Will EMV spur new models for digital payments?
The jury remains out. EMV-based payments (chip cards) are giving people time to think about how they make payments.
And this is a big thing. Believe it or not, people have never given much thought to that before. But with EMV, customers are now looking at the technology that makes payments in slow motion. While EMV transactions are reportedly safer and the EMV technology prevents fraud, it does raise questions on how payments are going to evolve.
Countries like Japan and Hong Kong have had contactless payments on phones and other cards for more than a decade. For the U.S., however, will EMV be the catalyst for broader change?
With all of the mobile and online payment technologies out there, will customers finally switch away from traditional cards, and actively adopt other methods of payments? Even today they have a wide variety of choices today as the payments ecosystem continues to evolve—mobile payments, EMV payments, online/web payments, and stored value payment models, to name a few prominent ones.
Bigger picture for bank issuers
For banks, these questions raise larger strategic discussions. As other channels take a front seat, how will banks maintain their control on the experience? How will this affect the revenue models of the future? Non-bank players and fintech upstarts are now also beginning to gain the volume and scale.
Apple and Samsung are out to win the payments war. But it is clear that even with all of the hype surrounding the launches, phone-based payments are going to take some time to catch on. Not everyone carries the latest phones. Not everyone has set up their cards on those phones. And then for the device to work, the merchant must be set up to accept such payments.
Then there is the power of habit and fear of the unknown that needs to be overcome, through customer education. A special concern centers on fears of privacy involving third parties, such as Apple, Google, and Samsung.
Add to that the fact that even though overall non-cash payment statistics are in the hundreds of billions, each consumer still only physically buys goods and services a few times a week.
Given that mobile pay options are just wrappers around credit cards, will they replace cash when the most use is for smaller-value transactions?
What’s the merchant’s stake?
Most of us know that our local merchants expect us to help them save the associated transaction fees. That's deterrent enough for many of us who use cards without hesitation at large merchants or chains, and avoid using them at small merchants. Consumer behavior is important when we consider these softer aspects of relationships.
On the other hand, what's in it for the merchants? Should they be offering more deals, coupons, and discounts when they are also paying a commission on every sale?
Right now, the marketing world is indeed skewing towards more and more promotions as best and as fast as they can deliver them to consumers.
But for smaller merchants, an equally important aspect concerns creating a marketing platform and a community of people they can engage well. For example, the special story behind their sandwich recipe, or the fact that they are running the marathon next week and expect to see you there.
This capability is painfully missing in most digital or mobile systems today.
Show merchants more engagement and that might spur them to sign up to encourage alternative payment models.
Finally, store-specific payment mechanisms that bypass mobile altogether may be the future. We want payments to be seamless, not just a better way to do the usual.
Just as self-driving cars are leapfrogging the tech wizardry genius of traditional cars, and online movies decimated the traditional system, we should also expect payments to be disrupted completely.
And mobile wrappers around credit cards are probably not the answer. For that reason, innovations along the lines of Starbucks and Walmart could be the way of the future. Private networks such as the Target RED card are already flourishing. And Target is also leading the way with Cartwheel, a deals and promotions mobile app which has the potential to evolve into a market ecosystem of merchants and customers, based on ACH, not transaction interchange.
Where payments could develop
Here’s a simplified list of key parameters that may help assess the direction of payments:
• Access and ease: How easy it is to pay or receive payments?
Cash gave rise to cards and improved both access and ease parameters. Phones and wallets are catching up but technological ubiquity has to catch up first to ensure mass adoption.
We know that Square made a breakthrough by making it easy for merchants to receive payments on the go, although it was more expensive.
• Costs: While few are actively thinking about this, the cost to the merchants is actually a big deal.
Almost all new-age payment models including cards, Apple, Square, and Samsung are expensive for merchants. Will the cost of transactions continue to be treated as a cost to play? This dimension is where innovation is expected soon. The mechanisms exist in the form of ACH, and are beginning to take form (e.g. Dwolla). However, they aren’t mainstream yet.
• Rewards: Almost forever, we have had banks and card issuers providing us incentives in the form of airline miles and cashback.
More innovative merchant loyalty programs have been enabled by mobile but they need to catch up on customer adoption and user experience. (One example is BBVA’s mobile wallet real-time redemption feature, unveiled earlier this year.)
• Seamlessness: Customers do not want to be thinking about the way they pay.
When we travel or go out today the last thing on our mind is our mode of payment. A slew of cards are always available for all types of transactions except perhaps where merchants expect cash. Mobile has yet to catch up, likewise online and web channels.
• Security: This is vitally important and moreso in a digital age.
Arguably, fraud will reduce as context of transactions and people are connected better. For example, as my phone is tracked for location, the transactions on my card in other locations will be scrutinized.
Online payments may take more time to catch up but mechanisms such as customer notifications are already being refined so much better to catch fraud before items are shipped or billed.
Mobile payments and chip/EMV cards score here as they use automatically generated and encrypted identifiers for the transactions.
• Community: The retail industry is in a state of dynamic change.
The focus on customer engagement and loyalty has never been higher. And as the promotions-based digital marketing models give way to contextual and personalized interaction, the payments model will evolve to support that as well.
We are beginning to treat a customer as a unique person, recording their routines and helping them proactively with their activities (e.g. Google and Apple Siri). Payment innovations will likely follow suit by integrating customers and merchants into natural communities.
The biggest risk for banks is about losing the customer front end. It’s not just about the transaction and associated fees but the loss of an entire ecosystem that can generate the business models of the future.
Banks have the potential of creating an ecosystem much better than the thin credit card veneer that mobile payments are today, but they need to be thinking about creating customer communities leveraging trends such as IoT and mobile.
In short, they need to play the game of customer engagement, not the one of financial services.
About the author
Manish Grover wrote the book Dancing The Digital Tune: The 5 Principles of Competing in a Digital World. He focuses on strategies to meet new digital business and marketing paradigms, leveraging analytics and functional integration to improve customer engagement, profitability, and brand positioning. Learn more about his book at www.manishgrover.com.