Over the last two days, I’ve taken you from Apple Pay to Kool-Aid and Loyalty to Regulation. Today, I’ll wrap the year in payments by presenting the last 8 of the 26 topics of conversation that drove the headlines in payments this year.
So, without further ado, here’s Software to Zimbawbe.
Yes, I know, you were expecting security.
But software is at the heart of the payments and financial services disruption that we witnessed in 2015. Software makes it possible to embed payments into apps that make commerce and payments both possible and portable at any connected end point today and in the future. The combination of software-powered apps and embedded payments is reinventing where and how consumers shop and clearly how they pay. It’s disrupting the delivery of financial services and giving birth to new players who live only in a digital world. Software makes it possible for entirely new industries to emerge that, with the addition of payments, expand trade in a merchant category or a business sector in a region or even around the world.
The future of payments will belong to those who think software first and devices second.
That also implies that the future of payments and commerce isn’t likely to be the domain of a single mobile operating system, like Apple’s iOS or Google’s Android, either. That would assume that consumers treat their mobile wallets as utilities, a generic app that comes preloaded on their phone like the weather app or a flashlight. And, that consumers don’t care that those wallets aren’t portable outside of that mobile OS. Mobile wallets, like their physical counterparts, contain digital credentials that consumers want the freedom to use wherever they shop – online, offline and every other place that might present an opportunity to make a purchase. This year, and next, consumers aren’t going to want that mobile wallet tied to a mobile operating system that limits their choices.
Tokenization isn’t a new concept in payments. In fact, it’s been a part of payments since the mid-2000s to protect data at rest. But when the networks launched payments tokens as part of the launch of Apple Pay and later to support the launches of Android Pay and Samsung Pay, debates raged across the ecosystem. And those debates were centered mostly on whether as goes the payments tokens, so goes the ownership of the customer.
The card networks, who operate the secure servers where payments tokens are stored and provide payments tokenization services on behalf of issuers, believe that payments tokens and the cryptograms that mask the cardholder PAN offer superior protection. Merchants don’t necessarily debate that point but fear a loss of easy access to cardholder PAN data. That data, they say, is critical to linking transactions with consumers and their loyalty programs. They fear problems in doing simple things like returns. Some believe that since there are still places in the transaction where data is in the clear, PAN data is still exposed, even if briefly, so the risk remains.
But mostly they fear being dependent upon the networks for access to that data and the costs that may come along with it down the road.
On the flip side, advocates say that payments tokens remove the risk from the merchant of enabling a fraudulent transaction since consumer authentication is not their burden to bear. And that reduces fraud overall.
At the moment, the volume of mobile payments is low so the tokenization issue is all but mute and merchants have other and bigger fish to fry. But fear not, the tokens tug of war will continue in 2016 as the ecosystem works through the practical issues of how living with and managing payments tokens are sorted.
Uber has become the “gold standard” for how we talk about “invisible payments.” And, that is the experience that digital payments players want to replicate – payments is just something that happens in the background without the consumer giving it much thought – or any. The big question for payments players to explore in 2016 and beyond is what commerce experiences are best suited for an Uber-like experience – and which one's consumers want and need intervention. Having a $15 or $20 car ride post to a consumer's account automatically is quite different than having that $550 pair of shoes and scarf get magically charged to her account without a consumer clicking “buy” or “yes.” There is a delicate balance to be struck between removing friction entirely so that the process becomes totally invisible to the consumer and making it seamless for a consumer to transact.
But Uber is also important for a couple of other reasons.
It single-handedly defined the “on-demand” economy, which is unleashing entirely new sources of value around the world. Uber has demonstrated the power of a software platform that can efficiently match supply with demand. As a result, there are now hundreds and hundreds of “Ubers of XXX” proliferating all over the world. Not all of them will succeed, but Uber inspired many creative thinkers to develop new companies with new business models in their image.
Uber also demonstrated the power such platforms have when they achieve critical mass on both sides of their platform. For instance, Uber drivers with capacity are now delivering packages to consumers from retailers who want to enable same-day delivery. Uber is also bundling ride services with ticket purchases for events promoters who want to fill seats at the last minute and it enables passengers to listen to their Spotify playlists.
Uber is also the poster child for the challenges of innovative companies entering regulated industries and winning. Uber’s biggest headache (and probably its biggest expense) isn’t recruiting drivers, it’s battling the regulators. They’re winning more than their losing, and their strategy of asking for forgiveness and not permission is why they’re in 300 cities around the world today, with a service that, should regulators take away, has the risk of creating huge consumer backlash.
