Dec. 1, 2016

Dear Friends,

This is our 25^th annual letter to clients and as usual, there’s no shortage of hot topics to discuss. The major news items are easy to tick off: Brexit, Wells Fargo, the U.S. Presidential election, and now Yahoo, just to name a few. It was a banner year for bombshells, pessimists, and the doomsday crowd. So, it wouldn’t be hard to fill this letter with downbeat stories. But those stories have been covered ad nauseam in the press and around the water cooler. Instead, I’ve decided to take a step back and consider the other side of the coin… the upside… the positive stories that surrounded us every day but seemed to get lost in the news cycle. When I stepped back, I realized there was plenty of positive change, innovation, and growth about which to be optimistic.

The upbeat theme for this letter wasn’t reflexive, though. Rather, the inspiration came to me while in Rio for the Olympics with my children.

Each day, my kids and I were blown away by the pride and enthusiasm among the athletes, their coaches, and the fans. We saw ten events, and purposely avoided many of the more mainstream offerings. Instead, we witnessed indoor cycling, weightlifting, decathlon, Tae Kwon Do, and others. We found that media hype had no correlation to the enthusiasm of the participants or their cheering sections. In fact, it seemed that if you bought a ticket for Olympic wrestling (for example), there was a strong likelihood that you knew someone competing in the event. So, perhaps the cheers were even louder!

There were countless amazing moments – hearing the Japanese fans chanting for their female gold-medalist… watching the Brazilian grounds keeper wave his flag from the tractor between equestrian events… witnessing the martial artist from Ivory Coast fall to the mat in tears upon winning gold… hearing the loudest EVER rendition of a National Anthem when the Brazilian boxer won gold… stomping our feet and chanting along with the Kazakhstan team as their compatriot narrowly missed medaling in weightlifting. These and countless other moments brought goosebumps to even the most jaded spectator.

Being surrounded by such positive energy was contagious and uplifting. It made me wonder:  how do we infuse some of that amazing energy into our industry? The more I thought about it, the more I realized, we already have lots of very positive and exciting things to cheer for. Perhaps they just needed a light shone upon them more directly. So, below are some of the accomplishments that I think we should look back on with pride as we reflect on 2016.

Let’s start with a quick example. In the post-recession era, how many times have we heard that customers don’t want another credit card? Don’t tell that to JPMorgan Chase which successfully debuted the Chase Sapphire Reserve card with a whopping $450 annual fee. The card has been a resounding success, particularly among millennials – a demographic that countless news stories told us was particularly credit-averse and unlikely to be wooed by card providers.

Chase found a winning combination for a customer who is primarily motivated by rewards. This hunger for rewards, which has been covered often in ACG’s proprietary consumer research, has, in turn, meant that the co-brand industry is thriving and flourishing, with a wide range of large programs making strides of late.

Perhaps the most sought-after co-brand deal of the year was Cabela’s, one of the last major retail self-issuers, which resulted in a watershed $5 billion deal for Capital One. American Airlines was also in play this year due to its recent merger with US Airways. Just as in Rio, where only one Gold medal is awarded, conventional wisdom would have expected one of the two incumbent issuers to land the combined deal. Instead, the Airline wound up maintaining programs with both Citi and Barclays, leveraging each for its strongest acquisition channels. Time will tell if that was two Gold medals or a Gold and a Silver.

Although Costco chose its new partners in 2015, the deal rolled out to consumers early this year. After reports of some conversion headaches, the results have been extremely positive for Citibank, Visa, and the Retailer

In the U.K., where interchange has been cut to roughly 30 basis points, many experts worried about the future of co-branding. ACG has been hard at work helping both issuers and partners to determine a deal structure that could survive in the new environment. Perhaps the first manifestation can be seen in BNP Paribas’ Creation Financial Services’ recent deal with InterContinental Hotel Group. The partners have managed to create a successful program and even improve the customer value proposition by taking a fresh look at the business model. Not only was the card nominated as the Best Credit Card Product of the Year by The Card & Payments Awards, but it is proof that co-branding can still work in Europe. You simply need partners that are pragmatic and willing to work together to drive value for the consumer.

