Why commercial cards may need a rethink
Never before has there been so much turmoil in the commercial payments space.
There is almost a perfect storm of factors that are leading Payments Executives at banks to re-consider their strategies, and consider new approaches that were perhaps unthinkable just a short time ago.
The squeeze on commercial payments is coming from multiple sources:
- Required investments in new regulations is consuming a greater proportion of available development budgets
- The legacy tech stack in most banks is increasingly costly to maintain and upgrade
- Bank-wide resources are being redirected to address KYC and AML issues
- Bank operating margins are being compressed by the continuation of the very low interest rate environment
- Commercial Cards are complex, often standalone products, with much lesser scale than their consumer card cousins
- The Covid-19 pandemic has only widened the scale gap as traditional Commercial Card spend and revenue has been disproportionately hit. Levels of business travel falling off a cliff, followed by the economic impact of the pandemic suggests that there will be no quick bounce back to pre-Covid levels of spend
- Issuers that look to new segments, new payment flows and/or new partnership models to compensate for the shortfall will need to compete for scarce investment monies and expertise to realise these new strategies
As a result, Commercial Cards are becoming increasingly marginalised within many banks, which in turn means that growth opportunities are being left on the table and customer expectations for a ‘consumer card experience’ are largely unrealised.
All the signs are that the total cost of ownership for commercial payments will remain high in banks, and the McKinsey Global Payments Report 2020 describes payments as a burning platform.
The payments segment is performing well for banking—but not for banks. Under pressure from multiple forces, successful banks will develop a new operating model better suited to changing times.
Although Commercial Cards have historically been a growth business with good fee-based income, the squeeze elsewhere in banks is having an important knock-on impact. If this results in insufficient resources being available for digitalisation efforts and investment in new customer services and applications, then the Total Cost of Ownership will stay high and the bank will ultimately fall behind more nimble competitors.
Scale and lower unit costs must be key goals for issuers in the future, but they are not enough on their own to ensure success. Competition in payments is just getting started through market changes such as Open Banking, and this will dramatically change both the customer experience as well as ultimately, the business model itself. Lower money transfer costs are critical, because going forward no-one will care about the infrastructure behind the payment. What will determine success is how issuers can leverage and commercialise data to shift the focus from the cost of payments to the value of payments, and thereby significantly improve the customer experience.
With this in mind, and given their other bank-wide challenges, how should Payment Leaders view Commercial Cards? Are they considered a core product within the suite of bank services to business? And if not a core product, what options are available going forwards? Closing the business unit would be a tough call to make. Typically still profitable and even something of a cash cow, but perhaps more importantly, business customers have a reliance on these products to help them with working capital and to improve their operational efficiency. Withdrawing the products would likely send customers to a competitor, and open the door for further customer attrition. Conversely, selling a commercial card portfolio is also tricky, especially if you do not want to sell to a competitor who might naturally look to up-sell to your customers.
So, if the bank lacks the investment capabilities required to keep pace with the competition or hasn’t committed to being unique in its commercial card offerings, an attractive alternative might be to investigate outsourcing.
Outsourcing enables the rapid expansion of service breadth, even for banks unable to justify the cost of developing the service in-house. Banks can mix and match to create a broad suite of Commercial Card services suited to their customers. While outsourcing may lead to some reduction in control over product and service delivery, banks do retain control over critical customer relationships and valuable transaction data.
Before deciding to outsource, banks should ask themselves several questions:
- What scope of partnering and outsourcing is my bank willing to consider?
- How much cost savings and service improvements could be gained from outsourcing?
- How would the bank mitigate associated risks and ensure sufficient input in future product decisions?
- Is there a reliable, non-competitive commercial payments partner in the market to outsource to?
Whatever the going-in position or ambition level with Commercial Cards, Payment Leaders in banks of all shapes and sizes are having to face up to this ‘moment of truth’, and beginning to ask themselves: “Do we really need to do all this ourselves?”