“Are we there yet?” is the most frequently asked question in the world.
And asked by children an average of 4 times an hour anytime a trip is taken. Scientists in the U.S., with obviously way too much time on their hands, estimated a couple of years ago that over the course of a year, parents collectively hear that question 5 billion times – based on the number of kids in the U.S. and the average number and duration of trips made with those kids. Given that we are hitting prime vacation season, all you parents out there better get ready.
But kids aren’t the only ones asking that question. People in payments often ask that question of each other, too. And perhaps around 5 billion times a year.
“Are we there yet,” though, is shorthand for “When will all of the time and money and investments we’ve made in mobile payments actually pay off?” The person most likely to pose that question is the CEO who’s been hearing “20xx is the year mobile payments will really take off” for the last 7 years.
We get that question a lot at PYMNTS, too. Knowing how to answer that question though, is less about having a crystal ball – even though that would help – and more about understanding what and who’s driving innovation in payments. Once you get a lock on that, you’ll be better able to offer a more informed opinion as to when we’ll reach the promised land of digital payments, and who’ll be driving the bus that will get us there.
So, in the spirit of being able to help, here’s a framework that might help you answer the next time the boss asks, “Are we there yet?”
Introducing the eight fundamental truths about payments innovation:
• Payments innovation is happening. But being led by those outside of traditional payments.
This first ”truth” isn’t exactly in the category of a breaking news flash. And one that certainly comes as no surprise to those of you who read PYMNTS regularly.
But last year, Market Platform Dynamics conducted the most rigorous benchmarking of innovation across the payments ecosystem to date. We examined the 100 largest companies in payments in 10 segments — scouring every single patent they might have filed anywhere in the world related to payments, polling 2,000 payments experts about the degree to which these companies have innovated, and analyzing more than 40 variables related to each company’s financial performance, product launches, M&A and investments in R&D, etc. We then built a pretty fancy model and produced Pii360 (The Payments Innovation Index) which was released in March of 2015.
So, with as much quantitative certainty as exists in payments, we found that six out of the top 10 highest ranking companies (so more than half), those companies who are the most innovative overall in payments aren’t the traditional players at all.
Apple, Amazon, Facebook, PayPal, Google, Alibaba – are all companies whose core competencies are something else – commerce, technology, advertising, search. And who are incorporating payments into the “something else” that they are doing.
This provides a couple of important implications to the “are we there yet?” theme.
The first is that the rise of these non-traditional payments innovators doesn’t necessarily mean the demise of some of the biggest names in payments. Many of them are on the list, too – Visa (who for all intents and purposes tied for the No. 1 spot with Apple), MasterCard and American Express aren’t suffering at the expense of these innovators. In fact, it’s quite the contrary. The tracks they’ve laid over the years and the innovations they’ve made to the platforms is what’s give payments life to these new innovators.
Apple Pay and Android Pay have both embraced the four party model. Neither views payments as an end to a means, but rather a means to an end. Even PayPal – the alternative player that has gone on the record as saying that payments is their full-time job – as a platform to enable payments drives a pretty chunk of their volume to the card networks. Amazon does too.
So when it comes to who’s gonna get us to the digital nirvana and get us there STAT, it’s going to be the ecosystem that will get us there, driven by those whose eye is on a prize that isn’t entirely about payments.
But here’s where the bus might leave a few passengers behind or even run them over.
When you look at the Pii360 rankings by segment, half of those who scored the highest didn’t score highly enough to make it into the Top 10.
Segments like card and transaction processing and loyalty had among the lowest scores of all – suggesting that they are ripe to cede ground to those whose day jobs are commerce, advertising, engagement and network infrastructure. The big players in payments with scale just seem better positioned to take over areas like loyalty and security as they invest in or acquire the innovators who can make their already massive platforms that much more robust.
The final takeaway related to when we’ll “get there” is that these players didn’t get to the top of the Pii360 list because they launched innovations in the last year. Those innovations, launched a few weeks or months ago, were years in the making and planning. Those who would like to lead us into the digital payments age have had their eye on that prize for a long time. Their actions, even though just visible today, were the result of plans put in place many years ago and leverages investments in innovation that have been made over many decades.
