There are lots of things that will influence the actions of the players within the vast and dynamic ecosystem in 2016. But MPD CEO Karen Webster says, there are only six trends that you need to pay attention to. Well, more explicitly, she says, six trends that you won’t want to be on the wrong side of. The good news is that there’s still a little time to adjust – but not much. Time flies when you’re having fun.
If the principles of Nostradamus are to be believed, 2016 isn’t going to be such a great year.
Those who interpret the writings of this famous 16th century French astrologer predict that this year, Obama will be the last U.S. president, but not because 2016 marks his last year in office. They suggest that this will be the last year the U.S. will actually have a president.
Listening to the news, it sometimes seems that way.
Still, others interpret his writings — which hypothesize that the world’s events are cyclical and that history does really repeat itself — to mean that we’ll have severe meteorological catastrophes (doesn’t seem to require a huge leap of faith), that the Middle East will destabilize and erupt in war (ditto), and that instead of the world ending in 3797, as Nostradamus predicted, that it will, in fact, end this year.
That would be a real shame, since we’re just starting to have fun in payments.
But just in case these prognosticators are wrong, I thought I’d share my six for ’16 – the six trends that I think will define the year in payments – or whatever time we have left.
1. Mobile Apps Kill Countertop Checkout
Question: What’s the biggest friction consumers face paying for things in a store?
Answer: Standing in line waiting to checkout.
And all of the mobile payments apps in the world that substitute a tap for a swipe (and now the dreadful dip) won’t change that. In fact, it might even make it worse since there are so few locations where consumers can transact that way that it simply introduces more uncertainty, confusion and friction.
It’s well known that mobile phones and connected devices allow consumers to do lots of things anytime and anywhere, including shop, and to do those things even standing inside a physical store. We’ve been talking about the blurring of the online and offline worlds now on PYMNTS for the last six years — and with our MPD clients, even longer than that. We don’t think that’s much of a news flash anymore.
But in 2016, we’ll see the offline/online distinction blur even further, even faster and even more broadly.
And start to kill off the countertop checkout in the process – in some categories much, much faster and in a very material way.
And that is a news flash.
Consumers increasingly won’t use their phones to look for stuff inside or outside of a store, and then walk into them and wait patiently in line to pay for those items using a plastic card like they’ve done for the last 60 years. Nor will they routinely stand patiently in those same lines and whack their phones or their watches against a POS terminal that can enable a contactless transaction.
They’ll instead leverage cloud-based apps to checkout on their phones inside the store – and use them increasingly to pay things that they want to buy before they even step one foot inside.
And establish preference for the merchants that enable that experience.
That’s exactly the experience we’re seeing take off like a rocket ship in QSR, in many other traditional and even non-traditional retail formats and in the many connected end points that the Internet of Things makes possible.
And it makes total sense. That behavior replicates the habit that consumers have honed for the last 20 years while shopping online, and for the last seven, doing so via a mobile device.
In QSR, the impact is dramatic and in such a short time.
In less than a month’s time, Starbuck’s Mobile Order & Pay drove 5 million transactions a month and huge numbers of new downloads of its mobile app. Starbucks says that more than 20 percent of Starbuck’s mobile transactions are taking place this way now – and the service is less than three months old.
Taco Bell has seen 2 million downloads of its mobile app just because of that functionality. But there’s more. Consumers who order their burritos that way spend more, on average, about 17 percent more. It’s easy to click “yes” to the question “do you want to add side of beans to the order” online. Order ahead makes impulse buying a sport and that’s huge.
Domino’s Pizza now calls itself a digital company since 50 percent of its orders happen online. Pizza Hut says 40 percent of theirs do, too.
But it’s not just QSR where this checkout and payment transformation is happening.
Buy online and pick up in-store (BOLPUIS) is the hottest trend in retail. Ten percent – and growing – of Target’s online sales are done that way now. Kohl’s reports that 3 percent of theirs are, too – and the service has only been active for a few months. Retailers love it since the vast majority of consumers – 60 percent according to RetailNext — spend more when they get to the store to pick up their loot – on average, 30 percent more.
