Global Issuer revenues set to decline after period of rapid growth

The growth wave that issuers have long been riding is breaking, and catching the next one will require repositioning. However, companies that refine their practices can fend off disruption and secure their future footing.

Easy growth is over

Globally, from 2017 to 2022, issuer revenues rose at a CAGR of 8.1%. Much of this growth came from the contin­ued embrace of cashless and card-based payments, according to BCG’s Global Payments Report 2023.

Across major markets, steady economic growth and a low inter­est-rate environment helped drive high levels of employ­ment, contributing to a healthy credit picture and the lowest delinquency rates in 30 years.

But the going is likely to get rougher over the next five years. Overall, the report expects issuer revenues globally to grow by a CAGR of just 5.5% from now through 2027.

On the one hand, macroeconomic uncertainty may reduce consumer spending. On the other, high interest rates will continue to slow demand for credit.

Projections suggest that several key revenue compo­nents will come under pressure. Inter­change fees are likely to grow at a more modest rate of 7.0%, through 2027, down from 9.6% over the past five years.

Net interest revenue growth on revolving balances is likely to plummet further, tumbling to 3.4%.

On the plus side, foreign exchange fees seem poised to more than triple, jumping to 9.5% as travel recovers from pandemic lows.

This income, however, accounts for only a small part of total revenues.

Regulatory action on late fees could compress margins further. In the US, the Consumer Financial Protection Bureau has proposed a rule that would reduce the fees that payments companies can charge to consumers for missing payments on credit cards.

And the Credit Card Competition Act would require large banks to give mer­chants a choice of at least two different payments net­works to process credit card transactions.

Change is coming from all sides

A more challenging macroeconomic environment, in com­bination with an accelerating industry transition, raises the stakes for Issuer revenues.

Credit risk is escalating. A softening economy could weaken the quality of the lending pool, broadening default exposure.

And a recessionary environment could create financial challenges for issuers, since BCG research shows that consumers typically deprioritise credit card payments relative to other obligations when they are in financial distress.

Software innovation is forcing new forms of collabo­ration. As ISV platforms gain market share, traditional payments players will have to partner with these business­es to access SMEs.

ISVs are also beginning to offer a broad­er array of financial solutions—and business customers have responded enthusiastically.

BCG survey data suggests that 60% to 70% of SMEs in major markets would consider a debit or credit card offer from their software provider. Toast already offers a restaurant debit card, and other ISVs are likely to develop their own industry variants.

Software innovation isn’t solely a disintermediation lever, however. As the tech stack opens up, infrastructure specialists are emerging with capabilities that can help traditional issuers gain market advantage and manage parts of their business more cost effectively.

This new wave of service providers includes issuing processors, loyalty experts, debt collection enablers, and other niche players.

Loyalty is up for grabs. As competition intensifies, issu­ers must work harder to engage and retain customers. Some large issuers are responding by expanding their commerce capabilities.

Capital One launched a free brows­er tool that allows consumers to see which stores offer the best prices for the products they’re searching for online.

Others, such as Chase and Amex, are doubling down on travel and entertainment. For example, Chase recently acquired two travel management businesses, CXloyalty and Frosch, to scale its rewards and partnership offerings and provide richer travel recommendations to both business customers and individual consumers.

These investments have helped Chase become a major travel player, with $8 billion in bookings in 2022 and more than 2 million unique users.

Time to prepare for the next wave of growth

Change can be unsettling. But issuers have demonstrated their resilience during the crises of the past few years, and with the right focus they can emerge stronger than before.

To thrive in years ahead, leaders must embrace the new fundamentals of issuing:

• Become a tech- and data-led issuer
• Boost marketing efficiency by embracing agile
• Leverage M&A and partnerships to retool loyalty
• Cultivate corporate payments solutions
• Reduce delinquencies and their impacts