A Valuable Asset

Over the past decade, the Latin America and Caribbean (LAC) credit card industry has enjoyed explosive growth. What makes credit cards important for LAC’s issuer portfolios?

1. Strong Foothold: Credit cards have captured a dominant 30% of payments revenue in the region (1)

2. Lasting Customer Relationships: Credit cards are used for cross selling other banking products and existing credit card holders have strong response rates (60-70%) to potential cross sell efforts. (2) Brand loyalty also increases with multiple product offerings

3. High Earning Potential: LAC countries are amongst the most profitable credit card markets in the world due to high interest rates. In addition to interest income, issuers have diverse non-interest revenue earning mechanisms such as membership fee etc.

4. Sound Future Prospects: Rapid digitization and economic recovery are bound to accelerate credit card usage. Increasing customer willingness to take credit for rising non-essential spending will further boost existing adoption

The Need to Modernize 

The Covid-19 pandemic has hastened disruption and innovation across the LAC payments landscape. It has fueled a swift transition towards digital payments, leading to an 80-fold acceleration in volume. (3) The structural shifts are expected to last — from declining cash usage, to migration from in-store to electronic commerce, to emergence of  alternate payment choices.

On one hand, continued cash displacement, boost in financial inclusion and return to economic growth will accelerate existing upward momentum in share and number of credit card transactions. On the other, losing ground to alternate payment methods, changing customer behaviors, threats from big technology firms, and non-traditional players can diminish the viability of credit cards.

To remain the de facto payment choice, the real challenge, as well as the opportunity, lies in embracing these challenges head on. Traditional credit card issuers have generously focused on legacy card features like – standard rewards, fee waivers, network benefits etc., but now is the time to modernize by moving beyond those features and bundling an integrated suite of services / experiences.

Towards this end, this paper seeks to examine recent credit card trends and how issuers can modernize their value proposition.

Prevailing Headwinds 

Diverse customer preferences, new business models, advanced technologies, and regulatory pressures are all contributing to the rapid changes in payments. Some noteworthy changes are:

1. Phasing out of plastic: Transactions on the web or via apps are growing. Customers are increasingly relying on mobile payment solutions like Apple Pay, PayPal etc. These payment methods are putting the plastic credit cards in the background

2. Growing preference for debit cards: GenZ and millennial customers are increasingly preferring debit cards instead of credit when checking out

3. Rise of Super Apps: Facebook and other Super Apps are entering the payments arena with solutions that offer convenience to customers. Their daily, prolonged engagement with various customer segments have significant influence over the customer’s buying and paying decisions, which is a threat for credit card issuers

4. Disruption from fintechs: 20,000+ fintech startups have been launched in the last decade (4). A quarter of these fintechs launches between 2015-20 were in Payments, with Digital Retail Payments occupying the largest share (Exhibit 1). New players are providing credit cards, digital assets and digital lending via BNPL. These start-ups are also partnering with issuers to launch new products and services, increasing competition for traditional and legacy credit cards.

5. Rise of Alternate Payment Rails: Rails that route payments directly between bank accounts are gaining traction among customers due to their quickness and simplicity. Transactions which are routed over rails instead of a card network can bring a 10-15% reduction in issuer card revenue (5)

Exhibit 1. Digital Retail Payments has received the largest share of funding amongst Paymentechs

Race to the Future

In the presence of these threats, traditional bases for competitive advantage of credit cards such as rewards, network benefits etc. that issuers have grown used to, have dissipated. Issuers need to now move beyond these traditional features by employing customer segment led strategies, differentiating payment experiences, enabling digital capabilities, expanding self service features, forming partnerships, utilizing advanced technologies, creating personalized journeys etc. to promote credit card usage in the face of emerging challenges.

Multiple opportunities exist for issuers to strengthen their offerings (Exhibit 2):

i. Enhancing customer experience

ii. Renewing business models

iii. Leveraging newer technologies

iv.Augmenting value add services

Exhibit 2. Opportunities for issuers to strengthen their offerings

Enhancing Customer Experience

Customers preferences are moving in favor of simplification, transparency, personalization, convenience, innovation, and agility. Issuers must include these experiences as part of the overall value proposition to prevent alienating a loyal customer base.

Frictionless payment methods:

Adoption of contactless payments has accelerated due it ease of use, technology maturity, enhanced security, flexibility of payment devices, and the pandemic. Wearable payment devices are primed to take advantage of this trend, with total market expected to grow at ~27% CAGR till 2026 (Exhibit 3). (6) From fitness trackers and watches to jewelry and smart clothing, there are now a vast range of wearable devices that enable payments.

Given the surge in contactless payments, it’s perhaps no surprise that biometric embedded payments / card solutions are also on the rise. They are projected to capture 15% share of the global card market within the next five years. (7) Customers could begin using biometric embedded cards by recording their biometric data in the bank, which can be stored in the issued credit card, used for PIN free payments later. Even if the card is lost, the user’s identity cannot be stolen, and the card cannot be used by any other entity for fraudulent activity.