Co-brand competition will continue well into 2017. Hilton will perhaps be the first to watch as it determines which of its two current issuers will manage its program into the future. A couple of recent mergers will also likely cause a stir as Marriott/Starwood and Alaska Airlines/Virgin America come together and sort out their various card programs. On top of this, other marquee programs will be up for renewal and several very interesting names have signaled their desire for de novo programs.

We’ll also have to keep an eye on Washington as we try to read the tea leaves for 2017. Economists are fond of the Latin phrase “ceteris paribus” which roughly translates into “all other things being unchanged.” If you are a banker (or own bank stock) and apply that phrase, you are probably feeling pretty good since the U.S. Presidential election. Your stock is likely feeling the effect of the “Trump Bump,” and you may be anticipating a near-term environment of higher interest rates, lower tax rates, and less regulation.

While less regulation would be welcomed in certain quarters, it must be said that, even in the face of an increasingly stringent regulatory environment, our industry has found ways to innovate and excel. For example, regulations like the TCPA hindered the efforts of the Collections industry. The restrictions it set forth necessitated changes to the business model and in time the industry adapted. Enhancements in self-service, proactive client interactions, and “opt-in” mechanisms for communications, all led to a net positive for issuers and their customers.

The CFPB started supervising non-bank auto finance companies in 2015. Our clients quickly built capable Compliance teams and developed a rapport with the examiners. When you consider the speed at which these lenders expanded and invested in Compliance operations to handle large-scale audits with a brand-new regulator, the progress is impressive.

Mortgage lenders have also successfully navigated the ever-more-challenging scrutiny by regulators, often having State and Federal auditors onsite simultaneously. Meanwhile, they continued to emphasize staffing, processing, and technology improvements to keep customer experience paramount. Going forward, these lenders can look forward to HAMP coming to an end, property values gaining strength, reductions in modifications and short sales, and an uptick in originations.

Over the summer, the CFPB released an outline of proposals under consideration to overhaul the debt collection market. The agency limited the scope of its actions, saying it would address first-party creditors and third-party debt collectors in separate proceedings. This is exactly what ACG had recommended in comments to the CFPB when the rulemaking process began in 2013. The overhaul, which will include new requirements on debt substantiation, expanded disclosures, and limited “excessive” communications, represents the first major refresh for the industry since the Fair Debt Collection Practices Act was enacted in the 1970s. The CFPB’s willingness to listen to the industry and hone the application of its rules was widely appreciated. Perhaps it was even an example of how regulators and lenders can work together to meet their respective objectives.

Earlier this year, the FCA recognized the nuances of the card business as well. The U.K. agency released its Credit Card Market Study, and while many anticipated the report would be a wide-ranging critique of the industry, it instead focused on the needs of consumers with persistent debt. The FCA is currently conducting research on how to improve consumer repayment behavior, with everything from behavioral cues and statement language on the table. This is an opportunity for the U.K. credit card market to creatively serve the needs of these customers, as well as to proactively help improve consumers’ financial health.

The lessons learned from the Great Recession continue to inform industry decisions. All our lending clients have been watching closely for signs of pending trouble. Indeed, there are some signs of a potential cyclical downturn afoot. Delinquencies and credit declines are both on the uptick, for example. However, the fact that we are so keenly watching the landscape is a major improvement from previous cycles. It wasn’t long ago that in the wake of a credit crisis, a large number of bankers admitted to American Banker that their credit models had failed to accurately predict losses. Our current vigilance suggests an industry that is better prepared than ever.

