The Future of Payments. Achieving Relevancy in a Disrupting Market

Transcription

1 The Future of Payments Achieving Relevancy in a Disrupting Market

2 challenging. So many expensive efforts have been made with so little certainty about which technologies will survive and which standards will prevail. M-wallets have sought market share with a variety of schemes: NFC tap-to-pay, location-based payments, mobile wallets with multiple cards and merchant loyalty programs. Which of these will win? Source: MarketsandMarkets and Aite Group, 2012 Introduction The intersection of technology and ever escalating consumer expectations/demands is driving a surge of disruptive innovation. That innovation is transforming the payments industry and creating opportunities, fearfulness, confusion and challenges for traditional players and new entrants alike. For instance, mobile payments are both explosively innovative and hamstrung by lack of standardization among industry participants. The issue of standardization must be addressed because in the near future, consumers will expect mobile payments to be available everywhere and accessible by every phone. To date, the lack of industry standards and technology interoperability has meant that a mobile payments app that works on an iphone doesn t work on a Blackberry. And it means that while a consumer may use a single credit or debit card for purchasing, she may need to download numerous apps to pay for goods at different retailers. It shows that stakeholders are more vested in competition than in growing their industry as a whole. For financial services firms, technology vendors and retailers, the wholesale migration of key consumer cohorts to mobile phone and tablet payment applications is particularly Who are Leading Emerging Payments Actors? 2013 is poised to be the year that new mobile payment technology moves into the consumer mainstream. Below is a sample of players operating in this space: Digital and Mobile Wallets Visa and MasterCard Both have their own m-wallets while also participating in other wallets. Visa s digital wallet, V.me, stores information for each of the major card brands and when shopping online (at a participating merchant s site) a consumer only needs to enter a V.me and password. Soon, Visa will add a mobile wallet to V.me which will be compatible with NFC, QR codes and others that allow tap-and-pay. MasterCard s new digital PayPass Wallet offers tap-and-go, NFC-enabled payments (on an NFC-enabled phone through a mobile app). PayPass Wallet is an open solution that can store all major credit, debit and prepaid cards. A consumer s shipping address is stored to speed online retailer checkouts. High profile partners out-of-the-gate include American Airlines and Barnes & Noble, which will each feature a PayPass checkout button on their sites. Google Wallet NFC-based wallet. Recently acquired TxVia to enhance its digital payment 2

3 service. Google characterized the acquisition as complementing the capabilities of Google Wallet and accelerating the innovation that would allow Google to realize the company s vision of a full Google Wallet. PayPal offers a digital wallet, not a mobile wallet. The wallet exists in the cloud and is not specific to any device. This means that if a phone is lost or stolen, information can still be accessed via any Internet enabled device. Payments Starbucks quietly rolled out a mobile payment app in 2011 and encouraged its customers to link their rewards cards to that app. Rather than switch over all its POS terminals or wait for standardization of mobile payments, the Starbuck s app puts a barcode on a customer s iphone. The company can use its regular barcode readers to read the mobile barcode on a customer s iphone and the ease of its solution has led to the processing of 42 million payments in 2011 alone. In August 2012, Starbucks invested $25 million in Square and is now bringing Square s mobile payments acceptance into the world of brick, mortar and lattes. This small investment will bolster Square s value for a future IPO and allows Starbucks to stake out its position as best in show for geolocation enriched customer experiences. Venmo There are more than a dozen mobile P2P vendors in the marketplace, but almost every single one is flawed: Too expensive, or too slow, or too cumbersome. Companies in the space have charged significant fees so consumers can pay one another back or split dinner checks or bar tabs. Those fees have given consumers pause (why pay a fee when you can give your friend $20?) and that pause has been reinforced when those same companies ask transacting consumers to wait 3-5 days for funds to clear along the ACH rails. In high relief, Venmo is finally bringing ease and free to this service. While Venmo also runs on ACH, it has successfully combined SMS ease/speed and free P2P transfers 1 with social networks and that combination has caused its business to surge. Venmo realized that settling debts between friends oftentimes corresponds with the creation of great memories. For instance, say a friend fronts you cash for dinner or a football game. Having logged into Venmo through Facebook, the app can include a message about the experience you and your friends shared and now all your friends can be jealous about the great time you two had. Thanks for the great time! or Boston Red Sox? Never heard of em! Fifth Third s DUO Card After lying fallow for years, hybrid cards are back and consumers, having grown comfortable with an increasingly complex world, are finally embracing them. A key feature of some new hybrid cards is that they add a line of unsecured credit (read: credit card) to a customer s existing checking account debit card. Post Durbin Amendment, debit transactions have lost their luster with most institutions so the new hybrid cards delete the Signature/offline debit option while retaining cheap-to-process PIN debit and adding a new credit card feature. This multi-functionality can be very helpful to a consumer. For instance, if a consumer is at a grocery store and usually pays for groceries with a debit card, that shopper will type in her/ his PIN to authorize the transaction. But if that person is shopping on Thursday and will not have a paycheck direct deposited until Friday morning, she/he may choose to pay for grocers with credit (fully intending to pay off that outstanding balance as soon as payroll funds are credited to a bank account). 1 However, in order to cover some of the costs associated with credit card processing, Venmo charges a fee of 3% for transactions funded by credit cards and debit cards issued from some smaller banks and credit unions because of the high rates imposed by credit card companies and small banks. (Company FAQs) 3

