BrainTrust Query: Which Emerging Payment System Is Best?
Through a special arrangement, presented here for discussion is an excerpt from a current article from Insight-Driven Retailing Blog.
Which emerging payment system is best? That’s probably the most common question I get asked. Unfortunately, my crystal ball is a bit cloudy. Remember, it took credit cards a while before they gained traction. Some of the same things I hear today ("We don’t need a new payment scheme," and "It compromises my privacy"), I’m hearing in reference to emerging payments. And just as those complaints eventually quieted, the same thing will happen and people will adopt new ways of paying. One thing I can say confidently is that the payment landscape will change over the next three to five years.
Is NFC dead on arrival? No. I’m not going to count Google, AT&T, Verizon, T-Mobile and MasterCard out this early in the game. They are behind thanks to a lack of NFC support in iPhones, but they are still viable solutions. With retailers needing to upgrade their POS terminals to accept EMV cards, now is a great time to also install NFC capabilities. Once there are more NFC readers out there, more and more innovation will occur around them.
PayPal is definitely in the lead since they are able to leverage their e-commerce base of users. Their lack of reliance on NFC has worked in their favor, at least in the short-term. Of course if NFC takes off, I’m sure PayPal can add that technology as well. Their flexibility and reach are strong points.
Google and Isis have great systems, but since they are limited to Android devices, they are not serving enough of the market. That, of course, will improve over time. While all three (Google, Isis, PayPal) are addressing consumer convenience, none are really addressing transaction costs for merchants. That’s where MCX, the retailer-led mobile wallet, could shine. Since they are not on the forefront, they have the luxury of watching the market and picking the best ideas.
At the recent NRF conference, MCX representatives said they are planning to use barcodes for payments in order to support all mobile phones. They are also focused on lowering transaction costs for merchants as well as protecting customer data, something that differentiates them. The approach sounds right, but they are far behind in development unless they acquire or partner to gain access to an existing wallet. They may have the most potential of all the solutions, but are furthest behind.
I suppose I could put all my retirement savings into one stock, but I’d rather spread the risk across many. By the same token, there’s no reason for retailers to pick winners at this early stage. The best advice is to get into the game and try supporting one of the new wallets. In many cases, there’s funding available to help offset costs. This invaluable experience will prepare you to take advantage when winners are more apparent.
Discussion Questions
Which emerging payment solution is most likely to succeed at retail? Is NFC dead on arrival? What do you think are the biggest hurdles facing adoption?
Barring the entry of new technology NFC will likely still play a role in emerging POS systems. But the POS ecosystem has all the makings of becoming the “Wild Wild West” before any true winners emerge. Fundamentally, the change catalysts for POS are threefold; mobile technology, the consumer who is beginning to embrace mobile payment, and the vagaries of the current system, dominated by Visa, MasterCard, Discover, and Amex.
It is not a secret that retailers are now actually organizing themselves to be in position to creating their own payment systems, whether they be mobile or otherwise. The onerous fees the current Credit organizations charge is the source of one of the great new opportunity areas for retailers, IF they can crack the code on getting consumers to transition to a retailer-driven, low cost debit alternative.
Barriers to this transition abound, whether it be resistance and competition from the incumbents or even new federal regulations that could change the landscape with one piece of new legislation or the increasingly-popular executive order.
Nonetheless, I think the future landscape of POS systems lies in how quickly retailers can form a critical-mass lower-fee platform. Once formed, then the technology and the mobility of payment applications will have something to anchor themselves to that has the staying power needed for investment.
Until a system becomes widely accepted, consumers for the most part will sit on the sidelines. When consumers sit on the sidelines, it’s difficult to convince merchants to try new technologies. We saw this with digital wallets in the late 1990s, where a number of companies tried and failed to sign up merchants and consumers.
With smart phones continuing to gain market share, it’s inevitable that a few payment options will break through, but at this point it’s still anyone’s game.