After years of hesitancy and skepticism, EMV is finally coming of age in the U.S. By now, over 85% of our clients’ portfolios have been converted. In 2017, nearly all issuers will have migrated, dealing a blow to counterfeit fraud. Some clients have even reported that they’ve already recouped the expenditure of reissuing their chip cards.

Meanwhile, the continued increase of chip-on-chip transactions should help reduce the customer experience challenges still evident at POS, where customers often must quiz store employees if they should be swiping or using the chip. The uneven acceptance strategies across some of the nation’s biggest retailers have left customers cold – and tweeting thousands of jokes at the payment industry’s expense.

Retailers who were not EMV-compliant saw an uptick in card-present chargebacks due to the liability shift. But as more retailers expand their EMV acceptance, that chargeback category will decline. We anticipate rates should begin to normalize and then improve over pre-EMV rates, which is good news across the board.

While EMV migration has blunted fraud in face-to-face transactions, the fraud has shifted elsewhere. Card-not-present and old fraudster favorites like check, wire, and ACH fraud are on the rise. It may be hard to see the good news here – unless you’re a criminal. However, the industry is working together in unprecedented ways to curtail some of the newer strands of fraud that are emerging. For example, ACG just launched a roundtable for retailers to address the challenges of payments fraud in a post-EMV world.

Fraudsters are also increasingly deploying synthetic fraud, an esoteric fraud type that uses stolen data (often from children and the elderly) to open new accounts. This fraud is nearly impossible to proactively identify, since current consumer privacy concerns hamper efforts by credit bureaus to validate social security numbers. The key to defusing this fast-growing fraud is industry cooperation. Earlier this year, ACG gathered more than 30 representatives from issuers, industry associations and networks, and credit bureaus to discuss how to tackle the problem. The path forward will require navigating a legislative thicket, but at least the conversation is underway.

Mobile payments have also gained ground this year. When Apple Pay hit the market two years ago, the headlines decried the imminent death of credit cards. Two years later, the headlines have reversed, calling mobile a major flop. Both sides of the spectrum are wildly exaggerated. While 2016 certainly wasn’t the “Year of Mobile Payments,” we never really expected it to be. Nor do we expect that 2017 or even 2018 will earn that title. Instead, consumer adoption will be gradual as consumer preference evolves and technology matures.

Issuers lament the lack of enough mobile volume to impact their overall results. But, according to ACG’s Cardbeat^® research, just over half of cardholders have the option of using Apple, Android or Samsung mobile payments, due to their phone’s capabilities. Of those, 31% are doing so at least some of the time. That’s a pretty good take rate for a brand-new product. Additionally, there’s a small universe of mobile payments invisibly thriving via apps such as Uber, Starbucks, and Venmo.

Players like PayPal have also continued to make major strides in the digital and P2P spaces. In our most recent Cardbeat research, PayPal beat out the major banks to be the favorite P2P service for consumers. While consumers claim to trust their banks more implicitly with their financial information, 69% say PayPal’s technology is superior to the banks’ ability to protect their information. Banks are coming to grips with this in a variety of ways. Citi recently hired over 40 employees from start-ups and tech companies to start its own FinTech division. Others, like BBVA and USAA, are forging partnerships with FinTech companies to develop new solutions and stay nimble. Even auto lenders are contemplating FinTech acquisitions to bolster their capabilities in credit verification and decisioning.

The global political landscape of 2016 can be characterized by shock and upheaval. Voters from the U.S. to the U.K. to Italy to Colombia, have surprised the world with their decisions. The status quo has been upended, and what this means for our industry and markets is still being decided.

ACG’s mission is to provide guidance for challenging decisions in challenging times. While we may not be able to change the behavior of regulators, consumers, or fraudsters, we can help clients to influence outcomes and deal with ramifications. We can help to decipher trends, prepare a good offense and/or a strong defense.

In 2017, you can expect ACG to unveil several initiatives in our ongoing effort to enhance our offerings. In addition to improving the analytical tools and customer experience in our proprietary VIZOR platform, we’ll be debuting a research portal for our Payments Insights data called CAMBER. Both of these platforms demonstrate our commitment to providing the rich data necessary to make meaningful decisions.