2015 saw Uber raise billions and become one of the most valuable startups in the world. Hey, it's worth almost as much as America Express! In 2016, we’ll see how they expand their geographic and platform reach.
The very first letter of the alphabet – Apple Pay – made the point that payments is hard, which is why the speed at which new innovation moves through payments is actually very slow. Velocity and payments innovation often operate at cross purposes.
That’s for all of the reasons you know really well. And also why igniting innovation in payments is the hardest trick in the book.
Igniting innovation in payments isn’t magic and it isn’t luck. It’s hard and it usually takes a long time. One big clue is understanding which side of the platform needs to embrace the innovation the most – and then what you must do on the other side to get them to fall in love – or to at least make it easy for that to happen. In retail payments, that’s, hands down, the consumer. When enough consumers start asking for something or adopting something new, merchants will follow suit.
But getting “enough” is hard and in 2015, we saw more misses than hits. Consumers dropped one big hint though – getting them to adopt mobile payments means making mobile payments less about payments and more about something else. Hopefully, in 2016 we’ll see more evidence that innovators have picked up on that hint.
Smartwatches include a whole host of features and functions but are widely considered mobile payments’ kissing cousin – a convenient way for payments to be made without rooting around a pocket or a purse for a mobile phone. That’s also why they’ve become such a big priority for manufacturers. Whoever makes the best watch and gets a consumer to buy it could end up influencing the purchase of an entire portfolio of devices that run the same operating system and support the same apps.
Yet as a category, smartwatches have failed to impress the consumer. Most haven’t yet convinced themselves that using their mobile phone can make payments lives easier, never mind what they might be wearing on their wrist. Battery life and tiny screens make usability challenging overall and in some cases limiting. And, since many people regard their watch as an important accessory, not a utility, they aren’t convinced that they really need one for anything, never mind as an additional payments tool.
Where smartwatches have made inroads is as a substitute for fitness bands since they offer the same tracking and monitoring benefit, with added and useful functionality.
In 2015, we saw a whole host of new and/or revamped watches hit the market from storied brands: Apple, Samsung, LG, Sony and Pebble. By the end of 2016, NPD says that 9 percent of the U.S. population will own a smartwatch. That may be — and consumers may buy them for lots of different reasons. But unless and until acceptance at the point of sale improves, like mobile phones, being able to pay using one won’t be the key driver. That will make watches as payments utilities a tough sell to consumers. Unless, of course, payments is app and not device/operating system and technology dependent.
Welcome to China!
While in the U.S, the conversation about smartphone handsets tends to be dominated by a discussion of Apple vs. Samsung, zooming out to the global picture changes the view of the landscape considerably. Though largely invisible to the U.S. consumer, Xiaomi has exploded in recent years and is now the third largest handset manufacturer in the world, controlling about 5.3 percent of global handset market.
And while that is admittedly a small number, it represents stunning growth for a handset maker that didn’t even exist six years ago. This manufacturer of an affordable handset, Xiaomi is increasingly making the smartphone “on ramp” for customers in China, India and the developing world.
They also offer a pretty good metaphor for the massive explosion of the Chinese mobile and digital ecosystem in the last half decade. The narrative about China as the world-beating economic engine is well-worn (if somewhat in doubt of late), but the story of China as the global hub of mobile and digital commerce innovation is undeniable.
Take this data point. While Americans spent about $7.5 billion online between Thanksgiving, Black Friday and Cyber Monday, Alibaba’s Singles' Day (the shopping holiday the eCommerce giant pretty much invented) saw sales of over $14 billion. Alibaba made its first $5 billion — $2 billion more than all of U.S. digital commerce snapped up on Cyber Monday in total — in about an hour and-a-half.
And this is in a slowing Chinese economy.
But the takeaway is obvious. Chinese digital payers, players and shoppers have seen the evolution of digital capitalism alongside the local evolution of capitalism. They have fewer habits to unlearn, are eager to experiment and like to leverage technology to get a hold of the best goods — even if those goods originate on the other side of the world.
In 2015, we saw Facebook Messenger take its inspiration from WePay, the powerful messaging app that is the digital walled garden of communication and commerce for the Chinese consumer. We also saw everyone from Apple, to Google, to the card networks move West in order to tap into this growing pool of digital consumers despite the complexities of doing business there. And Alipay become everyone’s new favorite payment method. In 2016, that will only continue.
While every up and coming generation is closely watched for the imprint they are leaving on the world, millennials — the generation born roughly between 1980 and 2000 — are among the most watched, studied and commented upon generation in American history.
