Yep. It’s that time of the year - when we pause to reflect on the year that was as we prepare to embark on the year that will be. And, 2014 was quite the year in payments – one that got more interesting and intense as the year progressed. At end of 2013, I wrote a piece that offered my take on the six forces that I believed would inform the direction of payments in 2014 and help payments execs hone their payments “sixth sense” in the year that is now about to come to a close.
So, how I’d do?
I started that piece by saying:
“2014 promises to be a year in which a number of new developments worldwide will surface that reinvent the relationship between consumers and merchants and radically transform the ecosystem that supports it. Those developments will serve as a catalyst for the future of how this vibrant industry will perform.”
Well, that turned out to be the understatement of the year!
From Apple Pay to Alibaba to breaches and breakups, there were many events that happened in 2014 that will set the stage for 2015 and beyond. I narrowed that list to the 10 happenings that I said, looking back, were the pivotal points for payments this year. The common thread among all of them was the opportunities each created to reinvent the relationship between consumers and merchants, and potentially shift the balance of power, longer term, across the payments ecosystem.
As for the “six forces” that were designed to give execs their “sixth sense” in payments, well, here they are, too…
Force No. 1 | The act of paying – and therefore payments - becomes invisible
Now, anything that a clever entrepreneur has identified as an offline point of friction, can now not only have an online solution, but one that enables payment.
We saw any number of players embed payment into apps in order to solve for the friction of bringing buyers and sellers and merchants and consumers together in the offline world.
For instance ….
Services marketplaces like Thumbtack that brings together tradespeople with capacity and skill and consumers with a need would be impossible to ignite but for the ability to enable booking and payment via an app.
Online ordering and delivery apps flourished this year, with Starbucks even deciding to give it a try. And, we even saw innovators one-up the online order/pick up in store retail trend by teaming up with third parties to actually deliver merchandise to the cars of consumers as they approached the store.
We also saw OpenTable embed payment into its dining reservations app to remove payment friction at the end of the meal at finer dining establishments.
Meanwhile Uber’s invisible payment ridesharing service exploded around the world, although it met its match in India which insisted that it reintroduce payment friction via a third party wallet, which of course was better than its reception in South Korea which indicted Uber’s CEO and Korean country executive for messing around with their insulated and highly regulated taxi business.
Force No. 2 | The future of payments lives in the cloud
If the future of payments isn’t about the act of paying but buying and the act of paying is invisible to the consumer, then the future of enabling those payments is about the cloud and not hardware.
OK, so tell that to Apple and Apple Pay, you say, which is all about hardware and a Secure Element in the phone. I say – yep, all true, for now.
But also why the biggest players on the planet - whose entire businesses are wrapped around hardware – hedge their bets like crazy on software and the cloud.
For instance …
Ingenico, whose bank account must be bulging thanks to the sales of its EMV terminals in the U.S., double down on online, cross border online and mobility via a series of acquisitions, investments and new product rollouts in 2014.
Ditto with Vantiv and First Data who are shifting their focus away from selling processing and hardware to merchants to creating solutions and apps that are device and technology agnostic.
Even the payments networks that gave Apple Pay life, are hedging their bets on hardware-based mobile payments solutions by investing in initiatives that advance their own cloud-based payments schemes and tokens and tokenization schemes that are technology and channel agnostic, as well.
And, let’s not forget that the players, at least so far, that have the most sizeable roster of registered digital accounts – Alibaba, Amazon and PayPal – are all cloud-based. And the most successful mobile payments scheme in the United States, Starbucks, is, too. As is Visa’s counter to Apple Pay – Visa Checkout and MasterCard’s MasterPass platform. MCX’s CurrenC isn’t like to be NFC enabled either, and LevelUp, has gotten quite a head of steam in the QSR space by embracing apps and QR codes.
As I said in my “sixth sense” piece and will say again, there’s nothing wrong with NFC as an enabling technology. Rather, it’s an observation that the longer it takes for NFC to gain enough presence in merchant locations (Apple Pay is accepted at less than 100 merchants – there are 9 million in the US), the more risk there is for cloud-based, beacon-enabled payments schemes that work for any consumer with any handset and an app, will gain momentum and leave it behind. And that as an interoperable standard, that depends on hardware, it’s totally unrealistic. There will be many emerging markets for which the only hardware that enables payment is another mobile device.