But here’s where it gets really interesting.
Walmart Pay just launched its mobile payments app which essentially mimics an eCommerce transaction at checkout – linking the consumer’s app to a QR code that not only triggers payment but also applies coupons, promotions and Savings Catcher and gift card balances. The phone can be inside a consumer’s pocket or purse – it isn’t even material to “checkout” once the consumer has been checked in via the app. Target is said to be toying with a mobile app that works in somewhat the same way. Macy’s, with PayPal, rolled out a checkout option that mimics a PayPal online/in app checkout in the store, with, it says, amazing results.
SAP and its connected commerce initiative brings together a variety of players to enable commerce at the gas pump without swiping at the pump or in the store – or even getting out of the car. And, of course, Amazon with its Echo ecosystem and dash replenishment system is all about giving consumers the ultimate cloud-based digital experience. All that’s required of the consumer is to ask Alexa to add Tide to the shopping list and it’s done.
Of course, countertop checkout isn’t going to die totally in 2016, or even entirely ever. Payments is a slow moving train, as we’ve seen. But in some categories, it will deliver a remarkable and dramatic shift in how consumers pay for the things they are buying from physical stores – paving the way for the retail transformation inside of the store that will happen in the years to come. The 2016 offline/online blurring trend isn’t about giving consumers an app that allows them to move seamlessly between worlds to shop but about giving them the ability pay that way, too.
Which will increasingly not be standing in a line at a counter – at least to pay.
2. Faster Payments Won’t Just Be About Speed
The world is in a lather over faster payments. Eighteen countries have implemented some form of it, and here in the U.S. a number of initiatives are underway to replace and/or modify the payments rails to enable faster, secure and data-rich payments between all of the ~13,000 FIs that exist here.
NACHA is the first to advance the ball down that field in the U.S. in any sort of meaningful way by enabling ubiquitous Same Day ACH this coming fall. Three settlement windows each day will enable settlement and posting the same day, where needed.
But faster payments, like beauty, is in the eye of the beholder and comes with a number of trade-offs. Speed can deliver great benefits in some cases, but can introduce friction in the form of risk, uncertainty and cost in others. There’s a natural trade-off between the speed of payments and their flexibility and efficiency. For example, is a real-time payments system without ubiquity among all of the various relying parties any better than same day or even next day with it? Or without the appropriate risk management or compliance requirements that guarantee the integrity of the funds? Or the accompanying data that makes posting seamless and efficient for the receiver? And with a business model that allows the banks to recover the investments made in new systems?
That’s why in 2016 the faster payments debate will shift beyond a discussion of what rails and initiatives can make payments happen faster but about those that can make payments happen better. That will be about making payments flexible and efficient — instant in some cases, but always efficient enough to deliver payment and the value-added layers that relying parties also need: appropriate levels of risk management, compliance, security and data that travels with the payment and enables accurate posting to banks and enterprise systems of record.
Rails that do that – be they new and/or modified existing rails – will then become the platforms for enabling a whole host of use cases – some familiar like instant bill payment and others that are yet to be defined.
And that will set an interesting tension within payments as these initiatives take shape and these rails become more defined in the years to come.
It’s not exactly easy to build a global payments system capable of operating at scale and moving trillions of dollars daily, securely and quickly between relying parties. It’s why the notion of the blockchain as the world’s global financial systems backbone is little more than interesting cocktail party conversation. Not only is its tie to bitcoin fatal, but it’s slow, even at the small volumes it carries today.
But, the concept of a distributed ledger, a software platform that can support new products, and new ways of moving data and money together has given rise to the new thinking that is influencing the “faster payments” debate today. There’s great agreement that we need a fast, transparent, and reliable way to move money between people, businesses and governments.