It is time for LAC issuers to fully exploit the realm of frictionless payment methods from e-wallets (Apple Pay) to wearables and biometric enabled cards. Promerica group has already partnered with Fitbit and Garmin to integrate cards into watch-based wallets , Fitbit and Garmin Pay, for a seamless and quicker checkout.


Rewards are primary drivers of credit card customer loyalty and motivation. However, generic and preset reward choices / categories no longer appease customers. 75% customers prefer personalized reward offerings (8) and 47% indulge in repeat purchases from issuers offering market relevant and innovative rewards. (9) To drive reward personalization, some issuers  provide accelerated rewards on top spend / preferred merchant categories. In LAC, Promerica group is among the few issuers personalizing rewards with options to earn accelerated rewards on top spend merchant categories. Other examples of reward personalization include rewards on rotating merchant categories. Santander has adopted innovative reward accumulation mechanisms, rewarding customers based on responsible card usage, timely bill payments, use of digital channels etc.

Cryptocurrency based rewards are also gaining traction, especially in LAC which has high cryptocurrency adoption. These mechanisms have proven to be successful in attracting young millennials or new-to-credit individuals.

Exhibit 3. Expected growth in wearable payment devices

One-stop Services:

With mobile penetration of ~70% in Latin America (10), Super Apps have a huge potential to unlock. These apps are a one-stop platform for multiple financial needs and offer greater convenience, with high in-app customer engagement. Issuers must leverage the super app ecosystem and bundle various banking and non-banking services. While Super Apps will likely include all core banking features like card application, activation, etc., other features such as peer-to-peer real-time payments, virtual assistance, spend categorization, budget tracking, in-app reward redemption, split payments, tax payments, dedicated promotional offerings, real-time reward balance alerts, contextual push notifications, payment schedulers, product catalogues, shopping and entertainment, education and public welfare, movie bookings, taxi services, food delivery etc. will also likely be present. Further, with the emergence of Open Banking in LAC, issuers can encourage customers to engage with their financial data in innovative ways by consolidating all credit card information in one place. Leading banks in Dominican Republic are moving in this direction by unifying different banking and non-banking services in their mobile banking app to provide seamless customer experience.

Renewing Business Models 

Rise of embedded finance is rapidly changing traditional banking. Emerging business models are challenging traditional processes starting from the way banks interact with customers and fulfill their needs. Issuers need to act in accordance with existing scenarios to remain relevant and increase their credit card sales.

Integrate alternate financing solutions:

Alternate financing solutions like ‘Buy Now Pay Later’ (BNPL) create a classic two-sided network that delivers strong benefits to both consumers and merchants.  For consumers,  the upside includes easy checkout,  generous and often interest-free installment terms, and convenient payments. Merchants and fintechs are seeing value in these solutions because of enhanced cart conversion, increasing average order value, repeat customers, and attracting young customers. Global BNPL market is expected to reach $4 trillion by 2030. (11)


BNPL solutions are offered in different types

(a) Integrated shopping apps like Klarna and Afterpay that engage customers through complete merchant subsidized 0% APR solutions for small purchases and monetize engagement through offerings other than BNPL financing (e.g., cross-selling of credit cards and banking products)

(b) Off card financing solutions like Affirm and Uplift which provide partially merchant subsidized APRs for midsized purchases

(c) Rent-to-Own models like AcceptanceNow which target subprime consumers with high implied APRs, longer duration to pay, and options to return purchases in case of payment failures

(d) Vertical focused solutions like CareCredit and GreenSky which cater to industry specific financing (e.g., healthcare, home improvement)

(e) Card linked installment offerings like Citi Flex Pay and American Express Plan It which have post purchase installment offerings with issuer / network subsidized APRs.

Off card financing solutions are growing in LAC, given low credit card penetration. Card linked installment offerings also have a high potential to grow if issuers start integrating such solutions into their credit card value proposition.

Enhance digital capabilities:

More than 60% of consumers across Brazil, Mexico, and Colombia are willing to leave their brick-and-mortar bank for fully digital competitors.(12) Neobanks or most digital banks strategically target the unbanked population and tech-savvy millennials with their cost-effective structures (no monthly fees, no withdrawal, or overdraft costs), personalized customer experiences (budgeting and money-tracking tools, real-time balance alerts), freemium pricing strategies, multi-tiered subscriptions, innovative card designs, virtual cards, instant onboarding and activation, higher reward percentages, omni channel presence, niche targeting (women, students) etc.

Traditional LAC credit card issuers should get ahead of this trend by revamping their own card value propositions to provide a seamless and efficient digital interface to their customers.