We’ll also be altering our physical and digital footprints. A new website with refreshed branding is in store for release later in the year. Our Twitter account will be more active. And, after years of managing our growth in creative ways within our current spaces in the Financial District of New York City and Farringdon in London, we’ll be making changes to both offices. Our London team will be relocating to new and upgraded offices, while our New York headquarters will be renovated to make room for a larger team. Both offices will see new and exciting designs meant to enhance our ability to work effectively. We look forward to hosting you at our new facilities before long.

As we wrap up 2016, it’s obvious that the world’s events can’t be boiled down into a letter any more than they can be squeezed into 140 characters on Twitter, a snapshot on Instagram, or a shaky video that disappears on Snapchat.  These are complex times, and I’ve fielded hundreds of phone calls and hosted scores of clients in our offices, all to dissect these topics. We are always happy to engage in discussions with you at any point, as well as to share the direction our data and intelligence say the winds are blowing.

Let’s kick-start 2017 by talking a little more about the sheer ingenuity, innovation, and optimism that permeates our industry. Let’s stomp our feet, wave our flags, and cheer on our competitors. Here’s to a productive, positive and, most importantly, happy and healthy year.

 

Best,

Michael

 

 

 

 

Dec. 1, 2015

Dear friends,

I’ve had a lot of time to think lately.

Like, the other day, when my normally eight-hour flight home from London turned into a 12-hour trek. It was a miserable end to an otherwise productive business trip. First, the Uber driver dropped me off at the wrong terminal. Then, the British Airways gate was devoid of employees, even 30 minutes after our flight was scheduled to leave. An hour later, we were hustled onto the plane – only to languish on the runway for two more hours without explanation.

The flight couldn’t have been more of a contrast to my recent 900-mile motorcycle trip with friends through New England. The trip was pure pleasure – plenty of laughs, practical jokes, and good times. There were blue skies and changing leaves, the colors of which would take your breath away.

Combined, these trips gave me an opportunity to sit back and reflect on some of the events we’ve witnessed in our industry throughout 2015. But like many of those events, the beautiful foliage of New England left me wondering… should these harbingers of change be cherished? Or, were they just a reminder of colder and bleaker times ahead? Certainly, there are parallels to be seen everywhere in our industry these days – often, just as things start to look brighter, something crops up to dampen the mood.

To wit, the global economy continued to struggle this year, despite showing signs of improvement and feeling, to many, as if it was finally trying to resume robust growth. It seems as though we are in the midst of the world’s longest economic hangover! To be sure, there were many mixed messages. With countless unicorns roaming around (you do know what a unicorn is, right?), it is hard to suggest we aren’t in another tech bubble. The question is whether or not this one will burst, and if so, when? While some markets were doing well in their own right, they couldn’t help but be dragged down by those in dire straits… would Greece spiral to the point of being another “Lehman moment?” Would it tip other vulnerable economies in the EU and beyond into chaos? What about China’s currency devaluation, which sent markets tumbling?

I won’t opine about what happens next. Even an august group like the US Federal Reserve can’t make up its mind. Just as a strong jobs report seemed to signal that rates would finally increase, deterioration in the EU or China would delay it. And so it continues: Will they or won’t they? What effect will an increase have? What effect will it have if they don’t? Isn’t any decision better than no decision?

Regulatory intervention continues to be a topic that cannot be avoided. It permeates every conversation we have with clients. Just a few days ago, I spoke to a CMO who told me she spends 90% of her time on compliance issues. Clearly, the regulators are well-intentioned. And many of the ills they attempt to cure should indeed be remedied. But, not everything they do is helpful. For sure, they are driving up costs and driving down the industry’s appetite for much-needed innovation. And, their positive actions are often creating unintended side effects.

