Payments Innovation

What Amazon HQ2, Interchange Fees And Facebook Have In Common

Amazon HQ2, Interchange Fees And Facebook

I hosted a digital discussion last week with an executive from Sift with more than 15 years of experience building trust and safety organizations for some of the biggest digital brands in the world – including Google, Facebook and Square.

We had roughly 340 execs register to listen live to the two of us banter about the people, processes and tech necessary to do more than simply rebrand what’s typically described as the fraud and risk departments of digital platforms.

Toward the end of our conversation, the topic turned to what would make someone the “ideal” candidate for one of those roles.

In addition to the obvious technical skillsets, this executive said that being a contrarian was at the top of his list.

“Why?” I asked.

For those charged with managing the consumer’s trust and safety when transacting online, and in the midst of increasingly clever cybercrooks, being comfortable going against the status quo flow has become much more important than ever before, he said. Giving consumers a safe and trusted online payments experience means being comfortable finding and then following the paths not typically taken to uncover potential vulnerabilities – and then defending those decisions to team members and management.

I joked that I’d be a shoo-in for the job.

A contrarian, so says the dictionary, is someone who feels comfortable pushing back against the status quo, inevitably associated with going against the grain.

The point made as part of our conversation was that too many people following more or less the same game plan can become blinded to a new way of thinking that could inform better outcomes for the customer and the business.

The most effective contrarians, of course, are those whose countervailing opinions are rooted in an intellectually honest framework or set of hypotheses that offer credible support for looking at things through a different lens.

Or at least injecting some balance into the conversations to sharpen the debate.

I say this as your payments and commerce contrarian-in-residence here at PYMNTS, happily challenging the status quo 52 weeks a year.

This week, I’m compelled to offer a few thoughts that go against the grain on several topics that made the news last week: Amazon’s NY HQ2, card interchange fees and Facebook ad revenue.

Whether they rise to the level of being contrarian will be for you to decide.

Amazon Takes Its Bite Out of the Big Apple

There are countless articles now on Amazon’s decision to break up with New York, ironically announced on Valentine’s Day, and the withdrawal of its plans to build HQ2 in Long Island City.

I’ll leave the political and public policy discourse to others.

The seemingly prevailing view that I’d like to weigh in on is that Amazon’s decision to bolt from New York is somehow proof that Amazon is bad for the world and isn’t interested in making it a better place – and all because it is a self-interested business only out to make a buck.

Accusing a business of being self-interested is a bit like accusing humans of liking to breathe air.

Pretty much all businesses are self-interested, since most have a duty to their shareholders to make profits. That’s the only way the business can ultimately continue to create value for its customers, create jobs for people, serve the ecosystem in which it operates and provide tax revenues.

Most also know that to do that, they have to pay attention to doing right by those stakeholders.

The self-interested business known as Amazon has created its shareholder value by putting the consumer experience at the center of its strategy.

What the Amazon detractors seem to have missed is the value of the experience that the company has built over the last 25 years – an experience that has not only transformed the consumer’s retail shopping experience over that time, but has also raised the bar for how all businesses, everywhere, must rethink the delivery of their digital, omnichannel experiences to their end users.

All while keeping prices low for consumers.

Today, it is impossible to have a conversation with a CEO, a management team or the board of any company and not have Amazon – and the expectations that it has set for consumers and businesses over those 25 years – as an input to their strategic thinking.

So, Amazon hasn’t just benefited its customers: It has forced retailers to lower prices and increase their levels of service.

It has also spurred other businesses to follow its lead, irrespective of whether Amazon is even a relevant player in the ecosystem in which it operates.

Whether that business is a traditional retailer, a consumer brand, a bank, a healthcare provider, a small business, an insurance company or an automobile manufacturer, the “Amazon effect” has forced it to think differently about the experiences it is creating for its customers.

All this seems like a pretty good thing for the world and the people living in it.

Businesses that are forced to think harder today about eliminating friction and making it easier for their customers to do business is a big win for everyone – even if it inevitably means that some businesses will lose if they can’t make that transition and compete effectively.

The introduction of Alexa in 2014, and the creation of a voice-activated ecosystem with tens of thousands of skills, is a more recent proof point of that value creation.

Amazon, with Alexa, wasn’t the first voice-activated assistant to enter the world – that was Apple, with Siri – but it was the first to marry voice with a commerce experience that gave consumers access to new contextual buying opportunities wherever Alexa can be found: in their kitchens, family rooms, offices and even their cars. Consumers today can use Alexa to order food, book an Uber and do their banking – and they do.

The popularity and utility of Alexa has since accelerated the development of voice as an important commerce channel, now for almost every player across every sector.

Our own studies show that more than 14 percent of all consumers over the age of 18 living in the U.S. own voice-activated speakers, as do more than a third of the 30- to 40-year-old bridge millennials. More than a quarter of consumers who own voice-activated speakers use them to purchase things, and more than half of all bridge millennials do, too – with growth that more than doubled from 2017 to 2018.

Twenty-five years after Amazon opened its virtual doors, consumers have more places than ever to buy things. Yet, over the last four years, Amazon has gone from 2.2 percent of all retail sales to 6.4 percent of retail sales and 50 percent of all eCommerce sales.

Consumers shop with Amazon because they value the experience. If and when they no longer do, they won’t.

And then, there will probably be an uproar about why the next player has made life worse than it was when Amazon was the lead dog.

Card Networks Want to Raise Their Prices

The Wall Street Journal reported last week that the card networks are mulling increases in the fees paid to issuers by the merchants that accept their cards, as well as the processing fees paid by acquirers that process those transactions.

A Visa spokesperson quoted in the article said this was the first such contemplated increase in more than three years.