4 Recently, Fifth Third introduced its DUO card which is a combined PIN-debit and credit card product. With the new card, a customer s signature at POS triggers that purchase to be routed as a credit card charge, which pays a higher interchange rate to the issuer and may even earn the issuer additional income if the customer begins carrying a balance. Customers of the new DUO card receive a separate statement each month for the credit card portion of their transactions. Introducing bank customers to an empowering tool that allows them the choice of putting a purchase on debit or on credit also has additional benefits for the bank. Each customer signing up represents a new credit card customer for the bank. For many customers, a debit card is top of wallet and by appending its own credit card to the debit product, Fifth Third has just jumped the line ahead of all the other credit card products. The Challenges of the Payments Industry s Near Future? Too Much, Too Fast Ubiquitous mobile payments are inevitable, but in this moment, making the inclusion of mobile payments into a suite of payment products and channels is particularly challenging. New and disruptive products are being introduced (it seems like) daily but technology decision making, product testing and selection as well as integration into a traditional core continue to happen in plain old real time. payments. Many questions remain as handset and chip manufacturers, telecom companies, card networks, financial institutions, and software providers all try to get a foothold in mobile payments. Some of the questions are smaller how will consumers know who to call when they encounter a problem? Some are larger how exactly will the different players come together to smoothly handle mobile payments as they move through the settlement process? Consumers Concerned About Payment Safety Perceptions of limited usefulness and concerns about security are holding back the adoption of mobile financial services. The primary reason why mobile phone users had not yet adopted mobile banking was that they felt their banking needs were being met without the use of mobile banking (58 percent) Concerns about the security of the technology were the primary reason given for not using mobile payments (42 percent) and the second most common reason given for not using mobile banking (48 percent) More than a third of mobile phone users who do not use mobile payments either don t see any benefit from using mobile payments or find it easier to pay with another method. 2 Too Many Big and Small Unique Systems Being Developed As the payment landscape morphs, the industry is moving to create a secure, interoperable, and universally accessible channel for mobile Source: Federal Reserve Board of Governors, Consumers and Mobile Financial Services, Federal Reserve Board of Governors, The chart reflects responses from mobile phone users. 4

