In 2013, it was tokenization, 2014 was Apple Pay, and 2015 was MCX (RIP). What are we in for in 2017 and beyond?
Next week’s upcoming Money20/20 conference — co-founded by Anil Aggarwal and Jonathan Weiner — is the reason more payments business gets done in October than any other month.
And the payments business has been good. Payments (and other networked businesses) have been some of the best market performers since 2007. Every year, this event serves as a key arena to assess trends and better inform the bets we’ve all been taking.
The payments landscape is currently undergoing tectonic shifts. As we approach this year’s conference, we know major things are going to happen. In 2013, it was tokenization, 2014 was Apple Pay, and 2015 was MCX (RIP). What are we in for in 2016 and beyond?
New merchant value propositions
Retailers are a very long-tail business, with more than 3.8M establishments. But only the biggest businesses — the top several hundred — are able to execute on data and loyalty. Take a look at this single restaurant’s monthly processing invoice. Do you wonder why Square has been successful? Its flat fee of 2.75 percent is not only less expensive, it also helps the merchant create a better customer experience and a quasi-loyalty program with email receipts.
We should watch out for new merchant value propositions at Money2020, particularly those that create richer customer experiences and faster paths to talk outside of the transaction. Why? Any repeat customer experience is heavily influenced at the point of the most recent interaction. Mobile operators and location data companies are well-positioned for this, but they must play with financial institutions’ data. Merchants are the starting place to initiate the conversation.
A top merchant told me a few months ago, “Retailers like Starbucks have proven that we are best placed to deliver value and influence consumer behavior. I don’t want to force my consumers to do anything, but similarly I want payment networks to enable me to play on an even field. What partners can help me discover, engage and create value with new and current customers?”
Collaboration is going to be the top focus area for the Money2020 event. There are always many press releases, but where are retailers, mobile operators, banks or advertisers playing, beyond their typical environment? Payments are the connective tissue of commerce, and changes here are indicators for how commerce is changing. Where are investments being made, and who is working together?
My favorite story about this is from the CMO of a top movie theater. He said, “Tom, we don’t compete with the restaurants and retailers around us. When they win, I win, and vice versa. When I compete against another theater, it is not me against them, it is my community versus their community. How can we deliver greater customer experiences and collaborate more effectively?”
Google and Facebook are becoming platforms for commerce. Other media companies are engaged in massive new deals that will unlock tremendous value.
One collaboration that’s very exciting is Zelle, the new name for the banking industry’s reinvigorated person-to-person payment service. Will they achieve their goal of killing Venmo? Technically, the product is best in class. We should expect auto- enrollment of all the payment instruments when integrating online banking authentication. The biggest unknown is the marketing support that Apple and the banks will give to make this work.
Delivering value beyond the payment transaction
The payments industry is going through explosive global growth, with significant changes in economics, consumer behavior, technology integration and competitive dynamics. Regulation combined with new competitive forces that “bundle and integrate” payments are reducing interchange and allowing smaller companies to operate at scale. Expanding use of electronic payments is a rising tide that will lift all boats in the next two to four years, but longer-term value is flowing away from large issuers into the network.
Today, card issuers give most interchange back as rewards, and large issuers enjoy significant economies of scale particularly in areas such as risk management, rule making and acquisition. Large players have historically enjoyed very significant advantages, as they not only defined the rules, but owned the underlying infrastructure and built corresponding utilities (fraud/risk) that could not be matched by smaller players.
Mobile, authentication and tokenization are enabling specialization within payments, undermining the traditional economies of scale and causing fragmentation. Specialization will result in much greater credit competition and thus NIM (net interest margin) compression.
Payments work enormously well, and are quickly becoming something we no longer think about — they are embedded in how we interact with merchants. Large issuers are struggling to adapt and participate in this new world. Their struggle has been masked somewhat by the success of new rewards schemes that have given them par with the previously untouchable AmEx. Market forces are coming in like a tsunami, and payment network participants must tilt to be more merchant-friendly and assemble new bundles.
Payment in the OS
ApplePay in browser is the big thing in e-commerce, with Google not far behind. Payment in the OS is a subset of the bundling topic above, as it is “bundling” driven by Apple/Google. Platform ownership of authentication and token management changes the dynamics of payments (and the power). Apple is able to get 15bps from U.S. issuers, and Australian issuers are pressing regulators to force Apple to open up its secure IOS enclave.
This battle also highlights risks for PayPal, as its core assets here are ease of use (conversion rate) and risk management. Banks are also impacted. As the costs to issue a new card drop to nothing, existing portfolios could be at risk.
Wars benefit no one. My personal opinion is that banks like Citi, Capital One and Bank of America (not exhaustive) want to be where their customers are. They have tremendous innovation teams that seek to deliver value. There are other banks that seek to build their own sand box. Investors, VCs and start ups need to be aware of the dynamics here, as even good ideas play within an overall environment challenged where competing forces operate.
This is wasted energy. Payments are working well. Visa and MasterCard are enormously efficient networks. Everything else in commerce is broken. When was the last time you clicked on an online ad? Innovation looks like Google Shopping Express … not Chase Pay.
The $4 trillion economic opportunity is in the transformation of commercial networks. Not in the breaking of what works.
Hear more from Tom Noyes during his panel at Money20/20 on Oct. 25.
Thomas C. Noyes is the founder and CEO of Commerce Signals. Known as an industry connector and for his payments blog, he has 20 years of experience in banking, payments, software development, venture finance, consumer marketing and sales. Prior to creating Commerce Signals, Noyes held roles ranging from a NASA engineer to head of channels for Citigroup’s Global Consumer Group. Reach him @noyesclt.