And, so, yes, now that you press me, with mobile, the cloud, and wireless I do think that NFC’s time is past, sort of like VHS tapes and video rental.
Force No. 3 | Financial services, retail and payments are being creatively destroyed
The creative destruction of retail and financial services is in full swing – third party digital wallet providers and alternative providers are emerging as tomorrow’s sector leaders.
I know what you’re thinking – Apple Pay embraced the existing payments ecosystem so on this point, Webster, you’re dead wrong.
That’s only if you don’t look below the surface at the Titanic-sized iceberg that’s Apple Pay and that could totally disrupt the status quo of the payments and commerce ecosystem.
Like starting with the fact that it’s called Apple Pay.
It’s the Apple brand that’s front and center and the issuers who are promoting Apple Pay like crazy are, well, sort of invisible. That’s not to say that they’re not important, they’re providing the accounts that enable the Apple Pay wallet and transactions to happen. And for that, they’re paying Apple on each transaction and seem happy as clams to accept the role of Apple as the intermediary standing between it and their customer and paying for the opportunity.
Tokens, the keys to the consumer data kingdom in schemes like Apple Pay are being provided by the network on behalf of many issuers which gives networks control over who accesses that token data and how much it costs to do so. Issuers are hoping against hope, of course, that mobile in store volume skyrockets and even shifts from debit (lower interchange) to credit (higher interchange) – which at least for me - is exactly what’s happening. If that happens, issuers win a little, but merchants not so much, at least in this scenario.
Which leaves the door open, of course, for a merchant friendly solution by an existing digital wallet provider or a new one to emerge to disrupt the balance of power even further. Layer on top of that the move on the part of NACHA, The Clearing House and the Fed to add enhanced same day/real time clearing and settlement to the ACH network and you have all sorts of possibilities swirling around that have the potential to give the existing ecosystem heartburn over time.
And that’s just payments. The alt lending space exploded in 2014, with Lending Club and OnDeck both going public, having filled a gap big enough for them and players like them to drive their innovative platforms through over the last several years. Square and PayPal both got into the merchant cash advance business lending money against receivables to merchants using their platforms, and taking repayment from future sales. New technology, new risk models and new ways to secure risk allowed all of these new lending platforms to flourish and banks to miss out on the opportunity to establish relationships with and revenue from these small businesses. In a twist, however, banks are now partnering with these new lending platforms as a way to serve their existing relationships while passing the risk off to those who can better assess and manage the risk.
Force No. 4 | Out with the old business model, in with the new
The way in which money flows across the payments ecosystem will look dramatically different a few years from now than it looks today.
How about these few data points for support.
Exhibit One – Apple Pay in the U.S.
Exhibit Two – EU putting the kibosh on interchange and legislating it to oblivion.
Exhibit Three – Uncertainty over whether Supreme Court in the U.S. will give the retailers another chance and hear their appeal of the Fed’s Durbin price caps (which the retailers think are too high).
Exhibit Four – Google hopping on the interchange bandwagon and suing Visa and MasterCard.
Exhibit Five – The possibility that the Fed proposal for Real Time ACH is to have the banks invest hundreds of millions of dollars to develop that capability while forbidding interbank fees to cover the costs.
Exhibit Six – The network’s new tokenization scheme and fee schedule.
Exhibit Seven – LevelUp’s momentum in adding merchants to its network with its “interchange zero” and loyalty-based incentive fee structure.
Exhibit Eight – MCX/CurrenC which was conceived as a low-cost alternative to the traditional payments network and has 25 or so merchants that drive $1 trillion in spending as members.
Exhibit Nine – Operating a payments’ network isn’t free.
There are a lot of headwinds facing the business model that underpins payments today. Payment for acceptance has always been a merchant gripe, but the regulators seem increasingly sympathetic. And some of the biggest retailers in the market do, as well, since they seem willing to pay to both build an alternative they control while paying to support the existing system used by their customers today (and for many years to come). Whether by regulatory, brute force or by the creative destruction that the industry controls, a new business model for operating and monetizing payment will have to emerge. And now, with the ability to gather and present data as part of the shopping and commerce experience, a new alternative based on data seems not only possible but also plausible.