Leveraging Newer Technologies 

Credit card issuers can greatly benefit from the adoption of advanced technologies to capture an estimated $1 trillion of incremental value. (13)

Smoothen credit origination:

Today credit origination is a time-consuming process, with traditional banking methods relying on manual intervention for verification of transactions, credit scores, personal information etc. Entire customer onboarding process is prone to human errors, resulting in customers not getting the right product in timely and efficient manner. Artificial Intelligence / Machine Learning (AI / ML) can automate these processes to reduce turn around time and enhance customer experiences. Banks are increasingly partnering with fintechs and credit bureaus to leverage their AI / ML algorithms for making credit cards available for their customers in a matter of minutes. A leading bank in Dominican Republic has partnered with FICO to automate its lending process, implementing new credit scoring models, AI-based origination manager decision modules etc. It automated 80% of its loan applications and reduced the processing time by 50%. (14) Issuers can greatly benefit from such partnerships by fastening their credit origination processes.

Enrich credit decisioning:

Although issuers provide financing solutions to significant share of population, large segments of customers are underserved. New-to-credit or thin-file customers are a common example of this segment. Today, issuers refrain from providing credit cards to this segment because of lack of decisioning factors or poor historic transactional data. While transactional data is paramount for credit decisioning, thousands of additional data points are available to prove the creditworthiness of new-to-credit consumers (Exhibit 4). Fintechs are increasingly relying on non-transactional data like call or text patterns, social media profiles, geo coordinates digital footprint, SMSs, device data, emails, utility payments, delivery apps, monthly EMIs, etc. for credit decisioning. These fintech players are available to complement issuer credit decisioning processes through their AI / ML algorithms.


Exhibit 4. Categories of Alternate Non-Traditional Data to leverage

Bolster e-commerce transaction security:

Growth in e-commerce has led to rising transaction fraud. As much as 20% of new accounts created in LAC are fraudulent, and the world’s highest card-not-present (CNP) fraud rates are found in Mexico and Brazil.(15) To combat CNP fraud, EMV 3D Secure 2.0 has been released with ‘risk-based authentication’, enabling faster and securer transactions. This allows banks to exchange ~150 data elements on every transaction, which includes payment specific data like shipping address, as well as contextual data such as device ID, transaction history etc. Issuers can use this information to accurately assess the risk level of transactions and select appropriate transaction responses (frictionless vs. challenge). Unlike static authentication processes which create customer friction by requiring cardholder verification for all transactions, EMV 3D Secure 2.0 only requires verification on the riskiest transactions (Exhibit 5). Ability to share more data using 3D Secure 2.0 aims to increase number of transactions that can be authenticated without friction, This helps customers enjoy reduction in transaction time by ~4x (16), lowers false declines, and revives trust.

Exhibit 6. Authentication flow using 3D Secure 2.0

Augmenting Value Add Services

Increasingly issuers are offering diverse value-add services to help maintain customer financial well being and develop a sense of belongingness. Additionally, these services are becoming an important source of revenue and competitive advantage.

Targeted experiences:

In LAC, segment focus on millennials, women, fitness enthusiasts, etc. is becoming popular, delivering growth through a large number of new customer segments. Issuers are increasingly partnering with merchants such as PriceSmart, Bravo etc. to pursue these customer segments. At present, these card partnerships account for one-third of total card portfolio in LAC. Issuers are targeting segment focused experiences through these partnerships e.g., medical cover for women specific diseases, delivery partnerships for courier services, gifts exchange, laundry,  benefits on women owned businesses, reward redemption for payment towards loans, special offers on visits to gynecologist or purchases of women hygiene products. While many customers are interested in these partnerships for their specific rewards, issuers also need to tailor their card offerings closely to specific benefits / experiences to capture these segments.

Supplemental card controls:

LAC is home to ~106 million young people 15-24 years of age. (17) Issuers can expand their customer base by targeting this younger generation through their parents. Transaction control services let cardholders place their own rules on credit cards and get notified. They can also set alert and decline settings tailored to specific transactions and merchant types (e.g., gambling, gasoline). These features create greater access to financial services for the younger generation and instill responsible credit usage at an early age.

Unified payment experiences:

One in three top merchants rely on credential-on-file business models. Customers are looking for token management tools to securely manage their increasing credential-on-file transactions  Token management tools link tokens across different merchants into one unified place for a 360-degree view of the customers’ buying behavior. Customers can push credit cards to a new device or merchant, suspend, resume or delete a token, and update tokens automatically when their card or / and their mobile is replaced, stolen, or lost. Several fintechs are providing token management solutions and issuers can partner with these fintechs to empower customers with greater control.

In Closing...

Covid-19 pandemic has accelerated digitization of payments. However, with changing customer expectations, entry of tech giants, disruption from fintechs, and emergence of alternate rails, the future of traditional credit cards seems ominous. Issuers need to strategically rework their approach, by revamping value proposition, switching to smarter business models, enhancing specific digital capabilities, and making the right technology investments.

Kepler Cannon can support credit card issuers in reinventing themselves and capturing such growth opportunities. Our market intelligence, proven strategic frameworks and experience across the payment landscape makes us an ideal partner.

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