• Payments looks really easy. Which is why innovation is so hard.
Every woman knows that the “natural beauties” that grace the covers of Vogue and Elle are because models spend hours in hair and makeup, attended to by professionals who know how to make them look that way. The result is a “Cover Girl” look that’s frustratingly impossible for anyone but the pros to replicate.
That’s sort of like the curse of payments innovation.
In developed economies, payments works really well. Consumers walk up to a point of sale terminal in a store, swipe or dip a plastic and voila, the transaction goes through in a matter of milliseconds. What could be so hard about that?
Well, plenty. And that’s why over the course of 50 or 60 years we haven’t seen more than four card networks take off in the U.S.
The biggest impediment to payments innovation isn’t all of the competitors out there duking it out for mindshare.
Or even giving innovators access to capital – with interest rates on money near zero, it’s never been easier to get it.
It’s trying to solve for a payments problem that really doesn’t exist – and then do that at scale.
That means that unless the “new thing” is available at the places that consumers like to shop today and does more than just substitute for a plastic card at checkout, the competitor that all innovators have to unseat is inertia.
Just ask Apple Pay.
For all of the hype and the promise, fewer than 5 percent of all iPhone 6 users use it “every chance they get.” It’s not because people aren’t excited by Apple Pay or don’t think it’s neat. It’s because it is simply a replacement for a card that isn’t accepted at most of the brick-and-mortar places they want to shop.
And that creates friction for everyone.
Plastic cards are really easy to use and they’re accepted everywhere. And what consumers default to using when they’re in a store.
The lack of appreciation for the complexity of payments at the point of sale, how to actually make something new work and work at scale is why so many innovators get money to start something but so few ever make it out of alpha.
And why it will take more than a great new idea to get merchants and consumers to break their old habits and move us more quickly toward a digital payments future.
• Payments is becoming invisible. And shifting ecosystem dynamics in a pretty big way.
A big part of answering the “are we there yet” question is defining where “there” is. And, for the future of payments, that’s really about moving payments to the back and embedding it into something else that helps a consumer and a business solve another problem.
Uber is about eliminating the friction of getting a ride.
Airbnb is about eliminating the friction of finding a hotel alternative.
TaskRabbit is about finding someone to do odd jobs and run errands.
Amazon’s Dash buttons are about ordering commodity products like laundry detergent, diapers and paper towels via buttons stuck on washing machines and pantry cabinet doors.
In every single one of those cases, payments is just what makes it easy for two parties to exchange the measure of value when a ride is completed, an errand is run, a room is booked and Tide is ordered.
And in every single situation, it’s the brand of the payment enablers that is perceived as “taking us there.” The card brands and the network brands are totally invisible.
That’s true even in the most celebrated mobile payments launches of the last year — Apple Pay and Android Pay – which are both only about payments. The card brands and network brands are invisible to the consumer.
The relationship that the consumer perceives they have in all of those cases is with the brands that are on the apps themselves – Uber, Airbnb, Apple Pay, Android Pay. Even Tide in the case of the Amazon Dash button.
Of course, what makes all of these apps valuable is the payments functionality built into it. But it’s the “out of sight and out of mind” dimension of payments in a digital world that keeps issuers awake at night. Their challenge is how to innovate and remain relevant when the consumer and the merchant may not even remember that they are riding in the same car with them on that journey. And why their focus has to be less about being more visible and more about making their invisible product great enough that consumers choose and stick with it.
• Faster payments is a solution. But what’s the problem?
“Faster payments” is sort of the payments equivalent of motherhood and apple pie.
It’s hard to argue against the notion that moving money between people and businesses should move as fast as possible. But more often than not, when people in the industry advocate for “faster payments” as the way to move our payments system forward, what they really mean is for payments to move in real time and run across brand new rails.
Which, ironically, has the potential to only slow things down. Faster – aka real-time payments – is only a solution looking for a problem and a big pile of money.