Force No. 5 | Consumers will decide the winners and losers
Connected devices and the cloud may reinvent the retail experience and business models may totally change how money changes hands across the ecosystem, but it’s the consumer who will decide the winners and losers.
And, so far, the winner is …. the plastic card – everywhere in the world! (Except in all the other places where it is isn’t—there, cash is the winner!)
Merchants may want cheaper solutions and the networks may want digital NFC-enabled schemes, but the consumer will have to be convinced that the devil they don’t know – mobile payments – is better than the one they do – the plastic card and cash. And until they are, guess what. They’ll keep using them and merchants will keep accepting them for payment.
Do consumers love their mobile devices? Of course they do. But using them just for payment isn’t really floating their boat right now because there is too much inconsistent acceptance.
Do consumers want a safer payments experience? Of course - times two. But the endless string of breaches hasn’t stopped them from using their plastic cards. They know that their bank will protect them if something goes wrong.
For mobile payments to succeed, it has to eliminate friction or add value to consumers where friction exists today. In the store, that hurdle is a big one to clear but can be solved a few different ways, perhaps by wrapping loyalty around payment, creating a better consumer experience (like being able to tap and pay and not sign no matter how large the purchase) and/or being accepted at most of the merchants that consumers visit frequently. But getting all of those right and at a critical mass of merchants will take time, agreement on technology standards, refinement of security standards and protocols, tweaks to network rules and quite possibly a new business model.
Now, transacting in app and online, the situation is vastly different. There is tons of friction today and an easier way to pay is both needed and wanted by consumers. It’s also how those with the largest number of digital wallets today have accumulated them – they’ve made it easier for people to transact online and in apps. And that’s where the big battle ground for payments will happen over the next couple of years – and will likely enable consumers to pay for things via those apps even when they are standing in physical stores.
Force No. 6 | Change won’t be as fast as you think or as slow as it’s been
Everyone wants to know how long it will take for more than 50 percent of consumer spend in the developed world to happen via mobile devices and the answer is whatever you’ve heard, multiply by two.
Rome wasn’t built in a day. And changing the way that consumers pay for the ~$4 trillion dollar’s worth of goods and services here in the U.S. and $22 trillion worldwide is going to take time, as motivated as innovators and merchants and issuers and networks are to make it happen faster. If we’re waiting on all merchants to have technology that enables a new way to pay, e.g. NFC, then it will be at least five years before 80 percent of the merchants in the U.S. have terminals capable of supporting that technology, not to mention consumers with phones that can support it, too. Being capable is also a long way from being activated. Then, getting all of the same standard to be adopted at 80 percent of all merchants across the globe? Yikes.
There are, as I said, a couple of ways for mobile payments to happen faster. The first is for consumers to fall in love with a method that they simply want to use for everything and merchants, seeing that, scramble to do whatever they need to do to support it. That’s the bet that many have placed on Apple Pay. Those who have used it, love it. But the constraints on the user side (have to have an iPhone 6) and merchant side (have to enable NFC) limit ignition unless Apple Pay goes to the cloud (see Force No. 2 and why I still think it’s relevant for Apple Pay) and they do it fast.
The other is that a killer app comes out of nowhere that all consumers with smartphones want to use and use at their favorite merchants. That, too, is what everyone is furiously solving for. And, that’s not likely to be just about payment, unless that “killer app” enables payment at just about every merchant in one fell swoop (so a technology play that literally turns a phone in a ubiquitous payment device) or is inextricably linked to value that consumers get when using it.
So far, attempts on that score have been unremarkable. Amazon Fire Phone hoped that killer app was Firefly, the showrooming app that would literally grab sales out of the merchants physical store (didn’t happen), it’s the magic that MCX is hoping to create with its new scheme (if it ever launches) and what many third party wallets have mistakenly thought was just tapping via a phone instead of swiping with a card (Isis and Google Wallet).
The third, of course is to combine one and two and enable it via the cloud so that all consumers with any device – phone, tablet, wearable, iOT-enabled device – can take advantage of it immediately across any of the channels they care to transact.
Which is why 2015 is going to be such an interesting year for payments.
And why, when we bid “Auld Lang Syne” to 2014, we won’t want to forget it, but remember the “old times” fondly since they really did, this year in particular, shape the road that’s ahead.
All my very best for a wonderful 2015. Happy New Year!