For years, experts have been anticipating the “digital disruption” of payments, a shift in consumer transaction habits that could upend financial services.
To a degree, this disruption is already underway, evidenced by the decline in cash and check transactions in recent years, coinciding with the rise of e-payments.
The prospect of cashing in on disruption keeps attracting a wave of tech companies, startups, and venture capital investors to the payments market. All hope to leverage new technologies like bitcoin and mobile payments to change the way consumers pay. This has led to an overcrowded field.
Many areas within payments, like cross-border and in-store mobile payments, have multiple startups or tech companies claiming to be disruptors, all offering somewhat similar solutions.
So the market for digital payments startups is now incredibly oversaturated, but the influx won’t stop. That’s because, despite all the change that’s happened in “payments years,” digital disruption of payments hasn’t really happened yet.
Awaiting tipping point
The gradual rise in digital payments and decline in cash and check transaction volumes in recent years has yet to reach a tipping point where a true disruption has occurred.
When that tipping point is reached, the competitive balance in financial services will be significantly altered and consumers’ lives will truly be transformed by the inherent benefits of digital payments, leading to a steep decline in paper payments.
We haven’t reached this cliff yet. So venture capital investors will continue to back new payments startups entering a crowded field. CB Insights recently found that venture capital investment deals in the payments sector increased 17% in Q2 of this year compared to the same period last year.
Even successful payments startups like Venmo process minuscule volumes compared to more traditional payments providers. E-commerce still only accounted for 8.1% of all retail sales in the U.S. last quarter, according to the U.S. Census Bureau. This indicates that although digital payments volumes have risen, mostly because of adoption by younger demographics, consumers overall still have not realized the full benefits that digital transactions can bring to their lives.
What’s delaying disruption?
One barrier facing delivery of all of the benefits of digital payments is that digital transactions are typically still tied to traditional payments rails.
For example, a key point of digital transactions is that they can be processed in real-time. However, banks’ transaction processing systems and procedures are typically designed for batch processing. So it can take a day or more for a mobile check deposit or a Venmo cash-out to post to a bank customer’s account.
Taken a step further, real-time transaction processing could enable banks to deliver real-time financial advice to their customers based on how a transaction will impact their finances and spending patterns.
Until digital transactions are routinely processed in real-time, customers won’t get this major benefit of digital payments.
Banks aren’t selling customers on digital pluses
Customers also don’t truly understand the benefits that digital transactions can bring. That’s because it’s a difficult message for payments providers to deliver.
Why? Because the modern payments industry has been built on the premise that all the consumer needs to know about payments is how to conduct one. Everything that happens in the background stays there.
The consumer isn’t supposed to worry about any of it.
Digital payments companies have to break this barrier and get customers to understand the value propositions they can offer.
So far, providers have not communicated this message. For example, the alternative mobile wallet providers have failed to get customers to understand the security benefits of their solutions compared to card payments—resulting in many consumers still not trusting their solutions.
Train keeps chugging
However, other forces are at work. These issues are not significant enough to stop the growth of digital payments, which will continue to be fueled by the rise of e-commerce. [See “M-commerce transforming retail point of sale.”] As consumers grow used to buying more things online, they will continue to become more comfortable conducting other transactions—like paying rent or sending remittances—online.
Both the retail and technology industries will continue to push more transactions online, giving payments startups that make these transactions easier a path to growth.
More consumer products are also being connected to the internet, which will drive more e-commerce transactions. For example:
• Connected cars will allow consumers to pay for gas straight from their car’s dashboard rather than swiping their card or going into the station to pay with cash.
• Connected appliances will allow consumers to order groceries or laundry detergent online straight from the screen on their connected refrigerator or washing machine.
All of these trends will help make digital payments easier for consumers to conduct, but that won’t be enough to bring about a real transformation of the payments market.
Digital adoption hinges on consumer understanding
Swiping a card is easy enough—digital payments need to provide greater benefits to consumers’ lives to create large-scale disruption.
Digital payments are inherently faster and more secure than paper transactions, and they can provide more data for analysis that can lead to valuable insights for consumers.
Until these benefits are fully realized, digital disruption in payments will remain a future target rather than a present force for change in consumers’ lives.