Point of Transaction 201 Lesson 1: PoT Landscape

Point of Transaction 201: Competition for Consumer Choice

Lesson 1 Discussion Board: What is the biggest driver of consumer payment choice at checkout today? Is it the value in the product or options at the merchant? Click here to respond.

Will That Be Paper or Plastic? As you walk up to the checkout counter with a cart full of goods, you are faced with a choice. How will you pay for the things you, or your kids, have tossed into the cart? If you’re like the vast majority of consumers, you have the funds sitting somewhere to cover everything in there – even the 4 boxes of Cocoa Puffs that your 5-year-old somehow snuck in there while you were reading the label on the organic yogurts. Those funds are either on deposit with a financial institution, sitting in a fund deposited for you by your employer (for examples, visit the previous section on GPR prepaid), or are on their way to you at the end of the week or the month in a paycheck. So, you’ve got (or will have) the money. But how do you plan to access it there at the checkout counter? For the payments industry, so much depends upon your answer to that fundamental question. An entire ecosystem of companies — retailers, processors, financial institutions, networks, technology providers, manufacturers, database managers, armored car companies, even the Federal Reserve — have businesses whose growth, revenue, profits, and futures are built from that simple decision made by individual consumers every day, thousands of times per second, all over the world.

Going to Ground: While many of us (this author included) love to spend our time talking about the coming wave of future growth in remote payments — mobile, eCommerce, and IP interfaces — it’s important to remember that the vast majority of payments today, and the companies who manage them, are firmly grounded in managing transactions from the physical point of sale. Consensus estimates of payments data indicate that over 80% of all payments transactions begin in a physical place. And while a growing share of consumer payments are electronic — almost all through a plastic card of some type — a large share are still the old standbys of cash and check. So, there’s a lot of room for growth in replacing paper with electronic payments. Let’s take a look at the prevailing trends in traditional electronic payments value chain for each of the key stakeholders.

 
• Consumers: As we discussed in our first section on Debit, consumers want to use the funds they have to pay for things. Why? Because, that’s… what they have. Although credit underwriting has tightened recently, the impact on consumer spending should be negligible. The vast majority of everyday consumer spending is against a deposit account, either directly — through cash, check or debit — or indirectly through using a credit card and paying it off in full every month. And they expect all electronic payments to bring them the same benefits — security, reliability, rewards — that they’ve come to expect from traditional bankcard products.

 

• Merchants: As we discussed as well in the first section, retailers want to clear consumers through the checkout quickly. Also, as we discussed in our first session, these merchants are accustomed to seeing unit costs go down with increased volume. Electronic payments haven’t necessarily performed that way. Large retailers are increasingly getting larger, using their cost leverage against suppliers to compete more vigorously in the marketplace. Some estimates place the share of all consumer spending in the hands of the top 200 retailers at north of 20%, which would make this group bigger than Visa and MasterCard combined.

 

• Acquirers/Processors: These folks want to process transactions, lots of them. And they’d like those transactions to grow. That means adding more merchants, getting the big ones and hanging on, and increasingly bringing more new electronic transaction options to large merchants to grab a bigger share of the growth of electronic payments as they replace cash and check. This strategic business driver increasingly means that even the acquiring arms of large integrated financial institutions, with significant portfolios of branded consumer payments on the issuing side, work closely with merchants to create options for them that compete directly with revenue streams on the issuing side of the business

 

• Networks: Payments networks work hard to maximize participation in their network, provide as many ways as possible for those participants to interact, and try to deliver value as transactions flow through to encourage more transaction traffic. However, as networks work to maximize preferential treatment by participants they have increasingly found that it’s the issuers of payment products, and not the acceptors, who are willing to exhibit a brand or product preference for their transactions. And so the majority of network value flows to…

 

• Issuers: …who are themselves increasingly large and powerful companies, representing high degrees of concentration in electronic payments. These companies are highly competitive with each other for consumer relationships, so they’re always looking for ways to drive uniqueness to themselves in products, services, and, of course, revenue. The pressure they exert on networks, particularly with regard to product uniqueness, platform support, and economic exchange, can be quite intense.

 

As all of these forces converge on that seemingly simple decision — paper or plastic (& what kind) — at the point of transaction. They may show up in very simple ways: The consumer-facing card swipe that automatically asks for a PIN when you use a debit card; the promotion to add your bank account number to your merchant club card; the parking meter or gas pump that only works with a card; and now, the potential discounts for using this card instead of that one, or cash instead of any. In our next section, we’ll look at how these forces have driven the evolution of acceptance options and consumer choice at the point of transaction, as well as the vigorous and robust investment in electronic options for consumers.

Lesson 1 Discussion Board: What is the biggest driver of consumer payment choice at checkout today? Is it the value in the product or options at the merchant? Click here to respond.

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