So, 2016 will be the year that we get a better sense of how the new financial services superhighway will look, who’s best positioned to build and operate the on and the off ramps for that new superhighway, who might be the first to give it a ride, and what methods of transport they’ll use. And how faster and efficient they really need to be.
And, of course, which initiatives, will hit a big dead end.
3. Contextualized Commerce Will Redefine Impulse Buying — And Payments Innovation
A couple of years ago around this time I wrote that invisible payments, a la the “Uber” experience, would influence the direction of digital payments. Payments would simply become invisible as they became embedded into other apps that in the first instance solved other problems for a consumer – just as Uber did for those who wanted an alternative to a taxi.
“Invisible payments” has evolved to become contextual commerce and it’s the latest buzzword in payments. Contextual commerce takes the notion of embedding payments into apps and raises it to the power of 1,000. It’s about payments enabling the various digital experiences that consumers engage in during the course of their day. And, it’s sweeping payments by storm for one simple reason: the act of shopping isn’t something that consumes a huge part of a consumer’s digital day.
The latest Pew report says that consumers today spend about 5 hours and 38 minutes online. About 2 percent of that time is spent “shopping.” Instead, what consumers do with their digital day is check Facebook or other social media apps, text their friends, take pictures, listen to music, watch videos, play games, get caught up on news and weather, search for stuff, and get directions.
All of these environments, naturally, provide a rich set of information about consumer behavior that can shape or influence or even trigger a purchase in a very relevant and contextual way. It’s why advertisers and brands and retailers find mobile and digital such an amazingly attractive environment.
It’s also why ad blockers are among the most popular apps on mobile devices. Consumers find being served with ads in that environment utterly and amazingly annoying.
But that is contextual commerce’s greatest opportunity – the ability to payment-enable impulse purchases in a new and different way.
Today, contextual commerce is about putting buy buttons in places that consumers visit with an interest in buying – like Pinterest. But, if reports can be believed, payment-enabling Pinterest isn’t setting the world on fire. It’s been suggested that one of the major retailers participating in the program is only getting something like 10 orders a month. That’s not exactly game-changing. But perhaps not all that surprising.
Consumers might go to Pinterest for inspiration and ideas and perhaps even with an interest in buying something at some point in time. But more likely, they’re going to be inspired when they are planning a wedding or remodeling their family room or seeing what the latest in spring 2016 fashions might look like. But not to buy at that moment.
Consumers still need to process those inputs, be convinced that what they see they really want to buy, is in stock in their size, and that they are getting that item at the best price. Unless the item is a branded and familiar product that consumers need or want to buy right then and there, interest doesn’t translate to a transaction.
Pinterest is facing the same issue as Facebook. Buying inside the News Feed may sound like a great idea since consumers spend so much time there every day, but consumers aren’t taking the bait. Clicking on a news story in the News Feed about the Top 10 trends of a Vogue stylist is different than buying one of the 10 things that every Vogue editor has in her closet directly from the News Feed. That fashionista would want punch out to read the story but would want to visit the site where the item is being made available, zoom in on the product, check it out and then potentially see if a knock-off exists somewhere else.
But all of this is contextual commerce 1.0.
Contextual commerce 2.0 is giving the consumer the opportunity to buy something in the moment when there is both an interest and intent to buy. And not from an ad, but from inside an environment that is also providing useful information, in context, to consumers in some other way.
Maybe that’s inside a messaging app. Or a fashion site. Or a recipe site. Or a news site. Or Netflix. Or YouTube. Or search. It could be an app connected to the home that triggers an automatic purchase – or addition to a shopping list.
Anywhere it’s easy for a consumer to make an informed impulse purchase – from a brand presented in the right context that takes the uncertainty out of buying.
Contextual Commerce 2.0 will make it possible for new relationships between brands and consumers to be established and for the retail playing field to be defined differently and on the consumer’s terms. We’ve seen it happen already with Amazon and its branded Dash Buttons where consumers order Tide and Bounty, not laundry detergent and paper towels. And with recipe sites like Yummly that offer prompts to buy SnapDaddy BBQ sauce for that pulled pork recipe that a consumer wants to make for dinner.
