The Six Things That Will Change the Future of Payments
|ANALYSIS FROM KAREN WEBSTER
|“Fee Cap” And Those Other Three-Letter Words In Payments|
|Picking Yelp's Future Payments Partner|
By Karen Webster, CEO, Market Platform Dynamics (@karenmpd)
Well, it’s that time of year … summer is (sadly) coming to a close, the kids are headed back to school and 2014 strategic planning sessions are kicking off. If you’re someone who is leading, contributing to or relying on the output of these sessions, then pull up your beach chair, apply some sunscreen (this is a bit long) and read on.
The interactions among PYMNTS Summer School Faculty and students last week cemented my view that this isn’t payments as usual anymore and even payments the way everyone thought it would be even two or three years ago. There are six forces that will fundamentally reshape the way this sector operates over the next five to 10 years. You can bet all of the soft shell crabs in Maryland and salt water taffy at the Jersey Shore that these six forces will impact each and every player in this space in some way. And, there are only two outcomes: you can lead the creative destruction that these forces imply, or sit back and be the one who is creatively destroyed.
The culprit is the mash-up of connected devices, data and the cloud, which are dramatically accelerating the pace of change in an industry not exactly known for moving at warp speed. My colleagues and I have been talking about these things since 2007, but it is now possible to see evidence of their impact in full force. Here’s a peek at how this mash-up is feeding those six forces, and should be accounted for in your 2014 plan.
Interchange Fees Are Hosed
All I can say is that Judge Leon must have had a really bad experience with banks and bankers somewhere in his past. Not only is his ruling severe, but his rhetoric laced with the kind of sarcasm and cynicism reserved only for people that, well, you don’t really respect all that much. We’ll know soon whether the Fed will appeal. Those a lot smarter than me say that is a near certainty, but whether the Fed will be successful on appeal is anything but certain. The wildcard is the additional routing requirements that Leon’s ruling imposes, which could ultimately become a negotiating point in an outcome that could drive interchange fees much lower (maybe even lower than the 4 – 12 cent range) while keeping the routing rules where they are today. For more on the implications to this ruling on innovation, read here.
What’s for certain is that political and CFPB pressures on the card interchange model puts credit interchange at risk as well in the not too distant future. That will put at risk the entire payments business model and calls into question the value-add of the innovators who have developed products and value propositions around low cost acceptance models to interest merchants.
The implications of interchange fee declines are different depending on who you are. Networks and acquirers probably won’t all that much care much since they can extract their fees anyway and maybe even raise prices. FIs will care a lot since they will take a huge revenue hit. ACH might as well pack it in (along with the innovators who thought they would ride those rails to their IPO), and PIN debit could win at the expense of ACH. Three party systems that can drive volumes of consumers to merchants could keep high merchant discounts from extinction, and merchants will, of course, win big time since one way or the other they will force the industry to develop new business models to prove card acceptance drives incremental revenue.
In many respects, as crazy as this will sound, this whole battle over interchange has had one positive outcome and one hugely potential positive outcome yet to be realized. The one positive outcome is that the discussion has forced the payments industry to acknowledge that merchants are, in fact, a key customer worth listening to and one that has power to influence the direction of the industry. The one yet to be realized is the development of new business models that prove the value of card brands in enabling commerce at merchants.
The smart money is on credit and debit interchange as we know it today sharply declining over the next 5 to 7 years and that new business models need to be devised and in place well before that time. Those who follow the smart money are building their 2014 plans that way.
The Cloud Rules
If your three- to five-year strategy is tied exclusively to hardware, better think again.
The future of payments isn’t about devices: it’s about the software that enables commerce (more on this later) across a variety of environments. That’s why NFC is DOA and will soon be RIP and EMV won’t get off the ground in the US in spite of the liability shift implications. Those solutions tie merchants to devices that don’t give them the degrees of freedom they want to serve their customers.
As far as NFC goes, there’s little evidence anywhere that NFC in payments (outside of transit and a handful of countries such as Poland which are special cases) is igniting and in the U.S., the efforts that have relied on NFC – Google Wallet and Isis, namely, have floundered, or in the case of Google Wallet have died. NFC ties the merchant to a TSM and mobile operator and network and pricing scheme that they can’t control and an even lousier business case for ripping out terminals and replacing them with new ones. There are simply too many moving parts that have to come together to ignite in a relevant time frame and, repeat after me since you’ve heard me say this now so many times, the longer it takes for this to happen, the less likely it will.