This was evident as the CARD Act neared its fifth anniversary. In ACG’s comment letter to the CFPB, we noted that the Act indeed secured victories for consumers, including reduced fees, fewer interest rate hikes, and card agreements that rely more on plain English and less on legalese. But the Act also unleashed consequences, including reduced access to credit, and fewer products available for under-served customers. Not only do these borrowers have fewer products to choose from, but all borrowers must help offset banks’ risk by paying higher prices.
We saw another example in July, when the FCC released clarifications of the Telephone Consumer Protection Act (TCPA). The FCC’s interpretation of the law effectively restricts cell phone contact for debt collection – a decision that affects the card, auto, and mortgage industries. As cell phones become the primary method of communication for consumers, these laws show how legislation sometimes fails to reflect modern behavior. And when contact rates decline, so do repayments – which translates to long-term financial distress for consumers. Not to mention that creditors are less able to rehabilitate distressed borrowers when they can’t even have a conversation.

Given the scope of our services, ACG enjoys a 360-degree view of the most contentious issues facing the financial services and payments landscape. In our roles as intermediaries and advocates, we often try to find common ground between the industry and its regulators. Through continuous and open dialogue, we’ve tried to bring to light the need for balance and a complete understanding of the implications of even the most well-intentioned actions.

Either despite or because of the economic and regulatory environment, competition among lenders is heating up. One area in which this can be seen clearly is the subprime credit card market. Nearly one-third of consumers have FICO scores under 650, but when regulators cracked down on issuers, many abandoned the subprime market. Now, with high demand and strong (though risky) profit potential, we’ve seen a wave of new entrants to the market. In addition to the recently launched Build card, we are aware of at least three other significant players preparing to compete for their slice of the market. Meanwhile, even big issuers have been tip-toeing back into the sub and near-prime markets.

We are also witnessing the rapid rise of marketplace lenders. In the case of marketplace lenders though, I wonder: Are they all aware of the risk management issues at hand? Surprisingly, the answer isn’t clear from some of the conversations we’ve had.

A particularly hot segment is auto lending which has become one of the fastest growing sectors of consumer finance. Auto loan volume is the highest it’s ever been, according to American Banker and as witnessed in our auto lending roundtables. Auto lending emerged from the recession faster than other areas, thanks to relatively healthy credit quality. In response to this growth however, there’s been a surge of new subprime lenders backed by private equity firms like Blackstone and Blue Mountain. It will be interesting to see what happens next, as some buyers keep their cars longer on average, while Millennials are showing a reduced interest in owning a car in the first place.

Another area in which competition has intensified is co-branding. A raft of new US market entrants has brought the competition for deals to levels not seen in quite some time. This has increased the price of deals, though so far, not to the unsustainable levels we’ve seen in the past. It is also creating a bit of an arms race as issuers strive to develop rich value propositions to attract attention in already crowded wallets.

After a pause, even the UK seems ready to carry on with co-branding. Who could have been blamed for doubting if that would happen, as interchange (I refuse to say “swipe fees”) is headed to 30 basis points? But, the industry has recognized the value of the product, and found a way to restructure partnership economics in hopes of keeping co-branding alive and relevant. After all, why wouldn’t they, when the alternative is 37-month introductory rates? All this has led 2015 to be our partnership team’s busiest in the history of our firm (and we’ve been doing this since 1984!).

This year, the long awaited US EMV migration finally happened… kinda, sorta. In the three months leading up to the October 1st “deadline”, all four of the cards in my wallet suddenly sprouted chips. We understand that 47% of consumers say at least one of their cards has been converted. But how often can those chips be used? Are retailers prepared? Do the cashiers at the point of sale even understand what is involved?
What affect will EMV ultimately have on fraud? As anticipated, there was an uptick in fraud prior to the liability shift, as fraudsters tried to cash in while they still could. In 2016, we’ll be closely monitoring two areas that have been pinpointed for potential vulnerabilities – card-not-present (CNP) and account takeover (ATO). We have already witnessed an uptick in the debit space, with CNP fraud growing 20% in Q2, according to our Debit Fraud Benchmark Study. ATO, a relatively smaller fraud category, jumped 280%!

