Council Post by Kalpesh Kapadia, Deserve CEO, on Forbes.com, January 6, 2023

Visa founder and modern payments pioneer Dee Hock, who passed away this past year, transformed the way we spend. While he didn’t invent the credit card, his outsider status and visionary approach to the very concept of money changed the world. And despite commentary that the credit card is a relic of Hock’s generation and ripe for disruption, today’s credit card is stronger than ever. Gone are the days of paper imprinted slips and using a roller at the cash register. Today we simply tap our phone for a contactless checkout. Hock left us a legacy that defines the credit card as one of the best fintech products of all time.

The Acceleration of Digitized Payments

It’s no secret that Covid-19 accelerated the digitization of payments—cash today has reached an all-time low, and now more than ever, many businesses don’t even accept cash.

This shift has signaled significant improvements and new innovations in financial services including instant issuance of credit cards, wallet provisioning, tokenized payments and card-based controls. Ultimately, these technologies are fueling better experiences for consumers.

However, with the rise in consumer expectations, financial institutions will need to provide more integrated and effortless solutions in order to remain competitive.

How Credit Cards are Compared to Debit Cards and Bank Payments

Debit cards have long competed with credit cards, but they have never pushed credit cards out of the payment space—even during the Great Recession when millennial distrust of credit ran rampant. Knowing debit cards’ biggest failing points is important to understanding why other payment innovations pale when compared to the credit card. Debit cards rarely give consumers the opportunity to accrue rewards and they don't help build a credit score. Debit cards are also at a major disadvantage since credit cards are more secure (and no one agrees more than the author and former fraudster Frank Abagnale). If a fraudulent transaction is made, a credit card company will protect you and fight on your behalf with the merchant. And you will never see the money leave your bank account. When a bad actor gains access to your bank account, that story takes a different turn. Reimbursement for fraudulent activity, if successful, can take months, and during that time the consumer loses access to those funds entirely.

While debit cards have been around for decades, linking bank accounts to online experiences is a new process touted as a competitive payment innovation. When paying online, you can pay directly through your bank. But where is the benefit to the consumer? Generally speaking, credit cards provide consumers more protection against fraudulent activity than debit cards do.

Buy Now, Rewards Never

When you see new “innovative” technologies competing with credit cards like buy now, pay later (BNPL)—which is essentially debit card plus—see if they hold up to fulfilling the three pillars of a credit card’s value to consumers and businesses. In the case of BNPL, it falls short of at least two of these pillars, and sometimes the third: building credit.

The Value of Private Label Credit Cards to Businesses

Branded credit cards provide two major benefits to businesses. They can drive recurring brand loyalty and visibility, and they allow merchants to incentivize behavior.

Driving brand loyalty is the gift that keeps on giving with co-branded cards. These cards end up being a brand touchpoint that consumers interact with over and over again. Being able to make important purchases on a co-branded card drives positive brand association that can create additional purchases over time. If a consumer is carrying a private label card in their wallet from a clothing retailer, that retailer is almost certainly going to be the first stop for back-to-school shopping and more. The same goes for an airline or a hotel.

Co-branded or private-label cards also allow businesses to incentivize purchases that drive other business objectives. If a company is starting to see its widget inventory pile up, it can offer bonus rewards for widget purchases. If a supplier offers a business a discount that boosts profit on a particular product, a business can use a branded card to incentivize purchases of this product.

These are specific benefits that businesses can’t achieve really with BNPL. BNPL providers argue that they drive major value because they can arm customers with new purchasing power. But businesses that offer BNPL end up footing the bill for this benefit. Businesses only get paid for BNPL purchases after the consumer makes a payment and these businesses pay a fee to the BNPL provider. The money has to come from somewhere! Recently, the BNPL industry has come under regulatory scrutiny for its various business practices vis-à-vis credit disclosures, data harvesting and loan stacking. Various agencies such as the CFPB and the FTC are crafting regulations akin to the credit card industry.

The Bright Future For The Credit Card

The same technology that is driving fintech innovation is also transforming credit cards. That technology, based on cloud infrastructure and mobile and digital front end powered by APIs and SDKs, is making it possible for almost any size company or brand to offer branded cards.

This same technology is allowing cards to shift from plastic to digital and is transforming rewards offerings beyond simple airline points, retailer rewards and cash back. New reward opportunities can allow customers to access new benefits that help them.

More and more banks and financial institutions have entered the industry and are excited to back co-branded cards for smaller businesses or organizations. Now companies can offer rewards in crypto, fractional stocks, nonprofit donations, student loan repayment, and more.

Rather than facing demise, credit cards are expanding into new realms offering consumers and businesses a wealth of new opportunities. And don’t let anyone tell you otherwise.

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