Evolving Card Business Presents Opportunities and Threats for Banks

Cards in all their varied forms will continue to provide savvy banks with a lucrative business for years to come. But banks will have to fend off increasing competition from nontraditional players.

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The card business is alive and kicking, and will be well into the future, according to experts. Rapid advances in technology, the recent IPOs of Visa and MasterCard, an uncertain economy, and shifting consumer behaviors all are converging to create a whirlwind of change -- and opportunity -- in the card space.

Of course, change does not come without challenges. While industry insiders believe banks will have a great deal of growth opportunities in the card space, they will face increased competition from nonbanks.

So what exactly should U.S. banks expect from the card space in the next decade? Some of the industry's top experts recently offered their predictions to BS&T.

A Healthy Opportunity

If there is one trend that experts agree will reshape the card space, it is the convergence of cards and consumer-directed healthcare. Throughout 2007, a series of announcements were made by issuers, acquirers and even insurance companies around products to enable healthcare payments. Chief among these is the health savings account (HSA) or flexible spending account (FSA). According to Brian Riley, senior research analyst with TowerGroup (Needham, Mass.), a card -- particularly a debit card -- is the perfect fit for HSAs.

Michael Angus, global leader for payments strategy with MasterCard Advisors (Purchase, N.Y.), agrees. "There is between $2 trillion and $4 trillion flowing to hospitals, and a bigger chunk of this money is becoming directed by consumers," he relates. "A large amount of payments here will move to cards from ACH and checks. It's a great way to help with cash flow problems [between healthcare providers and insurers]. Cards will definitely be a differentiator in this space."

Accenture's (New York) Richard Winston, senior executive, says cards will help clean up the convoluted healthcare payments chain. "Healthcare payments in this country is a messy market," Winston contends. "There are so many intermediaries and it's very fragmented."

And cards can function as more than just a payments device, Winston adds; they also can serve as a means of storing healthcare information, such as medical records. "There's potential here for moving all your information to a smart card so that you can do payment transactions and view your medical history," he says. "We're in the early stages of this now."

Advanced analytics already are being applied to existing HSA debit cards, according to Red Gillen, senior analyst with Boston-based Celent, who says that some of these cards can distinguish between healthcare-related purchases and other items. "When you go to a mixed retailer that also sells medical products, when you swipe your card, the transaction message provided to the bank processor tells it how much to deduct from the HSA account versus your regular debit account," he explains. "The technology is able to tag a store's information for items that are medically related."