Our Payments Insights group’s research has found that when consumers use chip cards, 48% say that the transaction requires noticeably more time than swiping a mag stripe. Combined with shopper insight studies that have linked longer queue times with lost sales, this is a metric to watch. What will happen over the coming holiday season? And, what impact could lower-than-anticipated sales have on the aforementioned shaky economy? We expect the learning curve to smooth out, once more retailers enable their EMV-ready terminals and cashiers know how to better educate consumers. But in anticipation of a busy holiday season, some retailers aren’t taking any chances – they’ve turned off their EMV capabilities to avoid long lines; others aren’t migrating their systems until January.

For now, the US consumer experience is wildly inconsistent and will remain so well into 2016. This is unlike the UK, where consumers and retailers all made the migration simultaneously. I look forward to the day that my New York experience rivals that of London, where I’ve successfully used a chip-and-PIN card for quite some time. Last week, I used both my UK chip-and-Pin card and my US chip-and-signature cards (let’s not even mention THAT debate!) seamlessly throughout London. How long will it be before the US catches up? Will it even happen before mobile wallets make the card itself obsolete?

Our friends at Apple, Android, and Samsung are certainly placing their bets on mobile technology. The same holds true for Chase and MCX. In my 2012 annual letter, I declared a bright future for MCX and the influence it might wield. But earlier this year, I began to admit defeat. It seemed the retail consortium was about to be laid to rest. Now, just days before this letter, comes their biggest announcement yet: Chase has joined ranks with merchants in the mobile wallet battle. Chase Pay promises to reduce costs for merchants by eliminating network fees and eschewing expensive NFC technology. Will it be enough to compete with tech giants like Apple, Android, and Samsung?

Apple burst onto the scene a little over a year ago with great fanfare. Much has been written about the product, including our own Apple Pay Tracker consumer research. Consumers certainly love it – conceptually, at least. Banks have embraced it (or at least supported it). As such, you have a product that could finally bring some traction and credibility to mobile payments. But retailers have been slow to get onboard for one reason or another. Despite the promise, to date, the numbers are still all but impossible to find in issuers’ portfolios and economics.
No sooner had Apple Pay launched, than Android Pay followed. Much the same story, but for different hardware. Then, just moments later, Samsung announced its entry to the market, albeit with a very interesting twist. Thanks to its LoopPay acquisition, some of Samsung’s Galaxy phones can communicate with mag stripe readers, making the payment method compatible with approximately 90% of US retail locations! It is early days, but I’ve had three conversations just this week with executives claiming that the numbers on Samsung Pay are “for real.” We intend to track Android, Samsung, and Apple in our modified Apple Pay Tracker (which will be re-christened Mobile Pay Tracker), starting early next year.

With so much change afoot… with so many external influences shaping what lenders can and cannot do… with each decision leading to potentially significant (positive or negative) results, today’s industry participants find themselves clamoring for more and more information and data. I am often reminded of the quote (by Christopher Cherniak): “A society where members could only seek first-hand knowledge, would be profoundly crippled.” This thirst for information has proved fortuitous for ACG, as our roundtables are the perfect prescription for clients’ need for insights. We now offer over 30 groups to executives in three countries, covering seven products and 20 functions (see the full list at acg.net).

In 2015, leaders recognize that what worked yesterday often doesn’t work today. And, what works today likely won’t work tomorrow. Our groups allow executives with common concerns to come together in a controlled environment to talk about the issues that challenge them the most. They are discussing millennials (in our Retirement Customer Service Roundtable), PSD2 (in our UK Card Fraud Operations Roundtable), Uber (in our Auto Originations Roundtable), QRPC (in our Mortgage Collections Roundtable) and hundreds of other topics that we debate and benchmark extensively. In each of these roundtable communities, executives are learning from past mistakes, finding new ways to stay ahead of fraudsters, and discovering innovative ways to improve efficiencies and lower costs.

