What’s Next for US Payments
We’ve spent so much time the past several years obsessing about how mobile proximity payments would be deployed in the U.S. and the rest of the developed world.
Now we know.
This week, Apple Pay celebrates the first anniversary of its launch, and a new generation of payment-enabled iPhones will be announced. Later this month, Samsung and the rest of the Android ecosystem will fully join the NFC party. The names of MNO joint ventures around the world, which were keynote-worthy during last year’s fall conference season, will be hard to recall by the time the leaves begin to change color next month.
So, with the dilemma of mobile proximity payments now looking like “settled science,” what is a poor payments consultant left to ponder? Well, mobility is the great sea change of our generation, and there are other payment infrastructure changes afoot that demonstrate some of the downstream impacts in our new mobile society.
Here are a few of the budding trends I’ll be watching over the coming months and years.
From Pull to Push
The vast majority of non-cash payments made by consumers have been debits or “pull” payments. The payer shares his account number with a receiver and grants the receiver permission to withdraw or “pull” funds from his account. This is true for checks, cards, and many ACH transactions but not all (there are a good number of push payments in the form of ACH credits and wires, typically initiated by enterprises acting as payers).
In the retail payments arena, this largely reflected the prevalent network arrangements where a business receiving payment was better positioned to be online to its bank and thus more able to initiate the transaction into an online payment system than the consumer / payer herself. That model began to be altered with online bill payment, perhaps the first use case where consumers initiated large numbers of push payments. Now, in a world where mobile data networks mean that almost everyone is online almost all the time, it’s more feasible for transactions to be initiated by payers. We are now seeing more payment systems accommodate this shift in direction.
The push model may be most apparent in peer-to-peer (P2P) payment services like Venmo, Popmoney and Square Cash to name just a few. While P2P may not be the largest or more lucrative area of payments, we have learned that, once established, payment systems tend to break out of their originally intended domains. Push payments take advantage of existing systems that allow a payer’s financial institution to rapidly validate his identity and check his available balance prior to pushing a payment in near real-time. There are many potential use cases for that capability.
The Federal Reserve has quite publicly championed the development of real-time payment systems and The Clearing House (a payment processor owned by the largest banks in the U.S.) is already at work on building such a system. It won’t happen immediately, but look for new push payment systems to sprout and compete for volume in use cases that are impeded by “pull” payment failures due to insufficient funds, payer authentication problems, or other issues.
Private Label Renaissance
A few years ago, you couldn’t give away a private label card portfolio. Not surprisingly, these cards exhibited poor credit performance during the credit crisis, and were viewed as a growth-challenged category given that our leather wallets were already bulging with network branded cards. But lost in the credit washout was the underlying role private label cards play for retailers: they are a kind of customer relationship management tool. Store cards and their co-branded cousins give merchants insights into the behavior of their most loyal customers and open a communications channel to them.
Now, thanks in large part to digitization and creative incentives, private label may be in the early stages of a comeback. Lost in the media tsunami over Target’s security breach was a very positive story about adoption of its private REDcards (particular the ACH-powered “debit” version), which offered 5% discounts in an effort persuade consumers to concentrate more of their everyday purchases with the retailer. These private label cards came to represent about 20% of tender at Target in 2013. The breach has reportedly constrained subsequent growth, but Target is taking the unusual step of upgrading these private label cards to EMV chip technology, which could help assuage the consumers’ lingering security concerns about the company.
Earlier this year, Amazon.com quietly added a private label card program alongside its popular co-branded Visa card. Amazon Prime members who qualify for the Amazon Store Card automatically receive a 5% discount on their purchases at Amazon.com. While results for the card have not been disclosed, there was a notable increase in marketing of the card around Amazon’s Prime Day on July 15. No plastic card is sent to holders of the Amazon Store Card. It is installed within one’s account and accessed by the Amazon user’s login name and password. Digital-only products like this, along with the forthcoming ability to install private label cards in mobile wallets like Apple Passbook, should create space for these limited-used products that did not exist in those bulging leather wallets.
Do It in Installments
A somewhat overlooked feature of the Amazon Store Card is the consumer’s option to pay for larger purchases (those over $149) in installments over several months without interest charges. These sorts of custom credit arrangements for specific purchases could become another structural change in payments. There’s plenty of evidence. PayPal continues to market its PayPal Credit product with similar installment features and we are now watching the launch of Affirm (from PayPal co-founder Max Levchin) with similar features. Just last month we saw the U.S. introduction of Klarna, a Swedish company that successfully offers delayed payment and installment purchasing in Europe.
Installment payments sound to many people like an antiquated technique. While it is not a new idea, it is a fairly common feature in many markets—it’s a fairly standard option tied to credit card purchases in Brazil—and is increasingly common in the U.S. If you don’t believe U.S. consumers buy in installments, spend 15 minutes tonight watching QVC, Home Shopping Network or EVINE. Notice that prices are nearly always presented with a multi-payment option. Also, note that the personal loans originated on Lending Club and other fast-growing peer-to-peer lending sites are installment products (and ironically, are most frequently used to pay off revolving credit card debt).
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Of course, there is a lot more underway in the payments space. Please share a comment and let us know what you’ll be watching this fall. I’ll be back on PaymentsViews in the months ahead to assess how these trends are—or aren’t—playing out.
This post was written by Glenbrook’s Bryan Derman.