These fees are being considered on the heels of a Supreme Court decision in the fall of 2018 that ruled in favor of the networks and pricing schemes that reflect the dynamics of multi-sided platforms, the business model that has underpinned the payments ecosystem for six decades.

And the news also comes after most of the interchange cases brought by merchants in the U.S. have been settled.

Naturally, this announcement has merchants roiling in response, since the cost of accepting cards has long been the subject of their disdain. Particularly, they say, the cost of accepting rewards cards – which, of course, consumers really like using for the cash back and other goodies they get.

This outrage also comes, ironically, at the same time that more merchants are making the decision to go cashless.  Even the small merchants, like coffee shops and QSRs, are publicly denouncing what was once decried as their favored payment method – cash – in favor of plastic cards or their digital facsimiles.

Merchants now admit that cash has become a friction-filled and expensive payment tender to manage – and that cards are good because they can also increase average order value.

This thinking is shaped by the introduction of mobile apps that can order and pay ahead and/or pay using QSR codes in the establishments where cash was once king.

For those consumers who prefer not to use mobile apps, contactless cards will pick up the cashless slack. No more waiting in line behind someone fumbling around for dollar bills or waiting for an EMV transaction to finish (even as fast as it is becoming). Mobile banking apps that make transaction history accessible instantly – and mobile apps that use stored value cards that decrement purchases from an existing balance – make it easier to track that small dollar spend, and help consumers overcome the social stigma of using cards for those types of transactions at the point of sale.

Of course, all of this won’t stop merchants from complaining, or from spending money to create their own “Pay” schemes that use decoupled debit products over ACH to wrest their dependency from network-branded cards. Kroger, with its announcement last week, is the latest merchant to throw its hat into that ACH-based payments ring.

Good luck with that.

Some consumers will take the bait, of course, but most won’t. This topic was one that I researched and wrote about last year. I found that even the early adopters of that strategy, like Target, have seen their market share plateau.

Consumers have this thing about their money – as in, they want it to be kept safe. They trust their banks and the card networks to do that on their behalf. With a few notable and obvious exceptions, they don’t trust merchants, whose reports of being breached have become so familiar as to be numbing.

In the meantime, consumers everywhere are using cards more and more.

RBR Research reports that card volume worldwide increased by 13 percent to $25 trillion in 2017, and is expected to increase to $45 trillion in 2023. At the same time, the average transaction value is expected to dip slightly – from $67 to $62 – owing to the increased use of contactless cards at the places where cash was more used.

The Journal’s article also reported how consumers will likely feel the increase at the places they shop. Unfortunately, that assertion only adds unfounded fuel to the fizzling fire that the merchants would like to see stoked.

Remember when the Durbin amendment resulted in a dramatic decline in interchange fees? If consumers pay higher prices when interchange fees go up, why didn’t they pay merchants lower prices when they went down? Since, of course, they didn’t – even though that was the merchant party line at the time.

What did happen back then is that consumers paid more – at their bank, since (surprise, surprise) banks have to make money, too. The decline in interchange fee revenues from merchants meant that banks had to raise their consumer fees on checking accounts and cut back or eliminate debit card rewards.

Facebook’s Not-So-Fake Consumer Value

As longtime readers of my columns know, I have been very vocal about Facebook’s failure to govern its platform.

One of the things I advocated that the payments and commerce ecosystem leave behind at the start of 2019 was the free-for-all governance attitude that I said Facebook personified. That anything-goes governance, I wrote then, was one that failed to address the Russian election meddling, fake news and the bad behavior on the platform for many years – when it was painfully obvious that something was amiss.

New research reports now quantify just how valuable, even in the face of those lapses in governance, consumers – and therefore advertisers – find Facebook as a platform.

Facebook crushed its Q4 earnings with a 30.4 percent year-on-year revenue growth – but what took many by surprise was the increase in its average revenue per user. At $7.37 in Q4, that was 19 percent higher than it was in 2017 and 21 percent higher than it was in Q3.

Where there are consumers – more precisely, 30 percent of the world’s population – there are advertisers eager to reach them.

What economists found recently is that not only are there consumers on Facebook, but there are consumers who stick around because they value the efficiencies created by the social networks they’ve created there. On average, they found, consumers would have to be paid a little more than $1,000 over the course of the year to shut down their Facebook accounts.

The study authors are quick to point out, however, that this doesn’t mean consumers would pay $1,000 to have a Facebook account. Nor do they say that their study suggests any correlation between a consumer’s feelings toward Facebook as a social network and Facebook’s stance on privacy and data usage.

What’s clear, though, is how much people value being connected to one another – and the social value that Facebook has created by giving people a platform on which they can do that.

And a platform for advertisers to, in turn, reach them.

Now, there are lots of reasons to complain about Facebook’s lax governance – and critics, including regulators and lawmakers, are pushing to make it harder for Facebook to collect data from the consumers on its platform.

But wait a second.

Facebook uses that data to better serve targeted ads. And that’s what motivates Facebook to provide free social networking services that people seem to love and say they can’t live without. Facebook also uses that data to make sure consumers get the right organic posts, which further increases their value.

Is Facebook collecting data because it wants the world to be a better place?

Nope. Just like every other business, it, too, is self-interested. But in being self-interested, it has created and maintains an enormously valuable and popular platform. It can’t do that, certainly not as well, without collecting lots of data.

Now, getting back to where we started with Amazon.

In the words of Dave Loggins, who crooned his famous ballad, “please come to Boston for the  springtime and even for the wintertime, now that you have tasted what it’s like to have snow in the winter.”

And for the sports teams and one in particular: You do know that we are the home to the greatest sports dynasty ever, don’t you?

Yes, I know you’ve said “no” to another HQ2 – for now.

But remember, I’m a contrarian and like to think differently.

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