The State of Payments: 2014

by Carol Coye Benson on December 22, 2013

in Card Payments, Carol Coye Benson, Payments Views

Carol Coye Benson - Glenbrook Partners

What a year it has been! Twelve months ago, there were still people in our industry who didn’t know what Bitcoin was. There were still people who believed that EMV would roll out in the U.S. just like it did in the U.K.

There were still people who thought that the developing world would build payments systems that work like those of the developed world. And I could go on…but have decided to look forward, instead.

What are the key developments and ideas? I’ve been thinking about themes that describe both the current state and the innovations that matter – in the hope that this will help bring the crystal ball into focus.

CHAOS
We’ve had a neat and tidy payments industry for many years. It was fairly simple to describe the payments systems, the players, their roles, and the economics. We all knew cash was the enemy, that cards had troublesome interchange economics, that ACH was an underdeveloped resource, and that PayPal was a surprisingly successful competitor in the online world. Consumer trends were reasonably easy to see and understand, and merchant (and other enterprise) requirements were at least understood, if not always met.

But today we see an enormous splintering – a fracturing of this tidy industry. There are many components. The proliferation of mobile payments options for consumers (way, way out in front of the slow and complex network-sanctioned path of NFC-with-a-secure-element) has made it abundantly clear that the audience for payments isn’t going to be content to sit and wait for the deities to act. The astonishingly rapid ramp of mobile card acceptance is creating a “democratization of payments” that is really profound. The much-rumored delay or suspension of EMV liability transfer in the U.S., if it occurs, will further fracture things, as will possible changes to card-not-present rules. And all of the major players are moving – expanding vertically and horizontally into new markets and domains. And don’t get me started on Bitcoin (those of you who know me, know I’m the Bitcoin skeptic at Glenbrook, but I may be wrong…)

EMBEDDED
After all the discussion, debate, and angst over chips and phones and tapping, waving, poking, or swiping your payment credential, it may turn out to be just not that important. I’m going to bet that today, you have your card credentials stored online at a dozen or more vendors (airlines, hotels, iTunes, Amazon, etc.) and that you use that easily and happily for online purchases. Why not just migrate that model to the physical world? If you haven’t taken an Uber car and simply stepped out of the car and said “thanks” at the end of the ride, you may not yet have experienced the beauty of the embedded payment. This is what Square Wallet, Apple’s EasyPay and PayPal’s “Hands Free” are all about.

When I walk into Macy’s, and my Macy’s app automatically opens to tell me things I might want to know about what’s in the store that day, why can’t I just pick something up and have it charged to my card on file? This won’t work for all the merchants you use, but how many merchants do you suppose account for, say, 80% of your discretionary spend? For the many merchants with a loyal, or at least frequent-use, customer base, it won’t be difficult to implement a card-on-file system. An ACH debit authorization on file would be lower cost, but requires more risk management. Perhaps this is where MCX will come into play – as a platform within the merchant app that manages this for merchants.

Expect, by the way, for credit card issuers to awaken to the value of being the “card on file”. How much should your issuer pay you for you to put their card in a merchant wallet?

OPEN
Open of course, as in payments API’s – we all get that. But there are deeper things happening. The most important is the opening of bank transfer networks to non-bank participants in a number of countries around the world. These include card and ACH-type networks, including several of the “faster” networks in place or in the works. Regulators in the developed world seem to be agreeing on the idea that bringing non-banks into payments networks is a way to deliver more innovation to the users of payments systems. And in the developing world, it almost goes without saying that banks aren’t going to be the major players. In a country where only 10% of the residents have bank accounts, but 90% have mobile phones, it isn’t likely that payments will end up looking like they do in the U.S.

This kind of openness isn’t happening yet in the United States – but I wouldn’t be surprised to see the card networks (both Visa and MasterCard, but also the PIN debit networks) be the first movers here. There have been other signs of openness in network thinking – the astonishing Visa/Chase “closed loop within an open loop”, Discover’s ongoing creativity in deploying its network (PayPal, Ariba, Facebook, Marqeta) and American Express’s discovery of “financial inclusion” and the opportunities available by rethinking its network. I wouldn’t be surprised to see 2014 be a year of more major network surprises, including some big acquisitions and strange alliances.

And then, of course there is Bitcoin, or (and I find this easier to contemplate) some kind of country-issued digital equivalent along the lines of what Canada is working on with MintChip. Setting aside all of the many issues around the stability of currencies like these, there is no question but that they could create the ultimate in “openness”. Payments could be made between end parties without a payment system or network: I’d just send you my digital coin like I might hand you a dollar bill today. And the even-more-fascinating Ripple protocol arguably has the potential to “open” (or at least disrupt) the amazingly opaque, and lucrative, correspondent-banking based cross-border payments marketplace.

EASIER
Remember “faster, better, cheaper”? How about just “easier”? Today it’s easier to get a merchant account, thanks to master merchants and instant onboarding. It’s easier for developers to payment-enable their applications, thanks to new online gateways like PayPal’s Braintree and Stripe. And embedded payments are all about easy. What could be next? I was fascinated to read about the U.K.’s decision to enable the equivalent of bank account “number portability” – so you can switch banks without having to worry about all your preauthorized payments and deposits – they’d just seamlessly (easily!) map to your new account number.