EMV, on the other hand, is a solution to a problem we don’t have in the U.S. – significant fraud at the physical point of sale. It’s also tied to the way we have done business at the point of sale – plastic cards – and not the way we will do it going forward – digital. Sure, plastic cards won’t go the way of the dodo bird anytime soon, but since fraud in the U.S. is miniscule, the arguments that the U.S. is the weak link without EMV don’t hold water. What is the weak link is eCommerce, which is where all of the fraud has gone wherever EMV has been implemented – just ask Canada. I also understand the interoperability argument – those who travel oversees can’t use their cards – but that certainly isn’t the majority of people and solutions to address that can be handled in far less expensive ways. Somehow, I don’t think the tourist destinations are going to turn Americans away because we don’t have EMV—they’ll figure it out.
The mobile commerce revolution that we are poised to experience is about consumers and merchants using connected devices to communicate with each other over the air. There are and will continue to be any number of solutions to authenticate cardholders and secure data that have nothing to do with a physical card or a chip or EMV. Ask merchants why they should invest in EMV terminals when the future liability will be tied to digital payments and they’ll tell you they don’t know, that they’ve done the math and don’t see an ROI and really don’t want to.
The cloud, on the other hand, enables merchants to more easily adapt software solutions to their needs. It doesn’t take a rocket scientist to see more and more evidence of these developments each and every day and a ton of VC funding being directed to those players. Some of these cloud-based players create software platforms that make it possible for third-party developers to drive innovation even further to the edge, and both expand and accelerate its pace.
So, what are the implications for your 2014 planning activities? Well, a lot depends on where you sit. But, regardless, deciding which players make the most sense for you to enable, acquire, access or partner with will be impossible without a framework for realistically assessing and interpreting their capabilities, potential for ignition, ability to add value to your customers and enable profits for you. Without a framework for shortlisting key players, the more time you’ll spend with one entrepreneur after another whose goal is to seduce you into trial with their tale of goodness. Unless you plan to spend the better part of 2014 in meeting after meeting with innovators who need you more than you need them, you better have a framework for separating the wheat from the chaff.
It’s Not About Payments
Remember back in 2010 when Jack Dorsey said that payments should be invisible and everyone laughed? Well, he was right. Payments isn’t what’s driving merchant and consumer interest in using connected devices to interact with each other – it’s the shopping and commerce experience around payments. That’s gonna suck big time if you’re a payments player focused on improving something that has little friction today from a consumer and merchant perspective at the physical point of sale – payment.
I could write pages and pages on this but here’s the top line. Connected devices give players a chance to enable opportunities that solve a real commerce problem first, then bolting payment to that commerce solution. Payments comes at the end and should be invisible. It also becomes a one-time consumer decision. I’m sure that each of you has an iTunes account – do you remember what card you attached to it? Or, do you care each and every time you buy something on iTunes? I bet not. Consumers aren’t any different. In a digital world, they register a card to an application that enables them to buy online at eBay or Amazon or iTunes, book a room at Airbnb or secure a black car via Uber or run an errand via TaskRabbit or soon, order online via Yelp. At that point, card issuers become a series of 12 “X’s plus the last four digits and the expiration date. All branding is lost and so is the nature of consumer engagement in a physical wallet world.
So, that’s why everyone and his mother-in-law is developing a digital wallet. Only what most people have on the drawing boards are the digital equivalents of the leather wallet, which underutilize the power and potential of the “digital wallet.” I don’t think we’ve yet seen what the “wallet of the future” will look like and it will take us a while to get there. There will be many iterations along the path to wallet nirvana. What’s certain is that the digital wallet won’t be about enabling payments in the first instance but solving a bigger problem for merchants and consumers. For more on my views on digital wallets, generally, check out this chapter on digital wallets in my eBook.
Now, there is one exception and that is when using mobile devices (phones and tablets) as acceptance devices that facilitate payment. In that case, merchants are enabling payments where they never could before, or are enabling payments in environments that they weren’t able to before or using mobile devices as replacements for expensive devices that don’t give them the flexibility they want to enable payments and other cloud-based commerce-related activities using a traditional POS environment. And, there are surely a lot of players who are all over mPOS in a variety of ways.