So, is it time to sit back and enjoy the scenery as the changing autumn leaves put on a dazzling display? Hardly. Nor do we think it is time to hunker down for winter with a six-month supply of firewood and canned goods. The times they are a-changin’, for sure. And while confusing, and perhaps stressful, it can be quite exciting as well. It will take both self-awareness, as well as situational awareness, to navigate successfully going forward. We are thankful to everyone who asked ACG to stand by their side over the last year as they made challenging decisions. We look forward to doing so again in 2016, and beyond.

Thanks for listening and thank you for your confidence and support.

Michael Auriemma

January 2015

Dear Friends,

I’d like to start our 2014 annual letter by saying Happy New Year!  For the second time in 23 years, our year-end recap is being delivered in January.  The reason behind this could actually be our first topic of the year.  That is, 2014 was a difficult year!  At ACG, we were fortunate to achieve the highest revenues in the firm’s history.  But it wasn’t easy by any stretch.  As I’ve heard from many of you… lenders, vendors, competitors… the environment proved difficult for operating effectively.  Virtually every activity required more approvals, more “process”, more “compliance”, and therefore more time.  Often, much more time.  For many of us, it felt like the incline on the treadmill got turned up… we worked harder to maintain the same pace.  Below, we’ll touch on some of the market factors that led to this effect.

Another thing that got more challenging in 2014 was writing a single, meaningful update to all of ACG’s clients and prospects.  Our mailing list for this annual letter now numbers over 6,000 people in over 20 countries.  I think the first year’s list included fewer than 100 recipients!  We have struggled increasingly over the years to draft a letter that was relevant to readers in a growing number of industries, functional roles, and geographies.  For the last few years, we found ourselves writing longer and longer updates in an attempt to be more inclusive.  But that invariably meant some of you had to slog through sections that were irrelevant to you.

This year, we decided to try a new approach.  You’ll notice we’ve been briefer in our recap of what we think are the “hot topics” facing the consumer payments and lending ecosystems.  Rather than opine on each, we’ve tried to simply plant some seeds for future discussion.  Each topic below could warrant a full letter or even a full day of discussion. So, we invite you to reach out to us to discuss the issues you find most compelling… or most confusing!  Without further ado, here is our list:

* * * * * * * * * * * * *

• The pace of economic growth in the Western world diverged sharply, with increasingly gloomy prospects for continental Europe, while the UK seems to be on the path to recovery. In the US, the University of Michigan’s Consumer Sentiment index hit an 8-year high, on the heels of the Federal Reserve’s confirmation that household debt burdens have settled at their lowest level in more than a decade. Classic economic theory and past experience suggest that the stage is set for a rise in consumer spending and borrowing. However, widespread migration to debit card usage may indicate that the financial crisis left permanent scars, just as the Depression of the 1930s marked the attitudes of that generation.

 

