Payments Innovation

How Uncertainty Kills Commerce

Scientists say that humans have a lot in common with mice.

Both species, a new study conducted by researchers at the University of Minnesota Medical School has found, express profound regret over how much time is spent waiting for something to happen.

The study examined the behaviors of humans and mice before each were given an option to wait and receive reward (food for mice, videos for humans) and then after making the commitment, while waiting to receive it.

In both situations, the researchers found that mice and wo/men kept waiting and waiting — stalwart until the bitter end, even as the wait became longer. The concept these researchers were testing in economic parlance is that of sunk cost.

Sunk cost is the unwillingness to consider other options — including cutting their losses and running — after making a commitment to a decision — that is, sinking time and money into making it.

Economists have long recognized this as the sunk cost fallacy. What’s better, they say, is once you sink a cost, you should forget about it and just focus on future costs and benefits.

 

The Sinking Ship of Sunk Costs

The notion of sunk costs not only bedevils humans — and mice, we now know — but businesses too.

Companies that invest time, money and corporate reputation in something can become so invested in the end game that they keep waiting for better results, even in the face of headwinds and data that suggests those better results won’t materialize.

These execs rationalize that since the big investments in money and time have already been made, they might as well stay the course — since waiting for better results doesn’t cost that much more. And, who knows: The market may catch up — one day, eventually — and make the wait worth it.

In the dynamic environment in which the world operates now — one in which time is one of the most valuable currencies there is — the sunk cost fallacy can crater businesses in one of three ways.

It can sink the business entirely by refusing to deviate from the “bet the farm” strategy that won’t materialize in the timeframe needed to survive financially.

It can marginalize future opportunities, since waiting for that “next big thing” becomes so much of a distraction that there is a lack of resources available to explore other options.

Or the decision to cut and run comes too late to capitalize on what the market really wants.

On a more pragmatic level, this study and the notion of sunk cost speaks to one of the biggest frictions that consumers and businesses — and mice too, if they had to shop and pay for stuff — face across the commerce landscape.

Uncertainty.

Let’s face it: Sunk cost wouldn’t be so sunk if an outcome had certainty, even if it meant waiting, when waiting was an acceptable option.

The fact that you’ve sunk a cost means the payoff from waiting a bit longer is high. It’s the uncertainty of the outcome combined with the uncertainty of when that outcome could pay off and the decision to keep waiting that can sink the business ship.

Uncertainty also creates enough friction for consumers and businesses to take their business elsewhere and sink those ships too.

In the study, humans and mice knew going in that they would get a reward. Knowing that, humans and mice moved forward after taking time to deliberate the costs/benefits of waiting to get it. They were also given signals about how long the wait might be to get the outcome they wanted.

It could be that one of the reasons both mice and humans waited and continued to wait is because to get that reward they knew they’d have to wait. Each accepted waiting as part of the bargain to get what was promised.

Even with the wait, for those that participated in the research, there was enough certainty of the outcome to make waiting an acceptable option.

Yet certainty — and the ability to deliver it — isn’t how the commerce ecosystem talks to businesses and consumers today when describing the value of their innovations.

Maybe it’s time we should.

 

The Demands of On-Demand

We live in an on-demand world.

And, in an on-demand world, there’s nothing worse than waiting.

Today, consumers and businesses spend a lot of time waiting for things.

Waiting is the breeding ground for uncertainty.

Consumers wait for buses and trains and in traffic for the roads to clear. Consumers spend time waiting for a customer service agent to answer their questions, to be seen by their doctors and in security lines at the airport. Consumers spend time waiting in checkout lines at stores. Consumers spend time waiting for websites to load.

Timex did a study that quantified how much time U.S. consumers spent waiting.

As it turns out, a lot of time is wasted. A full six months of consumers’ lives, in fact, are spent waiting for things to happen. That amounts to a little more than 37 billion hours a year.

Businesses spend a lot of time waiting too.

Businesses wait to be paid by their buyers — not knowing when the money will actually be received, if it is good funds and sometimes how much they’ll get.

Buyers spend time deciding when to pay those suppliers based on how long they have waited — or are waiting — to be paid by the buyers of their services. This wait is especially pronounced when trading partners do business across borders. Both parties spend a lot of time waiting to see where in the world, literally, their money is.

The uncertainty of the wait costs businesses in many ways.

It makes it impossible to manage and forecast cash. This uncertainty often forces businesses to find and access sources of working capital to fill the gaps, which comes at a cost.

This waiting game for consumers and businesses has only fanned the flames of our on-demand world.

Retailers and commerce players know consumers will shop where they can get what they want when they want it —and that consumers are loyal to whomever can deliver convenience wrapped around a value proposition of speed.

Our own studies of thousands of consumers when shopping across in-store and online channels makes this point too: Consumers value convenience more than price in many cases. It’s not surprising that retailers have invested in making speed and convenience the hallmark of a great consumer experience.

On the commercial side of payments, the world has been fixated on making the concept of real-time payments a reality for more than a decade. Today, more than two dozen (globally, this is a puny number) faster payments schemes are in various stages of design and rollout, all with the goal of making payments happen faster between banks and corporate customers.