5 What is the Future of Emerging Payments? Mobile is a Need-Driven Solution Despite what may appear to be a muddle of conflicting and unsynchronized initiatives, these unherdable cats are still able to provide enough m-payment channels and vendor choices that consumers are willing to test mobile solutions. Sizing and Forecasting the Market for Mobile Payments In May 2012, Gartner estimated that in 2011, million users made m-payments worth $105.9 billion. In 2012, those numbers increase smartly: users will make $171.5 billion in payments with that market reaching a payments volume of $617 billion by Other analysts have different market sizing estimates and market forecasts: there is to be a strong U.S. mobile wallets and payments industry. To ensure interoperability between services and devices, 135 member companies have jointly promoted the NFC Forum, a non-profit industry association. Again, Apple Will Dominate the World There seems to be little doubt that Apple will enter the mobile payments space. The question appears to be when and how, not if. Why does the market seem so certain Apple will be jumping into payments? Because it has more than 400 million active credit card-linked itunes accounts, which means it has a tremendous and unexploited pool of instant users. Apple has recently introduced an ios 6 feature called Passbook, which is designed to collect discount cards, boarding passes, and other tickets. The strategic distance from mobile devices holding scannable boarding passes to holding scannable credit cards is infinitesimally small. Apple has the fourth most trusted brand in America, its iphone is leading an upticking curve of adoption, it has the stored credit card details of 400 million unique consumers together, these are inexorable market forces pulling Apple. The company must enter payments. Source: Gartner, Yankee, Portio, and Juniper, NFC Goes Mainstream Numerous analysts believe that after making a stuttering start, NFC technology is finally poised to assume a position of primacy in mobile payments. Most important is that NFC grows into industry foothold, industry participants are becoming increasingly cognizant that they must work together if Keep Swimming or Die Within the world of emerging payments, there are no laurels on which to rest. There is always a next big idea and there are always nimble competitors waiting to introduce that next big thing. Using Square as an example of the relentless pursuit of design excellence and a new, constantly evolving product suite, we can see that a company must reinvent/reinforce its unique value proposition each and every day. 5

6 Square was the first credit card reader to the market and its success has spawned imitative competitors. First a bit about Square: The company s card reader is a dongle that plugs into iphones, ipads and Androids. Square has deepened its product bench with an ipad app that allows micro-businesses to use an ipad as a register. They ve also headed into the consumer market with Pay With Square, a mobile wallet. In the past year, Square has doubled its user base to 2 million and is now processing an annualized $6 billion/year. The company takes 2.75% of each transaction and is now in the process of leveraging its merchant and customer networks to build loyalty and traffic for its merchants while generating additional income for itself. For instance, in June 2012 Square introduced a customer loyalty digital punch card program that creates trackable and customizable value for both consumers and merchants. Instead of getting a free car wash or cup of coffee after 10 holes are punched in a card, consumers can digitally track their loyalty points and can receive customized specials when they visit a Square merchant. Merchants may also choose to offer more generous rewards when that customer visits the third time or the twelfth time. Unlike traditional loyalty punch cards, Square allows merchants to peg rewards to dollars spent, not just repeat business. This ability to build merchant traffic and reward customer loyalty puts Square in competition with Foursquare, Groupon, Google, PayPal and LivingSocial. Conclusion The uptake rate of mobile technology has underscored its compelling value proposition. The great news for institutions still developing strategies for integrating their CRM with a full array of virtual and traditional delivery channels is that they still have a bit of time. Statistical Modeling of Innovations theory shows us that even if a credit union has missed marketing to the innovators or the early adopters of emerging payments, 84% of the market is still available the saturation of the consumer market is still in the future. As financial institutions respond to a kinetic marketplace of industry partnerships and cross-marketing/cobranding alliances, it is important to remember one critical thing. Never Allow Your Brand to be Subsumed Many of the facilitators of emerging payments are not financial institutions. They are technology companies or marketers or processors and many FIs act unconcerned about them. They adopt an attitude that as long as the FI holds the deposits, customers/ members are free to have their dalliances with Starbucks or PayPal or whomever. This is a mistake. We have no way of knowing who will have a depository institution charter in five to ten years. We don t know the partnership deals that could disintermediate your depositors. Imagine if PayPal aligned itself with Wells Fargo and became, essentially, a deposit broker for the bank? Imagine if Square partnered with a bank so that small businesses accepting credit cards via a Square dongle would have their payments deposited into a Square s account, which would in turn make the deposited amount available to the small business via a prepaid card. Embrace emerging payments but remember that all strategies must reflect a commitment to the primacy of your brand. When offering mobile banking services, keep your brand as the principal and organizing icon. You may offer PayPal or Western Union, but those names should always be secondary to yours. Make your customers loyalty a central tenant of business and don t facilitate a transfer of loyalty from your institution to another company. 6