payment card number theft.

Idemia says: “This technology replaces the static 3-digit security code usually printed on the back of a card, by a mini-screen that displays a code, which is automatically refreshed according to an algorithm, typically every hour.

This solution thus renders copying of card information useless: by the time fraudsters try to use it online, the stolen number will have already changed several times. “

Searching for the ideal refresh rate

PNC began a 90-day trial of cards featuring IDEMIA’s Motion Code technology in November and, according to an Ars Technica report the test run should identify the optimum refresh rate. According to Idemia, “PNC Treasury Management expects to offer Dynamic CVV2 technology to current customers in early 2019, following completion of the pilot.”

Coverage of the story in the Pittsburgh Post-Gazette states, “Card issuers like PNC will be able to customize the refresh interval. The e-ink display is limited by a small lithium battery, so a 60-minute CVV refresh rate offers the card a four-year lifespan, and higher refresh rates will make that lifespan shorter.”

The only downside of using the Motion Code technology is that “motion cards are more expensive than regular chip cards to produce,” the Post-Gazettewrites, adding, “Prices vary, but according to one estimate, they cost about $15 compared with around $2 to $4 for a regular chip card.”