“The decision to launch a faster payments systems was always strategic, not financial, as there was not an explicit business case,” says the Fed’s study on real-time payments. That “strategic investment” will cost the banks about $10 billion. (When’s the last time your boss gave you a $10 billion check to invest in something “because it was strategic?”)
Billions, by their own admission, that would enable some pretty low value use cases: about 5 percent of what they define as “low value” volume of B2B payments, an undetermined (code for too small to measure) percent of what they define as high-value B2B payments volume; and a whopping 4 percent of ad-hoc person to business transactions – like instant payment to avoid having mobile phone services shut off.
The rub, of course, is that for any of this to have any value to any of these stakeholders, the capability needs to exist across every single financial institution there is.
Which in the U.S. is about 12k.
The good news is that payments are getting faster and it isn’t going to have to cost $10 billion and take 10 years to build. Last month, NACHA member banks approved enhancements to ACH operating rules to enable Same Day ACH and will have Phase 1 up and running in the fall of 2016. MasterCard launched its Send platform last month to enable real-time payments from businesses to consumers in insurance disbursements and selected other cases. Bank of America’s Digital Disbursements enables faster payments between people and businesses and launched in September of 2014. A host of innovations in software and technology can enable faster clearing and settlement on top of existing rails and on a global scale.
All of these developments have the potential to use the ACH rails to enable digital payments on the retail and commercial side of payments, and unleash a host of innovation that could not move payments faster but our collective journey to digital payments faster, too.
• The days of wine and rose and interchange is over in Europe. But not in the U.S.
Not too long ago, I was with the CEO of one of the largest banks in the Asia-Pacific region. The topic of payments innovation turned to a discussion of the business models that underpin it. His opinion is that the near elimination of interchange had derailed innovation for his bank and the entirety of the ecosystem in his region.
That same contagion has spread to Europe. Debit and credit interchange rates have been demolished. And in a market that the innovators I talk to say is an already impossibly difficult market for innovation, will simply kill it off.
It’s already gotten in the way of launching Apple Pay, which is said to be on its way to the U.K. later this summer. The near zero (20 bps on debit, 30 bps on credit) interchange made it tough for issuers to wrap their arms around giving up any of that to Apple. Banks haven’t wanted to dig into their profit pools to fund Apple Pay.
The long-term implications are not good and coming at the exact same time that payments are becoming invisible behind a digital brand. It could make the journey from plastic to mobile move more slowly – in fact even move things backwards.
Here in the U.S., the interchange story is totally different. Durbin whacked debit, but not as much as merchants wanted it to and it’s still pretty healthy. They lost that battle even on appeal. Credit rates have stayed intact and don’t appear to be anything that Congress is likely to monkey with. The merchants even entered into a settlement with the card networks that didn’t give them any reduction in interchange fees and agreed never, ever, to sue over interchange fees — all in return for some cash.
That said, interchange fees are driving lots of innovation both directly and indirectly. Innovators are building new models to alleviate the dependency on interchange by merchants (to be more “merchant friendly”) at the same time issuers and networks are looking at new ways to drive revenue. Both could help speed the journey.
• Protecting cardholders is less about authorizing transactions. And more about authenticating their digital identities.
On Saturday, I overheard an anchor on CNN report on a memo that was being sent to the 4 million federal government employees whose personal information was stolen by the Chinese hackers. In that memo was advice on what to do, which included the active monitoring of their credit card statements for fraud.
Hardly a day goes by anymore without news of another breach.
But POS breaches seem to have given way to hacks that are much more pernicious. If you’re a cyber crook, it sort of makes sense. Why steal an account number that has a limited shelf life and financial value when you can hit the mother lode and take over someone’s identity and create fraudulent accounts to your heart’s content?
The journey to a digital payments world requires a whole new way of thinking about how we get there safely. That’s why when it comes to innovation in the security arena, the smart money is using technology to authenticate the user.
Ironically, the profile of today’s cyber crook is what you’d want in your best employee – resourceful, dedicated, flexible, adaptable, someone who’s focused on getting the job done no matter what and always with an eye on the ROI of what they are doing. Cyber crooks are all that and more.