• All the industries we serve share a growing concern with customer service and workforce management. Contact centers are caught between a relentless focus on CSAT scores and pressure to reduce costs while observing strict regulatory guidelines. At the same time, the composition of the workforce is changing, increasingly staffed by Millennials who value work/life balance issues, such as schedule flexibility and workplace amenities, over job security. Their expectations for rapid career advancement are challenging management to devise job enrichment and horizontal career paths to retain skilled agents.
• The burdens of compliance permeate all aspects of the payments, mortgage and auto finance industries. Executives complain of vague and contradictory guidance from multiple agencies, retroactive punishments for candor, and a chilling effect on product innovation.  Vendor management adds to the headaches as regulators extend their audits to the myriad of service suppliers whose activities are a potential liability to their clients.
• Regulated industries (which now include prepaid cards and captive auto finance, both newly brought under CFPB oversight in the US) face another balancing act: actions previously viewed as exemplary customer service, such as offering deferred payment or waiving late charges, are now being examined for disparate impact. Companies find themselves having to defend the basic premise of segmenting customers by their value and differentiating service levels: will loyalty and reward programs face additional scrutiny?
• Consumers’ privacy concerns, initially confined to fear of being victimized by cybercriminals, have been exacerbated by revelations of the massive scale of data-mining by both government entities and social media giants. Consumers’ willingness to barter personal information for convenience is beginning to come under question, with implications for marketing and customer service as companies try to walk a tightrope between helpfulness and intrusiveness.
• Sony and Apple aren’t the only victims of hacking, of course. Payment card fraud has gone from being a persistent but manageable annoyance to being one of the most pressing concerns in the industry.  While previous conversations about fraud had mostly revolved around online security, waves of highly-publicized data breaches at brick-and-mortar merchants have finally created the tipping point for EMV adoption.
• EMV conversion is finally underway, even though many issuers privately concede that the decision to convert is driven more by PR considerations than by belief in EMV’s efficacy. What’s more, we seem to have only gone part of the way down the road as most issuers have decided to support chip & signature vs. chip & PIN.  Credit cards going out well in advance of debit cards, owing to the latter’s long road to consensus on a standard compatible with Durbin requirements.  Debit cards are now on track for EMV conversion as well, but issuers are struggling with customer communications: does describing a new credit card as “safer” imply that the mag stripe debit card from the same bank is not secure?
• In the UK, credit cards are facing sharply lower interchange rates, a difficult adjustment that debit cards in the US have already had to make. There seems little chance that a Republican-controlled Congress will legislate lower credit card interchange rates in the near future.  Alternate payment products may achieve the same end through market forces, however, either skimming basis points off the issuer’s share (Apple Pay) or seeking to bypass the network rails altogether (MCX’s CurrentC, real-time ACH authorization). Will issuers respond by transforming the card back to being a lending vehicle, with the creation of no grace period products?
• Auto lenders are feeling the tailwinds of the highest level of US auto sales in nearly a decade. That increase in volume, however, could result in operational challenges for those that aren’t fully prepared.  Mortgage lenders, meanwhile, are also seeing an increase in volume.  Recent reports of artificially inflated appraisal values make one pause and consider the potential consequences of these actions.
• Probably THE biggest story in the payments world in 2014, was the long-awaited introduction of Apple Pay. I don’t think we’ve had a single client conversation since September 9^th that didn’t at least touch on this rollout, its likelihood of success, and the implications for merchants, issuers, processors, and every other player in the payments ecosystem. ACG has responded to the challenge with the launch of an ambitious and rigorous research program to track consumer adoption among iPhone 6 owners — and we’d love to tell you more about it.
• Thirty years ago, our firm was founded predominantly to help forge co-brand alliances. Today, while lots of other lines of business have taken root and grown at ACG, serving the co-brand market continues to be a thriving practice for us.  This year the co-brand market continued to evolve.  Some issuers purposely contracted.  Others got into the business or increased their appetite for deals.  Yet others struggled to maintain their status quo.  Given ongoing pressure on interchange, entitled and empowered consumers, and stiff competition among banks, what does the short-term future hold for co-brand?

 

As I said earlier, this letter, by design, can only scratch the surface of industry shaping subjects.  Hopefully, you think we touched on the most relevant ones.  If not, please let us know what’s on your mind.  Either way, we’d really appreciate a more detailed discussion with you about any of these issues…

whether or not you think you need help solving or navigating them.

Before signing off, I’d like to say how touched I was in November and December by the number of people calling to ask where our 2014 letter was!  It is rewarding to know our tradition has become one that many of you have embraced as well.

Here’s to a healthy, happy, and prosperous 2015.

Michael Auriemma