Here in the U.S., we have been talking about faster payments in earnest since the Federal Reserve organized a 500-person task force to study it in 2015. That effort aims to create a standard for making payments and settlement happen in real time across the entirety of the U.S. banking system. The task force published its recommendations in 2017, the same year NACHA went live with Same Day ACH across all of the banks in the country.

But why settle for same day when we can spend billions and wait who knows how many more years to make payments happen even faster than that?

Since faster and faster and faster is all that matters.

But does it really?

 

The Certainty of Certainty

I conducted a keynote fireside chat at an industry conference last week on the state of global B2B payments. As part of that session, I did some electronic polling of the corporate bankers and FinTechs in the audience.

One of the questions I asked was about the most important feature of a modernized B2B payments system. I gave the audience five choices: cost of payments, security of payments, speed of payments/settlement, data that travels with the payments or the transparency of the payments process.

The answer — overwhelmingly — was transparency of the payments process. Transparency defined by having certainty about where payments are when moving from bank to bank across borders.

While we are asking banks to spend billions ripping apart and replacing their existing systems to make payments happen in real time, banks count certainty about when those funds will arrive as priority No. 1.

So do their corporate customers: certainty that there are good funds and certainty about when they can access the money.

It makes perfect sense.

Without those two pieces of information, banks and corporates can’t plan, manage and optimize their cash.

Speed of payment is also of little benefit when most corporates don’t have real-time systems and can’t accommodate real-time settlement.

What they can accommodate is real-time information.

The most important attribute of a modernized, global payments system isn’t real time.

It’s certainty.

That’s not to say there aren’t use cases for on-demand payments — we know there are — and delivering payments faster to end users soon won’t be an option.

But faster needs definition – and use case-driven context.

And incumbents and innovators are making those faster, real-time, contextually driven use cases possible by enabling the certainty of payments without asking corporates or banks to rip out their own payments infrastructure today to deliver it.

 

The Weight of the Wait

On the retail side of payments, it’s certainty that increasingly drives consumer choice.

Skipping the line using order ahead is fast and convenient — provided the experience is as advertised and is consistently delivered.

Just ask Starbucks. The promise of speed and convenience is only as good as the certainty that it is fast and convenient and predictable.

Buying from Instagram’s feed is a convenient way for consumers to discover new, cool things to buy — fast. Provided that the checkout experience is friction-free across all shoppable ads.

Clicking the “Shop Now” button only to be confronted with shipping and billing and payment information to fill and promo codes that require typing in and then getting an email promo code to get 10 percent off the first order is enough to plant the seed of uncertainty in the mind of the consumer who sees other shoppable ads. The return on the consumer’s contextual commerce experience is only as good as the certainty of knowing that it’s easy, secure and consistent across the platform.

Knowing that Walmart will save consumers time and money is why consumers shop Walmart and why Walmart invests heavily in features that economize on the consumer’s time and pocketbook. The certainty of everyday low prices is what brings more than 100 million feet into Walmart stores in the U.S. — 270 million worldwide — every week.

Certainty of delivery is probably a major factor in why Amazon captured nearly half of all eCommerce sales in the U.S. in 2017. The certainty of what it means to be a Prime member is why consumers are (and remain) members of a club that now costs them $119 a year to join.

There’s a reason consumers start and end their product search on Amazon. They’re certain Amazon has the depth and breadth of selection, and its one-click, two-day/same-day/two-hour delivery and checkout experience is consistent and the service experience reliable every time they use it.

That sense of certainty is why consumers now turn to Alexa as their virtual commerce assistant and gives Amazon the authority to expand its commerce wings into grocery, apparel, healthcare, household services, household furnishings, quick-service restaurants, prescriptions, medical supplies and the many other commerce segments it now touches. And have consumers follow along.

Consumers are certain Amazon will deliver.

And certainty breeds trust.

 

The Certainty of Certainty

The famous mathematician and MIT professor Claude Shannon once said that information is the resolution of uncertainty. His name may not be well-known, but his contributions to the field of cryptography, artificial intelligence (AI) and information technology are.

Shannon is regarded as the father of the Information Age and is credited with the first AI learning device — a magnetic mouse trained to move through a labyrinth of his own creation that got smarter with each trip.

Consumers and businesses make tradeoffs every day about waiting or not waiting based on the options available to them and the context in which those decisions must be made.

Information provides that context.

Certainty, though, is the cornerstone of creating a trusted commerce relationship.

Information — relevant, accurate and actionable — presented to consumers and businesses when they’re making their decisions is what will build trust. That information will help them decide when waiting is okay, when it is not and when a wait is too long and other options look more viable.

When sunk cost is, indeed, sunk and it’s time to cut and run.

Innovators that power solutions that provide that information, create context and enable certainty will earn the trust of the business, the consumer and the many members of the commerce ecosystem they touch.

That’s my hypothesis.

Now let me round up some mice and men and test it out.

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