They study us so that they can stay one step ahead. And, they exploit our vulnerabilities. That’s why innovation in the creation, storing, securing and transacting with digital identities is driving the direction of security innovation today. This will only become more important as innovation in commerce moves well beyond POS terminals in stores to wearables and a host of connected devices. Authenticating the digital identities of these users across all of these channels becomes, therefore, critical.
But doing that without slowing anyone down is the trick. The innovations that will move us more quickly to a digital future will deploy technology that doesn’t introduce friction. The biggest headwinds that innovators – and payments ecosystems players – face in doing that is doing it in a world in which the vast majority of consumers (some recent reports say nearly 70 percent) give up gobs of information about themselves in order to get something free. Merchants just want to make sales. Consumers just want value. Innovators looking to move both stakeholders faster toward the goal of digital payments have to satisfy both.
• EMV may be on its way in the U.S. But it will be a very slow go.
EMV is a very big train that finally pulled out of the station here in the U.S. last January. Before then, it was a train that was having a hard time moving at all. Then the Target breach happened and the train picked up steam and is now chugging down the tracks.
In theory, this is a train that everyone should want to ride – a standardization train that provides a way to make payments interoperable around the world.
Except that this train’s destination is to an offline world at just the point in time that we are all riding a train headed to a digital one – and where in some merchant settings, the offline experience is even being co-opted by an online experience, including in an offline setting.
Which is why so many merchants want to, instead, jump on a train that’s headed to a digital and cloud-based destination.
And therein lies the rub. And why EMV will be slow going in the U.S.
Truth be told, it’s been slow going everywhere. It’s been a dozen years since EMV was introduced in Canada (which has four banks). Today, only 83 percent of all transactions are done via chip cards.
Maybe that train made sense 12 years ago. Then, Amazon was a minor part of commerce and it would be four years before we’d see the iPhone. The dominant smartphone was the Blackberry and it was used for email.
Twelve years from now it’s my guess that a third of transaction volume will be triggered by a mobile/digital device. In some merchant categories, like office supplies, specialty retail, and restaurants, it could be even higher.
Thirty-seven percent of small businesses still aren’t convinced they need to make the switch outside of their regular terminal refresh. In some segments, like restaurants, even more think that way. The stats suggesting that 60 percent of hacks happen to small businesses haven’t swayed their thinking so far. That’s not because these merchants don’t want to protect cardholder data, but because they know that EMV is only one of several things that they need to invest in to do that. They recognize that a “layered approach” to security — tokenization, end to end encryption and a host of other fraud detection systems — is essential to keeping their customers’ data secure and investments that they believe to be “future proof” since they operate independently of EMV.
Which explains why so many merchants, outside of the larger merchants like a Target, Macy’s, Best Buy, etc. aren’t rushing into EMV. The blurring of the on and offline worlds is happening even faster than they had anticipated and their money and focus and hopes, especially at the SMB end of the spectrum, are on investments in things that establish a better consumer experience via a mobile device. That includes payments, of course, but payments wrapped around something else of value.
• Merchants will change. When they see consumer demand.
In many ways, the answer to the “are we there yet” question isn’t for any of us to decide.
The consumer has all of the power.
Persuading merchants in retail payments today to embrace something new isn’t going to be driven by what any of us think they should do, but will be about what consumers think adds value to the relationship they have with the merchants they want to do business with.
And start to use regularly. And spend more when using “it.” And even switch from merchants without “it” to merchants that have “it.”
Consumers hold all of the cards – and merchants know it. It’s why checkout pages online now resemble NASCAR race cars, and why small businesses accept American Express when it costs them more to do it. It’s why no one cared about Softcard (ISIS) – consumers never asked for it.
Merchants won’t go to the time or trouble to integrate something new just because it’s “new.”
Which means getting consumers to care and into the habit of using a digital form factor when they were used to using a card isn’t about solving for a payments problem.
It’s about solving for an engagement problem – and enabling a bigger and more meaningful exchange of value between merchants and consumers.
Once that becomes the focus of innovation in payments, we’ll all be better able to answer the question “are we there yet?”
By then, too, we’ll also be well on our way.