In 2016 – and beyond — the winners will be those who can enable a relevant commerce experience across any operating system, channel or buying environment enabled by secure digital account credentials that move with them.
4. Online Friction Will Increasingly Drive Consumers Into Amazon’s Retail Arms, Unless …
There’s a reason that Amazon crushed the 2015 holiday shopping season: it’s just really easy to buy things on Amazon. Fill the virtual basket, click and two days later stuff just shows up. Consumers are prompted to put in their password at checkout, but they use Amazon so frequently that they remember it – it’s not a point of friction.
That’s not the case with most other retail sites. For sites that consumers visit for the first time, the information that’s asked of them before they’re allowed to pay for things is mind-numbing in some cases, including on some of the largest sites online, including the sites where consumers may have account credentials on file. Unless a consumer remembers her password (which she rarely does unless she uses the same one everywhere) it’s a very painful process to get past that gate to checkout.
And, more times than not, when that happens, consumers either go to Amazon to see if they can get the item they want to buy there, or just decide they don’t need the item that badly and buy something else somewhere else.
Yes, this is done for the protection of the consumer, but it’s also done because the merchant wants to capture consumer data. Consumers aren’t given the opportunity to checkout as a guest in these situations and then reestablish account credentials once the transaction is done. On many sites, even checkout pages that allow checkout in one click like PayPal, MasterPass, Visa Checkout, live on the page past that gate, which of course you can’t get to unless you enter your credentials.
That costs retailers — and in a big way, especially since consumers have other options that are less friction-filled, and consumers are increasingly taking advantage of them. Our work with BlueSnap to compile the Checkout Conversion Index suggests that retailers lose about 36 percent of their sales because of this sort of friction.
And a lot of them lose those sales to Amazon.
In 2016, retailers will need to come to grips with how they want to engineer the checkout process so that it solves a merchant’s biggest problem – making sales – first and their desire for data problems second. Having great products and great prices is only as good as the consumer’s ability and willingness to purchase on their terms. Sorting this out one way or the other will not only determine the degree to which retailers drive consumers into Amazon’s open and willing arms, but how well retailers deliver their omnichannel ambitions, which will increasingly be about using online credentials to pay for things via cloud-based apps from physical stores. Consumers just won’t put up with the friction retailers insert into the online shopping experience, especially when there are lots of alternatives to buy just about anything they want to buy.
5. Loyalty Will Become Payments’ Killer App
Give something to get something is an age-old and very familiar adage. And it’s the premise of a lot of online marketing programs: give up an email address to get [fill in the blank]. It’s also the premise of a lot of loyalty programs: give up name, address, and email address in exchange for discounts and other goodies. It’s one of the ways that retailers have tried to compensate for the lack of data about the customers that walk into their physical stores – enrolling them in their loyalty programs gives them the ability to create a record of what’s been bought and how frequently consumers shop at that retailer.
The problem is that loyalty, though, as a category, is also pretty unimaginative. As a category, it came out dead last in our Pii360 Innovation Index survey last year, as did the players representing that category. Until recently, loyalty has been a lot of the same-old, same-old – points-based programs with declining redemption values, that don’t inspire usage, much less influence loyalty.
So, most retailers get back what they give: enrollment without usage. Most consumers enroll in more loyalty programs — on average 29 — than they use – on average 12.
Data – and the creative use of that data — has the ability to change that and inspire the frequency of use that builds preference, engagement and loyalty. Loyalty programs alone can’t deliver that since there’s no ability to close the loop. And payments platforms alone are limited in their ability to deliver that since there’s no incentive, outside of acceptance, to build a base. But together they can change the consumer dynamic for their mutual benefit.