So, the bottom line here is that if your 2014 plans are focused on using mobile devices to make payments simple, then better think again. And, if it does have even a remote connection to a digital wallet, which I would almost guarantee it does, then you really need to think about where you fit. Not everyone who wants a branded wallet should have one, and for many, the biggest challenge is having the discipline to say no to a digital wallet and yes to a strategy that gets consumers to want to register your card to someone’s commerce application.
Traditional Loyalty And Rewards Die
Wait a minute here while I climb onto my soapbox, again. If ever an area needed to be completely blown up, this is it. I could say that even creative destruction is too kind for this category. There’s a desperate need for an outright restart – new players, new people, new models, new everything. Why? Well, for one, the fuel that feeds this points-based beast will diminish severely pretty soon; if interchange doesn’t kill it off, the CFPB will, adopting the mantra that points-based programs disadvantage the disadvantaged. Second, merchants are sick of supporting programs that don’t tie directly back to them. Earning points for purchases made at their stores that are redeemed elsewhere doesn’t cut it anymore, and merchants have the power and the tools to turn their dissatisfaction into new ways of doing business with consumers – with or without you. And, third, consumers want immediacy and that doesn’t mean card-linked offers and statement credits that are invisible until they check their statements.
Here’s where the combination of connected devices, data and technology really earn their keep. It’s now possible for merchants to serve consumers with offers based on what they like wherever they happen to be in real time. And for merchants to establish programs that reward consumers for shopping in their stores and reward them even more based on how often they shop at that merchant. Payments players even have the ability to unseat those “set it and forget it” digital wallet payments choices and steer payment linked to those offers and promotions. Connected devices are with consumers throughout the shopping experience which means that merchants and other third parties can be communicating with consumers in real time and with offers that are relevant. As for payment, it isn’t what will be monetized anymore since payments will become nothing more than a commodity activity in this new payments world. But, payment will become something much more important - a proof point to the incrementality that merchants now demand and an important baseline for establishing new business models.
The implication for the 2014 planning exercise is pretty simple. Everything in the loyalty space is up for grabs, finally, and new models will emerge, driven by the merchant and the consumers they want to reach. So, run, don’t walk, away from the gobbledy-gookey loyalty traditionalists who wax on about “consumer engagement.” Please. The name of the game here is incremental sales and how what you are doing helps merchants get more people into their storefronts. And, that’s something you can then take to the bank.
The Creative Destruction of Financial Services
So, here’s a news flash. Retail banking is being disrupted by non-traditional players who don’t have legacy systems, practices and mindsets. Thanks to the tailwinds provided by the financial crisis and the emergence of mobile devices that are now in the hands of nearly everyone worldwide, consumers and small businesses are not only open to new banking players and approaches but are embracing them. M-Pesa has shown the world that mobile devices can lower the cost of delivering basic banking services to the masses—or actually in the case of M-Pesa simply substitute for a banking system that had never existed. And, services like mobile remote deposit have shown banks that it is entirely possible to outsource what was once a staple of banking services, check deposit, to consumers’ mobile devices and have consumers not only embrace the service but happily use it.
The bigger insight here is the rise of alternative players and the implications to the traditional banking space. It’s the impact of Walmart and its interest in capturing the “unhappily banked” via its Bluebird product and GreenDot and its interest in extending mobile banking services to the underserved via GoBank. It’s the impact of players such as Prosper and Lending Club and their ability to manage risk and extend credit to consumers online via their peer-to-peer lending platforms and players such as Rapid, OnDeck and Capital Access Networks and their ability to use digital platforms to manage risk and extend credit online to small businesses. It’s about players such as Discover and its ability to leverage its Financial Services franchise and extend mortgages and student loans to consumers, and Capital One and ING who started life as online banks and are just fine thank-you-very-much in enabling a variety of virtual banking services to consumers who don’t care that there aren’t physical branches to visit.
The generation of consumer for whom bricks and mortar mattered are getting older and they don’t need banking services as much as they once did. Those who do have more options than ever. The affluent, regardless of their age, have an array of players who are quite happy to bring the bank to wherever they happen to be. Banks have taken a huge reputational hit and now that consumers and small businesses have options, they are taking them, and many aren’t looking back.
The implications for the 2014 planning session? Digital allows you to rethink just about everything that falls under the rubric of “traditional banking” including - gasp - outsourcing “traditional” banking services to players who can serve certain customer segments better and that you can monetize in a different way. If you don’t want to be creatively destroyed by someone else, then plan to do it to yourself starting in 2014.