Often referred to as the generation of digital natives – meaning that the youngest generation of American adults having lived with the Internet for most (or all) of their lives – millennials are far more likely to use email than the postal service (unless they are getting a Sunday delivery from Amazon), experienced cellphones (and then smartphones) as a standard method of communication, grew up on Facebook (then Twitter, Snapchat, Pinterest, etc.) and perfected the art of the selfie.
These digital natives are driving the shift to digital commerce – and are inspiring the innovators and innovation that hopes to tap into their digital-as-second-skin personas. This, the generation that would rather lose their car or house keys than their mobile phones, has forced a refocus of how financial and payments services must be delivered to a generation who will only become more – and not less – digitally savvy in the years to come. Many millennials may still live at home in their parent’s basements, but their habits and preferences are driving the development of payments and financial services writ large.
And that they have, but only to a point.
They “Venmo” money to each other but haven’t yet scratched their mobile payments at the point of sale itch, unless it’s to pop open their Starbucks app to buy a cuppa joe – and probably now order it ahead. Millennials spend hours on Facebook but haven’t yet jumped into the social commerce waters. They say they don’t like or trust banks, yet most of them have debit cards and use them – and the mobile banking services that come along with them.
Gee, at the core, are millennials really that different?
In 2015, we saw an array of new products and services targeted to “millennials” in an effort to build a relationship that will remain intact as their financial and payments needs evolve – the gamification of this, the digital version of that. In 2016, millennials will be a year older, maybe a year wiser, maybe with a better job – and maybe even moved out of the basements of their parents. And, maybe even starting to develop the kind of financial and payments habits that their older siblings and <gasp> their parents have. Maybe the focus in 2016 and beyond isn’t making products for millennials so different, but how they access them more in keeping with their status as “digital natives.”
Zimbabwe is a country in Africa most famous for Victoria Falls, the dramatic waterfall that is described by natives as the “smoke that thunders.”
It’s also a proxy for the impact that mobile money has made on financial inclusion in a country where 65 percent of the population earns $100 or less a month.
Seventy-seven percent of the citizens of Zimbabwe now have a mobile money account and use it to send and receive money, top up mobile accounts and pay bills. This is up from 60 percent three years ago. And all thanks to the efforts of innovators who’ve made access to stored value accounts with bill payment and P2P payments capabilities accessible to the citizens in that country.
Mobile, of course, has been – and will remain – the catalyst for enabling financial access to those who need it. Today, there are 2 billion smartphone users in the world, and 7 billion mobile phone subscribers. In a few short years, it is said that 6 billion will own a smartphone.
Yet as much progress as has been made in Zimbabwe and countries like it, much work remains to give the 2 billion consumers around the world who aren’t part of the financial mainstream with affordable access to financial services. Over the years, more than 200 initiatives have been launched by a variety of players around the world with the hopes of making access to financial services real, cost-effective and useful. Sadly, most of them have failed to achieve their stated objectives, but not for lack of trying.
Regulators often make it difficult to get these programs off the ground and banks and telcos and non-bank innovators battle over who should lead such efforts in these countries. The economics of launching and sustaining these programs are challenging given the limited financial means of the customers these programs serve. And, surprisingly to many, the lack of enough cash in and cash out facilities have made access to the physical currency inconvenient and therefore the practicality of mobile money schemes less so. One of the great misconceptions of mobile money is that cash is no longer needed, yet consumers still need a method of payment when buying things in their local markets – and that remains cash. In fact, the availability and density of cash in and cash out networks is one of the key factors attributed to the success of Kenya’s MPesa, the model to which all other mobile money schemes aspire.
In 2015, the collective payments ecosystem recognized that it actually takes an ecosystem to overcome the challenges of financial inclusion in the developed and developing worlds. And that digital and data are two of the most powerful tools this ecosystem can deploy to deliver the right mix of services to the underserved, with economics that drive profitable business models for participating players. We saw mobile money schemes accelerate, and regulatory barriers relax in key countries like India as well as an increased emphasis on improving financial literacy and service usability. We saw the glimmers of microlending services using novel data assets to extend loans to individuals and businesses that spurred economic growth in their countries and helped smooth cash flow.
In 2016, we only hope that we see all of that - and more - continue.
So, there it is – my take on the 26 topics of conversation that drove the payments agenda in 2015 – and will shape what’s to come in 2016.
What did I forget?
Feel free to shoot me your favorite letter of the alphabet and what it stands for and why! I’d love to get your take on Payments 2015 – By The Letter!