Dynamic Spending Limits the Next Big Thing in Credit Card Flexibility

With increasing competition, credit card issuing banks and financial institutions are looking at ways to capture more market share by unlocking new capabilities for customers. One of the latest entrants in this space is dynamic spending limits for credit cards. In simple terms, dynamic spending limits refer to the setting of a flexible credit limit for an issued credit card wherein the maximum spend on the card is continuously varying depending on the usage behavior of the cardholder.

In many ways, such credit cards mimic the dynamic spending cards usually issued to corporate employees for their official usage wherein the employer has the flexibility to set usage restrictions for each employee based on their roles and responsibilities. Before we go into the benefits of dynamic spending limits on credit cards, it is important to understand how the industry realized the need for such an offering.

The Evolution of Credit Cards

The global credit card market size is expected to surpass USD 1.14 trillion by 2033 according to studies. From established markets like the US to new and emerging markets in Asia and Africa, there is still a steady growth in demand for credit cards from users of all ages, incomes, and demographic brackets. The lucrative deals that customers can avail from partnering brands in retail, travel, entertainment, and other sectors offer a very irresistible proposition. With big growth in adoption, credit cards have also seen their share of problems being created due to fraud or personal financial mismanagement by customers.

Limiting the Damage the Old Way – Setting a Credit Limit

One of the biggest measures adopted by financial institutions to prevent overspending is the setting of credit limits for each card issued. The limits would be decided upfront based on the customer’s credit history and other eligibility parameters and it can be periodically revised as well. All purchases, cash withdrawals, or advances made are accounted against the credit limit. It was effective in preventing overspending and subsequent heavy debt. But such a technique that was followed for decades started to create problems having far more severe consequences than the benefits the limit realized.

The younger generation of credit card holders, as well as entrepreneurs or business users of credit cards often face significant challenges due to restrictions in their credit limit. Maxing out on their credit limit while on important travel occasions or business endeavors can be a major letdown. Several banks follow the practice of increasing interest rates on credit card EMIs when the utilization is high. Similarly, there would be scenarios wherein further transactions could be declined based on suspicion by the banks when credit limits are consumed beyond a tolerable extent.

Such moves were detrimental to new card owners especially those who were capable of handling larger transactions that are outside the purview of traditional credit limit-determining algorithms leveraged by card issuers. The focus thus shifted towards dynamic spending limits wherein a credit card doesn’t have a pre-defined limit of usage.

Changing the Credit Landscape with Dynamic Spending Limits

With such a powerful mechanism, card issuers can eliminate the hassles faced by customers when following the traditional card limit workflow. The spending limits allocated to a user will vary depending on their usage history, and continuous monitoring of purchase activity. This will be extremely beneficial for high-ticket spenders especially those who spend a lot on travel either on personal leisure or business trips. The ability to spend without worrying about maxing out credit limits or hefty fines and penalties is in itself a great relief.

The Journey into Dynamic Spending on Credit Cards is Not Easy

While the benefits of giving flexible credit purchasing power to worthy customers can help card issuers stay competitive, the initiatives that must be undertaken behind the scenes to facilitate such a flexible credit line are quite overwhelming.

For starters, banks or financial institutions that provide dynamic spending limits-enabled credit cards need to leverage intelligent insights from data on transactional behavior by card owners. Or they may have to set up flexible spending accounts to which such credit cards can be linked. Settlement systems used for managing bills of credit cards with dynamic spending limits have their own complexities.

Some of the bills may be settled by employers when the card is used on business missions. Some may be required to be settled by the card owners themselves. The same complexities may exist for ownership, limit variance calculations periodically, and other transactional data management.

Navigating the Challenges to Offer a Seamless Credit Card Experience

Treading into the path of dynamic spending limits with credit cards requires a whole new dimension of security, credit intelligence, settlement system configurations, and integration with flexible spending accounts if needed. Building such capabilities in-house would be a Herculean task and requires domain experts with complex digital engineering skills to create a resilient and reliable credit card ecosystem that supports dynamic spending limits.

This is where financial organizations and banks can consider leveraging the expertise of a technology partner like Verinite. Having empowered some of the world’s best financial enterprises to build new digital innovations with custom solutions and ready-to-deploy products, Verinite can help develop the most growth-oriented and risk-free roadmap for building a credit card ecosystem that facilitates dynamic spending. Get in touch with us to know more.