Payments 2015 By The Letter: L Through R

Yesterday, I gave you installment one of Payments by the letter – A through K – from Apple Pay to Kool-Aid, and a whole lot of juicy stuff in between.

If you missed it, you can get it here.

Ready for L through R? Of course you are.

Loyalty

Let’s face it. Loyalty needs a makeover. When we published our annual review of the 100 most innovative companies in payments last year, loyalty as a category, and loyalty firms, came in dead last. Deal platform after deal platform, digital coupon platform after digital coupon platform, points redemption platform after points redemption platform — all looked and operated the same. The barriers to entry are low and effectiveness with consumers is, too.

Yet what we learned in 2015 is that consumers don’t have to get “a deal” to be a loyal customer. Consumers value service just as much and don’t even mind paying more when they get it. As the travel industry has taught us, intangibles like boarding first, and getting upgrades are among the perks that keep consumers loyal to a brand. As Amazon has taught us, consumers will even pay to become a loyal customer, provided that they get value when they ante up.

And, when service and price are served up to consumers in a combo package – like letting a retailer’s best customers know when super sales are starting before others do – the impact on consumer engagement and their loyalty to the brand goes through the roof.

But when we asked 4,000 consumers last summer what really drove loyalty, we found that the answer is trust – trust that the brand will deliver value for service, the products and services that they want – and not the cheapest price.

2015 (and 2014 before that) taught us that consumers are price conscious, for sure, and they will follow the best deal if that’s what we force them do to. But the “best deal” is increasingly a function of value delivered: service, price and the experience with that brand overall – which builds the trust which delivers loyalty.

2016, I think, will begin to unlock some of those opportunities as brands, issuers, networks and merchants all experiment with the ways in which they can use data to deliver the value and the experience that builds trust. Loyalty, as a term of art, will fade to the background, as brands reexamine the ways in which they must get and keep consumers engaged.

Mobile

You know this better than anyone — the mobile device is the centerpiece of the change taking place throughout payments. Its power and potential is touching every aspect of a consumer’s (or a business’) payments and commerce life. Mobile is what has blurred the online and offline worlds and opened many new opportunities for every facet of the ecosystem to reimagine how they interact with their customers and stakeholders. Mobile devices help consumers find products and influence purchase, turn checks into deposits, monitor banking and transaction activities while on the go, pay friends, and pay for purchases – even in physical stores. They have become point-of-sale devices, enabling transactions with anyone at any time.

Mobile, and the apps that are part of the mobile platform, have made it possible for whole new categories of business to emerge that solve other problems for consumers: getting a taxi – and paying for it without taking out a card, finding a plumber – and paying for him without writing a check, having someone else shop and deliver groceries – and paying for it online, making a reservation for a table for two at a restaurant – and paying in-app at the table.

Mobile is also giving apps that have nothing to do with payments – yet assemble large groups of consumers – the ability for those apps to become commerce apps such as texting and social networks.

On the business side of payments, the ease with which consumers use mobile devices is also forcing businesses to adapt mobile strategies to their own operations. The “consumerization of commercial payments,” as one banking executive describes it, is driving change inside the enterprise payments business because every commercial payments decision-maker overseeing an antiquated paper-based process is a consumer who uses a mobile phone to manage many aspects of their financial lives.

As we leave 2015 behind, 2016 could also be the year in which the way we talk about mobile’s impact on commerce starts to change, too. Just as eBusiness became just “business” in the early 2000s, mobile commerce and payments is likely to evolve over the next couple of years to become simply commerce and payments. Consumers won’t make the distinction since the mobile device will be an increasingly important part of their daily routines. And soon, neither will the brands they interact with.

In 2015 we saw mobile drive the digital revolution in payments and commerce, In 2016 and beyond, we’ll see that on steroids as mobile blurs the online and offline worlds even further and every device becomes capable of enabling commerce. The challenge for payments providers next year and in the years to come will be to not only keep pace, but stay a step ahead. That means working now to enable the same method of payment across all of their shopping channels.

Networks

2015 was an interesting year for the card networks. Visa and MasterCard made friends with investors as their stock prices and market cap soared. They’ve made a few more enemies on the retail side of the house, or maybe just made some enemies a bit more peeved, with the move to EMV and a timetable that held firm and called for a liability shift a month before the busiest time in a retailer’s year. They’ve probably also made a few consumers confused, at least for now, since they don’t know when they have to use those cards and when they do, they may not understand why using cards has become a bit more inconvenient. Guess they’ll have to use NFC … but don’t get me going …

They made the mobile wallet wars a little more interesting by offering digital enablement platforms to help third-party mobile wallet services scale, at the same time they doubled down on getting distribution of their own “buy” buttons. They invested in developer platforms and open APIs to entice innovators to code to their platforms and build products and services bearing their card brands.

