September 10, 2015

Alternative payment methods – Who is in the driving seat?

Digital-Payment-MethodsThe days of cash being king are long gone and customers these days expect a wide range of payment methods to suit their situation and means, whether that is online or in-store. Or do they? Who is it who is actually generating this shift?

Who is truly driving the alternative payments landscape? Who really benefits from it? Some parallel with this question can be seen in the adoption of EMV (EuropPay, MasterCard and Visa) smart chip technologies around the world – or Chip and PIN as most people know it. The Card Schemes, banks and card companies have led a very successful campaign convincing cardholders of the security benefits and lower fraud risks of EMV based transactions, but all too often the retailers and processors are left with an expensive bill to adopt and implement the capability to take the transactions but without actually generating identifiable additional revenue.

Nowhere is this more obvious than the current state of adoption in the US card market of the EMV standards. Whilst the US is one of the largest card markets it is a long way behind Europe in rolling out Chip-and-PIN capabilities. Costs of implementation to retailers are estimated to be in the region of $8.65 billion US Dollars, and with an October 2015 deadline for adoption less than 20% of retailers feel they will meet this deadline, with many still asking “what’s in it for me?”.(http://multichannelmerchant.com/ecommerce/emvs-impact-u-s-15022015/) In reality they may be forced to make the changes in order to avoid increased costs and negative impact to their bottom line from non-compliance, a very different driver than new revenue generation – after all, the customer is still likely to buy their groceries whether they sign for them or enter their PIN, the benefit lies with the card companies and the customer.

So who is really pushing alternative payments? It’s true, more and more retailers are offering alternative payment methods both online for their ecommerce platforms (methods such as PayPal or Google Checkout), but also in-store through contactless technologies, mobile phone or other smart devices linked to an existing bank account or e-Wallet. Innovations such as Apple Pay that allow the customer to lodge several traditional card accounts into a single secure e-wallet, and given that the majority of people now have an immensely powerful computer on their person at all times, this change makes perfect sense. At the press of a screen, money can change hands without the customer having to withdraw cash, or reach into their bag or pocket for a credit card. In fact, around half of all transactions (http://www.demacmedia.com/ecommerce/payment-methods-affect-conversion-rates/) are now made with alternative methods, whether this is via the use of a virtual wallet or a money transfer service.

It is clear that alternative payment methods aren’t going to disappear any time soon, but again, there are many benefits to the card holder, but a great deal of complex and expensive technical change for retailers to be in a position to accept these payment methods, and the big issue for them is, does this create genuinely new transactions or just move them to a different payment method. Retailers need to be smart and prompt about getting on board and need processing systems and platforms that are flexible enough to allow them to move at pace.

The thorny question for card providers is where the move towards alternative payment methods leaves them. These companies typically rely on processing fees from retailers to make their profits, so any new ways of paying will reduce their income. However, both the main providers, Visa and Mastercard, are still making healthy profits (http://www.wsj.com/articles/visa-mastercard-get-credit-where-due-1430502251). This is because most alternative payment methods are linked to a bank or credit card at some stage in the chain, meaning that processing organisations still receive a fee. However, new and disruptive payment methods are likely to appear and may burst the bubble for the processing companies. In some ways, there are benefits to them from a shift in liability to the card holder, the more secure the transaction method is deemed to be the less the Card Schemes, issuers and processors absorb the risks and liabilities of fraud.

Customers demand more and more convenience and flexibility, and the Internet of Things – devices connected to the Internet – is likely to allow ever more immediate and automatic payments. While this is great news for customers, retailers really need to keep up with the rapidly changing landscape and will have to make quick, informed decisions about what methods to invest in. A lot of decisions will need to be made whilst this sector expands and settles down, some of those decisions may be costly and may prove to be wrong!

So consumers will love the convenience and choice of the diversity, card issuers will have opportunities to provide more ways to drive customer transactions through their accounts, Card Schemes will continue to be strong and the retailer may just end up paying more to have the capability to process the same transactions they’ve always had? Winners and losers? You decide.