Loyalty can become the killer app for digital payments in much the same way that points were the killer app for card acquisition back in the day. Creatively integrating loyalty capabilities into payments apps can help retailers get what they want — data on consumer behavior in their stores and a way to communicate with them – and consumers what they want – a benefit for being a loyal customer – and payments apps players what they want – adoption of their payments method online without violating consumer privacy or data security.
In 2016, we will see loyalty programs reinvented around data, payments and enabling platforms that simultaneously give consumers the incentive to give up the right data to get something of value from a retailer – and for that to become the foundation for building a lasting relationship between that consumer and that merchant.
6. Consolidation Will Shift Payments’ Balance Of Power
During the first part of 2015, many FinTech investors and startups partied like it was 1999. If the company you were running wasn’t a unicorn or on its way to becoming one, there must be something wrong with what you were doing. Unicorn valuations were a function of what might happen someday if all the stars aligned and revenue started flowing. But it didn’t matter. Investors, flush with cash that they couldn’t figure out what to do with given low interest rates and returns everywhere else, just kept plowing more money into those ventures to prop up the many firms without revenue and maybe even the semblance of a sound business model that might drive a revenue stream somehow, someday, maybe.
Even good companies with seemingly good ideas fell onto hard times. Alt lenders, for instance, that solved a lot of problems for SMBs in need of capital during the financial crisis, found themselves on the wrong side of the valuation spectrum after they went public and investors started to question their long-term viability.
In 2015, Square was the poster child for what happens to firms with great ideas that can’t scale efficiently. Square commercialized the mPOS market in 2009 when it launched, but could never cross the chasm and scale as their customers grew into the need for new and different capabilities. Their IPO not only failed to deliver the valuation that their last capital raise did, their future as a SMB platform is being questioned, as is their attractiveness as an acquisition by someone who might value their technology platform. Of course one could look at the $4.2 billion market cap of Square as of Dec. 31 and either be very impressed at what the company did in a short period or wonder whether there’s still a bubble to be burst.
But, in 2016, it will be time to sober up and that’s great news for anyone looking to pick up some assets for a reasonable price. At lower valuations, many of the unicorns (and wannabe unicorns) may now be good purchases by bigger guys looking to fill in the cracks or to buy some innovation.
And its not just the startups that are in play.
Some very smart players have been banking their pennies in the hopes of making some strategic moves as the market pushes downward pressure on valuations and that they get to snap up great companies for less then they would have cost even a year ago. It is very likely that American Express, at $69 billion in market cap and $27 billion less than it was valued a year ago, will either be acquired or taken private by a PE firm and probably broken up. Hey, I thought someone might even buy it for me for Christmas. Discover is likely in play, as well, as its network and issuing business are probably more readily sold – and potential even more valuable — broken apart then they are together.
Then, we’ll likely see lots of other interesting mashups as payments and commerce expands and extends into any number of places. Payments acquisitions won’t just be about one payments player buying another or even existing payments players expanding their capabilities into adjacent areas like lending, loyalty, or data analytics. Software companies like SAP and Salesforce have all shown their interest in adding payments and commerce capabilities to their platforms, and the acquisition of the right payments assets could accelerate and enrich those ambitions.
And speaking of platforms, there’s Alphabet and Apple with their sizeable war chests and commerce aspirations, too. The degree to which we see acquisitions versus investments or partnerships in payments capabilities by either of them will be directly related to their interest in becoming payments and commerce-centric instead of enabling those capabilities on behalf of the platform.
So, in 2016, I think we’ll see the payments and commerce industry get stronger, if not a little smaller in terms of the sheer number of players out there doing stuff. Without access to a freely flowing tap of capital, emerging and existing firms will have to dig deep and focus on the value they have to deliver to their stakeholders. Which includes, gasp, actually delivering real revenue streams. Those who survive will start 2017 that much stronger.
Then again, if some of the Nostradamus devotees are to be believed, it won’t matter since we won’t make it that far.
So, better get busy putting these six to work in the time that we have left this year. You never know, we just might make it to 2017 after all.