If one were to attempt to boil this week’s payments news down to a single question, it would likely be: “What happens now?” Consumers and businesses are unsure of what the “next normal” will look like — and when it will begin.
Amit Jhawar, formerly general manager of Venmo and current venture partner at Accel, joined Karen Webster for the latest edition of This Week In Payments to break the latest developments down. They discussed the digital shift, the future of buy now, pay later (BNPL), where to look for the first green shoots of economic recovery and why Google and Shopify just might offer Amazon some real competition.
Making Sense of the Digital Shift
Jhawar told Webster that “what’s actually happened is that some things that would have taken three or four years of digital evolution over time have arrived early and people are trying new solutions.”
He expects some of those solutions to stick around far longer than the pandemic that spawned them, and change the entirety of the payments and commerce ecosystems.
That a digital shift has happened is undeniable. Consumers work, shop and entertain themselves at home, prepare the vast majority of meals at home and enhance or enable all of those activities by leveraging digital channels. That’s the part we all know, Webster and Jhawar agreed.
But the big question mark is how much of that shift represents a long-term sea change in consumer behavior and how much is just blip. Jhawar said answering that requires looking at where the real value-adds are as opposed to the next-best-thing offerings.
“I think the question is: ‘Once we’re all allowed to go back into a physical location, does the trend continue, or does it kind of pause for a while? And then, ‘Did those who created digital interactions, do they outperform because they have lower costs?’” he said.
Jhawar said we can already see places where digital interactions will stick, because the main challenge they faced was merely overcoming consumers’ initial reluctance to try them out.
For example, when consumers get their groceries delivered curbside and see that their orders are correctly filled and the produce isn’t bruised, they’ll likely carry on with digital ordering because the value-add of saving time is apparent. And when customers can scan QR codes to pull up a restaurant’s menu, open a tab and pay once they’re done, that’s an improvement over looking for a waiter.
Jhawar said such systems are “adding ease, and people aren’t going to go back to make things harder on themselves. These are great outcomes for consumers, and certainly businesses that are providing that digital experience benefit and will definitely outperform those that don’t.”
He said the next normal will be defined by players who use digital to build something better than what came before, instead of merely digitizing the status quo.
The Google/Shopify Pair-Up
The digital status quo got a major shakeup this week with the announcement that Google was dropping its commission fees for merchants selling on its Buy on Google platform. It’s allowing merchants who want to sell on Google to enable their storefronts using Shopify or PayPal.
Webster described the move as “a turnkey way for Shopify merchants to get established with selling on Google,” while Jhawar noted that Amazon might actually be seeing its “first credible threat” emerging.
That Google would want to make a move on merchants makes sense, particularly as Amazon has begun to take a bite of Google’s product-search results. But actually getting merchants onto the Google Buy page has proven to be a challenge the pair-up with Shopify could solve. It also helps Google further differentiate its shopping experience from Amazon’s.
“If you are going to buy something that’s very well known — a clock or some bleach — you are probably going to buy that on Amazon,” Jhawar said. “That’s not necessarily the type of thing I am buying [on Shopify]. I am shopping [there] at a small store, and the reason I’m buying it is because there is something about that brand or company that makes it interesting and stand out to me especially.”
Jhawar said that’s a good starting point for Google, which enters the Shopify tie-up with a massive user base. If Google can convince a segment of that base to use its platform to transact directly with digital merchants, the company can build its monetization far beyond advertising, he said.
Jhawar said it’ll be interesting to watch what Google does next, and how the search giant ties other functions like Google Maps into a contextual-commerce flow to build even more channels for seamless shopping opportunities.
“There are a lot of things to watch with Google,” he said. “They are a traffic aggregator with a lot of user volume, and there is a lot they can do with that.”
The Buy Now, Pay Later Future
Buy now, pay later is offered in a variety of models by a host of different players — Affirm, Klarna, Afterpay — and as of this month, Visa and its issuers.
The concept has enjoyed a big bounce in recent years, powered by millennials looking for ways to expand their buying power but nervous about revolving-debt products like credit cards. Jhawar said that’s left a lot of consumers “clinging to debit” despite the fact that so doing “blunts the amount they can actually spend.”
Moreover, he noted that banks are cutting back given today’s economic downturn and are less likely to take a chance on potential borrowers. Jhawar said that taken together, those factors should create momentum for installment payments and other alternative-lending products.
In an environment where traditional credit is curtailed, such lenders are providing credit via products that offer better transparency and highly digital interfaces that old-school financial services firms often lack. Jhawar said the only question now — particularly for BNPL startups facing their first economic downturn — is how ready their risk models are to handle the current situation.
“What remains to be seen is if the underwriting that is being done is being done on people who can actually pay back,” he said. “It works in a bull market, [but] the question is, ‘Now with 30 million Americans unemployed and no clear way on how the economy gets jump-started again, do you really want to be expanding credit at this point in time?’ If you’re really smart and you have the right algorithm, you can do it. But I think some other people may stub their toe a few times before they get to the other side.”
After all, Jhawar noted that we probably haven’t seen the worst of the downturn yet. Government stimulus funds have blunted a lot of the problem, but they can’t go on forever.
The bottom will eventually come, and firms that will stumble will be the ones that prioritized growing their underwriting base at the expense of only taking customers they were reasonably sure would pay the money back. “I think where you start to see companies get in trouble is when they don’t try to hold that strict line of credit quality,” Jhawar said.
What Comes Next
Predicting the future is nearly impossible given today’s uncertainties, but Jhawar said that doesn’t mean there aren’t economic green shoots beginning push their way through the morass that has enveloped the world.
He said what particularly interests him as an investor are those players building infrastructure to support the rapidly expanding digital ecosystem that will allow transactions to happen both seamlessly and securely. Jhawar said while the jury’s still out on exactly which digital experiences will stick with consumers, what’s certain is that many of them will.
“What we saw at first was a big move of offline-only merchants to online because they had no other way to reach their customer,” he said. “I think they struggled with some of that move and the complications that came along with it, like fraud. But now they’ve built all these layers of digital infrastructure, and what we will see is those layers becoming more and more valuable over time.”