The Retail Revolution Is Underway
Raise your hands if you have ever heard this one before. Changing anything at the merchant’s point of sale is hard.
And it is. But here’s something that you may not have heard before. In spite of turning up their noses at NFC and EMV, more merchants are saying yes to changes at the point of sale. Why? Because the point of sale is no longer a device on a countertop but an opportunity to use technology and connected devices to interact with consumers wherever they happen to be, including outsourcing payment to the consumer’s mobile device via self-checkout or paying online and picking up in store via the cloud.
Even more interesting is the degree to which mobile and connected devices are driving people into physical stores and not the other way around. Sixty years since the shopping mall was “invented” and the consumer appetite for buying was ignited, one thing hasn’t changed much: consumers still like to touch and feel and see and try stuff before they buy it. Not everything, but the vast majority of the things that they spend the vast majority of their money on. Mobile devices help consumers check out reviews, product information and compare one product to another. But, when it comes to actually buying, they still like to do it in stores. And not just those crusty old Boomer Luddites, but teens, the most connected generation of all, 95 percent of whom say that they’d rather shop in stores than online.
The real insight here is also something that has been a very familiar refrain in my musings about this space: mobile blurs the on and offline worlds, making it possible for everything with a physical component to have an online component. But, I don’t think that this means that mobile/digital will destroy bricks and mortar. It will change retail, though, in ways that we are just starting to see, at both the consumer level and at the store operations level. Having the ability to communicate with consumers in real time during their shopping journey is something that merchants have never been able to do, and with that comes both power and responsibility – the power to influence sales, and the responsibility to be relevant.
One other thought here on the retail reinvention that is worth sharing. Anyone know what’s the biggest buzzword in retail? Omnichannel. It’s also probably the least understood. Yet that’s what the entire payments and commerce community is chasing.
It’s a fact that consumers want and expect consistency across shopping channels – but they aren’t the ones imposing the almost unattainable goal (at least in the near term) of having the same exact shopping and payments experience online, offline, on the mobile device, in front of the TV, etc. Most consumers who are regular customers of a merchant probably have created an account online with that merchant and have stored a card in that account which makes transacting online/on the mobile easier. They also aren’t complaining about whipping out a card to pay at checkout in the physical store.
What consumers do expect is that merchants know who they are across all of those channels, and that their status as a valued customer follows them wherever they shop. Having a consistent payment experience tied first to the overall shopping experience, at least now, trumps having the same payments experience across all of those channels, at least for now.
In terms of the implications for 2014, I’ll offer the words of a retail executive at one of the world’s biggest retailers. Let’s get multi-channel right first, then move to omnichannel.
So What Now?
Well, hopefully you are not (a) asleep or (b) sunburned if you have been reading this outside. My colleagues and I are classically trained skeptics. For instance, we were NFC naysayers before it was cool to be on that side of the debate. So, what I am about to say should give you pause.
Change in payments has been historically slow. For goodness sakes, it has taken 30 years for debit to be 50 percent of consumer spending volume. And, 40 years later, we’re all still running around with mag stripe cards in the US. But cloud based solutions and mobile devices, coupled with the merchant’s interest in pursuing new commerce solutions, will change all of that.
Your 2014 plans should reflect the likely reality that the pace of innovation in payments will accelerate sharply, resulting from the adoption of cloud-based solutions by merchants and consumers and what is expected to be the consolidation of software players and platforms to enable those solutions through those channels. Now, this isn’t to say that we’re all going to be running around with mobile devices and paying with them in physical stores next year. But, over the next five to seven, it’s almost certain that we will see a sharp uptake in the degree to which connected devices are enabling the shift from plastic cards to digital payments. Those who will be the most successful will be those who are enabling commerce that can be proven to drive incremental volume to merchants and relying on new business models to monetize those interactions. The implications are stark: those who wait will become invisible to their customers and in the space. Merchants will be the pace-car in payments. They have both the interest in and the power to drive innovation in payments. Oh, and they have the consumer relationships too.
The implications for your 2014 plan? Don’t wait. If you want something to happen in 2017 or 2018, it better be in your 2014 plan. Unlike other industries, change in payments requires the coordination of many players and takes time, even under the best of circumstances. And, it is inevitable that payments will be massively reshaped, thanks to the efforts of a variety of players who will heed these six forces and take the lead – and whose 2012 and 2013 plans may have even given them a head start.
So, happy end of summer, and happy planning.
Follow Karen on Twitter @karenmpd.