What’s not easy today in payments? Provisioning an NFC/SE phone. Entering card credentials into a mobile app. Understanding a traditional acquirer’s merchant statement. Using a bank to make a P2P payment in the United States. Making a cross-border payment. Paying a supplier electronically and getting the remittance data to them in a way they can digest.

Are you looking for business opportunities in payments? I’d suggest you look at products and services that make life easy for the users of payments!

FASTER
I’m still frustrated by people in the payments industry that are saying, basically, “payments don’t need to go any faster”. That may be true, but it’s moot! The world is going digital (hello, bankers?) and digital is immediate. Common sense tells us that we should be able to send money in an instant. We can, after all, spend money in an instant, when we present a card at the point of sale. (And, as I hate to point out, American consumers aren’t going to pay for this – any more than they pay for the use of their debit cards. Non-banks get this. Bankers are still struggling with it.)

Other countries are jumping on board this train. Will the U.S. end up doing the same – or will we end up sidelined with an outlier payments system, as we are by our refusal to align with the metric system?

Personally, I’m going to spend part of my holiday vacation reading some of the 166 responses to the Fed’s Public Consultation paper – I’ll let you know what I conclude!

SECURE
Finally, the sobering news from our friends at Target reminds us all that security is table stakes in the payments industry. It’s not a feature, it’s not a competitive advantage – it’s a requirement. The almost crushing complexity of some of the solutions – EMV, NFC secure elements, etc. is discouraging – but other trends and solutions in the works are better and easier. Tokenization for mobile and online payments, by The Clearing House as well as by American Express, MasterCard and Visa is encouraging. Discussions about directories and aliasing for P2P and B2B “push” payments are more so (as is the increasing understanding of the advantages of “push” payments in general). But my favorite new thing is Apple’s Touch ID security. Go back to that Macy’s scenario I drew. Your app has woken up when you went in to that store. You find the sweater you want to buy. You pick it up and touch your phone to authorize a charge to your card on file. Voilà!

Have I missed any trends you think should be on this list? Let me know! And best wishes for the holidays from all of us at Glenbrook!

{ 10 comments… read them below or add one }

James Esposito December 23, 2013 at 8:14 am

Nice article Carol. Happy holidays to you as well.

Cheers,

James

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Jeannie Foulkrod December 23, 2013 at 10:22 am

Carol, I agree with you about the banks and moving money. Great article. Don’t read any of the Fed stuff this holidat season, just enjoy!

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Karen kaukol December 23, 2013 at 10:41 am

Carol, as always, great insights. Love reading your stuff – keep it coming!
Happy new year

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Peter Ehmke December 23, 2013 at 12:15 pm

“Art is the triumph over chaos.”
John Cheever

Maybe we need to consider payments more of an art form? :-)
Looking fwd to 2014

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Kirsti Jansson December 23, 2013 at 6:27 pm

I very much enjoyed your article. Wonderful insights and a great way to cap off an amazing year!

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Lenny Gusel December 23, 2013 at 7:26 pm

Great article, thank you!

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Kosta Peric December 24, 2013 at 11:28 pm

Noce article Carol. I particularly look forward to embedded payments!
kosta

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Shilpoo Agrawal December 29, 2013 at 8:36 pm

Hi Carol

Great summarization of the year in payment industry.. few questions to get your valuable insight.. how do you see MCX helping merchants reduce their risks for ACH debit Auth? are you thinking of model like what DWOLLA have done for risk management and faster payments?

also do you think with tokenization of payments information (The Clearning House and Associations) , NFC / SE is no longer that important as actual card information will not be required on physical devices?

what do you think of strategic importance of closed loop ( Chase / Visa deal) on open network, you think FIs / Emerging Payment Players with access to POS and networks, are going to shift transaction volumes to them compare to those who do not have significant merchant acquiring business base?

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Carol Coye Benson Carol Coye Benson December 30, 2013 at 9:40 am

Shilpool – thanks, good questions! I don’t know what MCX is doing, but if I were in their shoes one of the services I’d be offering is an ACH risk-management service – more along the lines of PayPal than Dwolla.

You are right that tokenization is not necessary if the card info isn’t on the physical device – but I think we’re a long way away from that…

On your last point, I think the volume shift that could matter would be for high-spend, affluent credit card users – but the Chase/Visa deal would simply recreate what AmEx already has. I doubt if it will materially shift debit…

Carol

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ThatPaymentsGuy December 31, 2013 at 8:42 am

Nice article, Carol. A couple of items for consideration:

– Embedded payments, I love the ease with which I can make a payment within iTunes and Amazon’s One-Click. I’m afraid that the card-not-present changes that you suggest may inhibit those payments. Further, how easy would it be to simply approve a payment through a PIN/biometric authorization? I know we’ve been down the biometric path years ago but maybe it’s time has come.

– ACH account on file, I don’t see how there is more Risk Management required for these types of embedded payments versus a credit card on file. PCI compliance is more onerous than ACH audit/security requirements.

– I like the idea of being paid by the issuer to put their card in my merchant wallet, but I think the best reward program wins that race.

Lastly, I, too, am a Bitcoin skeptic. Commodity not currency.

Happy New Year

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