The US credit card industry has been basking in the glow of record profits for the last several years while effectively fending off attacks from FinTechs and other disruptors. However, most of this growth has been driven by macroeconomic conditions including a benign credit environment, while fierce competition among issuers has eroded both net interchange and net interest margin. If these trends continue and credit losses return to their long-term average, we estimate that profits could decline by more than 60 percent.
Can an issuer buck this trend by getting off the promotional and rewards treadmill? We think it’s challenging to do so given the implications for new customer acquisition and retention. The answer instead lies in lessons from Big Tech and how they continue to reinvent products as old as a taxi cab ride. Card issuers need to innovate to focus on solving big problems that their customers have, build active solutions and generate flywheel momentum to sustain growth. We suggest that they use the Oliver Wyman Financial Needs Hexagon to identify the big problems and use a structured approach to identify and develop the active solutions. A disciplined incubation process can help them generate flywheel momentum to sustain these gains with consumers.
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