They’ve invested in new ventures – including the blockchain – to get an inside look at how innovation could change or complement their place in the payments ecosystem. They’ve made a point of letting the world know that faster and secure payments is their core competency, launching products that enable the digital disbursement of funds from businesses and governments to consumers. They experimented with different engagement strategies and tactics to help issuers engage consumers to make their branded cards top of wallet – physical or digital.

They lost the interchange fee war in Europe but look like they may continue to dodge the bullet here in the U.S.

However, if you’re American Express and Discover the story is a bit different.

American Express can only characterize 2015 as annus horribilis. The storied brand with a market cap that was kissing $100 billion not that long ago has seen nearly a third of that valuation disappear. Yesterday, Amex’s market cap was $69.5 billion. Between the loss of key accounts like Costco – and the transaction volume that went with it — their seemingly unfocused mobile strategy (outside of Apple Pay which isn’t exactly saving their bacon), and beatings taken in the courts over merchant discounts, it’s been a year worth forgetting.

On the Discover Network side, their deal with Ariba to power payments along their B2B procurement network is starting to show some serious volume and tangible evidence of its strategy to white label its network to others. Ariba’s buyer/supplier network sends trillions of dollars of invoices across their network every year – a small fraction of that volume would deliver a tidy return to Discover.

In 2015 – and even before – we heard lots of players claim that they are going to make the networks irrelevant—see “blockchain” or troll the bitcoin pages on reddit for a laugh. But I think the networks can sleep tight in 2016. Their biggest worry? Getting merchants all fired up again.

Online to Offline

We started talking about the blurring of the on and offline worlds in 2006, even before there was the iPhone and app store that made that concept seem more real and even more possible. The combination of the mobile device, the cloud and data made it possible for consumers to move seamlessly between their on and offline worlds with ease. And no longer did that consumer have to be at a certain place sitting in front of her desktop or laptop to experience the pull and the power of a digital world.

Nowhere is this pronounced than in retail where consumers shop with their phones even while they’re standing in a store. The “showrooming” threat that paralyzed merchants in 2010, has taken a big backseat to merchants sharpening their omnichannel strategies to give consumers a consistent experience anywhere that they can touch a consumer. And, as we point out in the OmniReadi Index, powered by Vantiv, merchants are investing heavily to fill those gaps, actively blurring the lines by encouraging consumers to buy online and pick up in-store, where the data says that those consumers spend more 60 percent of the time.

Like my comment in the mobile section, 2016 could be the year that we start to lose the distinction between omnicommerce and commerce – commerce is the experience that follows the consumers across any channel. Just like with mobile, consumers don’t make the distinction, and their expectations are that merchants don’t either – both raising the bar for merchants and setting the agenda for everyone in the payments ecosystem to do their part to enable that experience.

P2P

2015 was the year that we saw a lot of P2P players double down on building their consumer bases. clearXchange expanded the number of banks on its platform and was acquired by Early Warning in October. PayPal’s Venmo platform racked up $2 billion in volume in 2015. Square Cash says it has topped $1 billon in volume, Snapcash (which rides on Square’s rails) is about a year old. Then there’s MasterCard’s MoneySend, Visa Direct, Amazon (which opened and closed P2P in the space of six months), Facebook Messenger, WeChat and a bunch of other emerging players that I have probably left out.

But what we learned in 2015 is that P2P is both a niche play and pretty unprofitable as a standalone offer.

Which makes it the proverbial Trojan Horse of payments.

Players are using P2P to build a consumer base that they serve as a foundation for other methods of payments that can crank out some revenue. Venmo will soon become an acceptance mark. Dorsey is said to be eyeing a Square Wallet Redux and Square Cash could be the platform for enabling that. Facebook Messenger is Facebook’s not-so-veiled-attempt to get debit accounts on file that could be later turned into a method of payment on Facebook for other commerce-related activities — like, say, event tickets.

And clearXchange, with its Early Warning security cred and hooks into a fair chunk of of the U.S. mobile banking consumers, may also have payments ambitions in its eyes. And if the rumor mill can be trusted, the Apple of Apple Pay’s eye as it is said to have both P2P and payment via the checking account on their roadmap.

