Next-generation powered payment cards have been in the market periphery for a number of years, largely remaining in a dormant phase as vendors continued to research, develop, and ultimately define and understand the potential customer base for some of the powered card form factors, including dynamic code verification (DCV) and biometric sensor cards and other interactive powered card variants. Next-generation powered payment card testing and evaluation has arguably arrived at the perfect time, aligned with a payment cards market that is slowing, enabling card vendors to use end-user pilots and testing to measure adoption appetites. Payment ecosystem players including, card, sensor, and payment networks and other component vendors including Gemalto, IDEMIA, MasterCard, MeReal Biometrics, KONA I, FPC, KSID, Elan Microelectronics, Juno Universal, IDEX, and Zwipe are hoping to eventually use them as a higher value proposition, creating a new revenue opportunity in a payment cards market where average selling prices (ASPs) continue to be challenged and revenue margins continue to be depleted, while presenting an innovative platform on which they can further differentiate themselves from low-cost competitors.
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Cost Proving the Single Largest Inhibitor to Next-Generation Payment Card Adoption
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NEWS
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Next-generation powered payment cards have been in the market periphery for a number of years, largely remaining in a dormant phase as vendors continued to research, develop, and ultimately define and understand the potential customer base for some of the powered card form factors, including dynamic code verification (DCV) and biometric sensor cards and other interactive powered card variants. Next-generation powered payment card testing and evaluation has arguably arrived at the perfect time, aligned with a payment cards market that is slowing, enabling card vendors to use end-user pilots and testing to measure adoption appetites. Payment ecosystem players including, card, sensor, and payment networks and other component vendors including Gemalto, IDEMIA, MasterCard, MeReal Biometrics, KONA I, FPC, KSID, Elan Microelectronics, Juno Universal, IDEX, and Zwipe are hoping to eventually use them as a higher value proposition, creating a new revenue opportunity in a payment cards market where average selling prices (ASPs) continue to be challenged and revenue margins continue to be depleted, while presenting an innovative platform on which they can further differentiate themselves from low-cost competitors.
However, no matter which next-generation smart card form factor is under evaluation, the fact is that the single largest contributing inhibitor is price. Today, the biometric sensor card tops the list, commanding an ASP of more than US$20 per card (depending on the solution and whether it is ISO compliant), and DVC cards commanding an ASP in the US$10 to US$15 range. This is a significant issue as most payment card issuers currently swallow the cost of card issuance (typically in the US$1 to US$2 range depending on the interface of choice), and even a slight increase in ASP across a multi-million customer portfolio will have a significant cost impact.
Today’s Business Model Approach
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IMPACT
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Many possible business model approaches exist that are designed to help minimize next-generation powered payment card issuance costs, while maximizing return on investment (ROI). These approaches can be used as standalone models or in conjunction with one another. However, today’s approach is largely focused on recouping the card cost, largely via a subscription approach.
Typically, the subscription approach would target the affluent banking community, charging a small fee in exchange for the next-generation smart card. This approach may appeal to affluent client bases that are keen to take advantage of the latest security technology to safeguard their accounts. The issuer simply pushes the associated issuance cost directly onto the client. By charging a monthly fee it may also be possible to regain the cost of any associated ongoing service, which is the case with DCV cards. Essentially, this is an “as-a-service” approach between a bank/financial institution and a client.
The focus on recouping issuance costs by passing them onto the end user is one of the primary reasons why next-generation payment cards have had significant success with pilots and commercial launches in France, where banking associated fees including bank account subscription, online banking, administrative, card, and insurance fees are more common place.
Banks and financial institutions, including Société Generale, BNP Paribas, BBVA, and UniCredit Bulbank already have pilots or commercial launches of next-generation payment cards in place. Although other activity is notable in countries including Japan, Norway, Poland, and South Africa, France is the notable epicenter for next-generation powered payment card activity to date.
Is a Shift in Business Model Approach Required?
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RECOMMENDATIONS
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In order to flesh out and expand, ABI Research believes a shift in business model approach is required in order to maximize the next-generation powered payment card opportunity, depending on the region, focus, and card form-factor functionality priorities. The fact remains that many issuers worldwide do not pass on the issuance cost directly to the banking customer and thus different business model approaches and flexibility are a must have requirement to better penetrate into other regions.
Other business model approaches can be summaries as follows:
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The Targeted Approach: The targeted approach involves the issuance of next-generation payment cards to a specific client base. Targets include a bank’s or financial institution’s affluent client base, a client base considered most at risk of becoming a victim of financial fraud, or specific use cases like using next-generation payment cards to help stem fraud in a specific payments industry, such as the distribution of special/welfare benefits. This targeted approach allows the issuer to target a specific user segment, likely a small proposition of its overall client base, minimizing issuance while maximizing the ROI.
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Payments/Security As-a-Service: The “as-a-service” approach is applied within a business-to-business (B2B) landscape. The supplying smart card vendor could distribute a next-generation payment card for free or heavily subsidized, generating revenues from an ongoing monthly/annual fee to help spread the increase in cost to the issuer. This is aligned with many smart card vendor strategies, which aim to move away from rigid one-time hardware-related revenues to a recurring service-based model. This approach has proven successful within the mobile space, but could also be allied to the payment cards business.
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Free Issuer Issuance: The end goal will ultimately be free issuance from banks/financial institutions to end users. This is the model largely used across the globe today and a service most banking customers have come to expect. In the short term, it may be possible to shift the issuance cost directly onto the end user, in exchange for the latest security features, but a large portion of banking users will not be willing to pay for additional banking services or features. Free issuance to end users will not happen until ASPs significantly decline, more aligned with what cards costs today. An issuer might accept a small incremental increase to card ASPs, but as it stands today, the cost is the real limitation to mass rollout.
Understanding regional drivers and use cases, such as emerging versus affluent regions and different drivers and factors will ultimately affect issuance and business model approach. Today the approach has largely been focused on the subscription model, but in order to move into mass issuance volumes, others need consideration.
In terms of next-generation powered payment card business models, there will not be a one-size-fits-all approach, and those vendors with the foresight and creativity to tailor and adjust models according to regional requirements will be better positioned to take advantage of the diverse and dynamic market opportunity.