In 2016, we’ll be watching how P2P platforms are used to enable B2P payments. Disbursements from insurance companies, government programs, rebates, incentives, settlements, disaster relief and payouts related to demand services platforms have shown adoption and a robust business model. Not surprisingly, innovators and emerging platforms are using new rails, network rails, faster rails or a combination thereof, to stake out their piece of that P2P/B2P pie.

Quick-Serve Restaurants

If you really want to see the future of retail, look no further than the QSR space, where the mobile device is transforming the consumer and retailer experience in the store.

The hottest thing in mobile payments right now is mobile order ahead – a concept that has positively transformed the Starbucks in-store experience literally overnight. Not three months into the experiment, Starbucks says that it is driving more than 20 percent of all transactions and pulling in demand for its mobile app, and all of the merchant (better economics) and consumer (loyalty!) benefits attached to it.

Dunkin’ rolled out something similar just a few weeks ago, and says that it is seeing some of the same benefits, including bigger ticket sizes. Previously, consumers who wanted to avoid the long lines in the store stood in the express/drinks only line. That meant that they didn’t order an “attachment” (aka doughnut or breakfast sandwich). With its new mobile order ahead service, now consumers at Dunkin’ can have the best of both worlds – no line, coffee plus a doughnut and higher ticket. Chipotle has also found that mobile order ahead reduces their costs at the same time it increases order size – which improves their margins.

The consumer benefits are obvious – it’s great to skip the line and get exactly what they want (since they are ordering it themselves online) using a payments experience that’s familiar to them: shopping and checking out online on any phone. It also builds loyalty. What better way to engage a customer than to ask them to use an app and an experience that turns them into a VIP that can just walk in and pick up their stuff without standing in line?

Which is likely to spell the beginning of the end of the “counter checkout” as we know it. Maybe not in 2016 and maybe not even in 2017, but certainly in not-too-distant future as store operations see the value in embracing a process that delights the consumer and improves their throughput and efficiency. In QSR sooner, but eventually most retail establishments, the counter will become the place in a store where consumers mostly pick up stuff and not pay for it.

Regulation

In the U.S., the year in regulation can be summed up in four letters: CFPB.

Under the rubric of protecting the consumer, they have proposed a series of regulations that will have the unintended consequence of denying many consumers the financial services they need and/or price them out of their reach. From prepaid products to payday lending, the CFPB’s initiatives would characterize a 24 hour $30 “overdraft” on a prepaid card that always gets a direct deposit a loan, and require that the borrower prove creditworthiness before getting it. This is, of course, asking the same financial institution that is challenged to make a small business loan for $30,000 due to the high costs of servicing such a loan, to do that for a $30 overdraft.

The full court press on payday lending treats all payday lenders as scumbags who are out to swindle the borrower and will deny those who need small dollar, short-term loans, the chance to get them from legitimate lenders who are providing a necessary service and price their product both fairly and consistent with the risk they are taking.

Their position on auto dealer reserves has revealed an embarrassing chink in their armor. As it turns out, their method of operation was to “guess” which names corresponded to certain racial and ethnic groups, resulting in a highly suspect set of conclusions about just who was being “wronged” by these programs. That’s of course, before questioning whether the CFPB’s reach could even extend into auto lending.

But that’s what happens when Congress creates an agency with a generous budget and no real appeals process, unless you count an appeals process as an Administrative Law judge appointed by the Director and who can be overruled by the Director.

Meanwhile, the who’s who of banking has paid tens of billions of dollars in fines, most of the time totally uncontested. Even Jamie Dimon has said he’s given up on pushing back on the regulators – since, in his words, it costs money either way and the banks come out on the short end of the stick.

2016 will likely see more of the same – since nothing about the agency will change. Perhaps Santa will deliver the final ruling on prepaid cards and payday loans. Then again, maybe it will be the Grinch who stole Christmas – and financial inclusion – from those who need it most.

Well, one thing could change — a Republican president with a veto-proof Congress could get their wish and shut down the CFPB or, more likely, put a bipartisan commission in charge of it, like the FTC, and actually give Congress the power to decide its funding like every other part of the government. (Reminder: The CFPB gets an almost-guaranteed share of the Federal Reserve Board’s budget — a sweet deal that I’m hoping to get someday.)

Click here for S through Z!

Click here to download the full ebook The ABCs of Payments 2015.