I think much of the discussion around payments is looking at the industry through the rear view mirror rather than looking ahead. When credit cards showed up on the scene, the alternatives were cash and checks, each of which had costs, time, and risks associated with them from both the consumer and merchant perspectives. Credit cards were (eventually) truly a faster, safer, more convenient way to pay. As a result, they could extract a toll on every transaction, which quickly added up.
Fast forward to today, and the question has to be, what more can a new payment system (mobile, digital, NFC, cloud, unicorn, whatever) offer that’s truly better than the existing ecosystem?
Lower fees for merchants? That would be huge for merchants (many grocery chains pay more in interchange fees than they make in profit!), but would crimp the rewards that many customers want from their cards. Easier transactions? Sure, but removing a piece of plastic from my wallet, sliding it, and returning it isn’t that hard.
The real answer has to be something else. The big value add that the new payment systems can bring is in driving consumers into stores, getting them to buy more, and getting them to try something new. If a payment system doesn’t bring a clear and compelling answer to how it will grow *your* business, then it’s just another gee-whiz tech project.
[Full disclosure: Google acquired my company (www.incentivetargeting.com) in November, but these comments are entirely my own.]
It’s clear not only from David’s post but also from the marketplace that there is not yet a leading emerging payment solution. There are fundamental flaws or inhibitors with almost all the emerging solutions out today that can easily prevent them from mass adoption.
Some are absolutely more interesting than others—Square stands out for sure—but there is so much inertia remaining in cards and the large card issuers and associations that it’s going to take longer than people expect for mass adoption of these payment vehicles.
Trust and privacy issues loom very large, and that means that there is still a significant amount of opportunity for legacy payment brands, even (especially) in new form factors.
If you are interested in payment systems I suggest you attend the RAMP Conference. I have attended two events and each time I come away with key market trends thanks to both guest speakers and exhibitors. Tough to put my money down on one solution, but I would bet on any solution that teams up with retail POS providers. MCX will be a top contender because of the retail support and low transaction costs. I also see any solution that ISIS, Google or PayPal working on having a fair chance.
With all of that said, there are over 30 start-ups working on mobile payments and each has unique features. As the article states, with retailers having to upgrade POS systems now is the time for NFC technology to get installed and included.
The biggest issue is showing consumers that a bump is easier than a swipe. I still struggle with the benefit, but and confident they will come up with more reasons for me to transition payments to my mobile device.
I think NFC went on life support at best when it wasn’t included in the iPhone 5.
MCX has the edge because it is retailer-led, but doesn’t have the technology powerhouse of a Google behind it. That said, if MCX is easiest for retailers and good enough for customers, it will win.
NFC will take off in 2013 due to the surprising sales of Samsung Galaxy S3 phones. QR Code will remain dominate as better mobile processors can decode QR codes faster and in lower light.
The biggest hurdle is the point of sale evolution retailers have to consider. The bulky old cash registers are a dinosaur as well as merchant devices connected to phone lines.
Maybe the answer isn’t one size fits all? Yes, swiping or bumping my phone may save me a step at the checkout, but IMHO the greater opportunities are for the retailer. With new payment options they can untether and move about the store. Restaurants can receive an alert that the customer has paid and issue tasks to bus tables. They can have fewer cash wraps and use staff in more meaningful ways.
I will be interested to see what comes about and suspect that I may see some interesting payment options based on the customer experience the retailer is trying to achieve.
Too early to pick a winner; indeed there will not be a single winner, but multiple. Just as with credit cards, most people carry multiples.
I do believe NFC will become the connection of choice, as it’s fast and reliable. NFC phones are pouring into consumers’ hands; latest statistics indicate Android now at 52% market share. NFC readers will be installed in retailers as the preferred way to implement the EMV mandate, unless MCX acts quickly and causes confusion in the marketplace.
The key to widespread use of mobile payments is consumer demand. Once some company develops a payment application that benefits the consumer, retailers will quickly implement.
The key to consumer acceptance of the MCX payment approach may be in the rewards structure offered by participating retailers. For instance, fuel rewards programs, a tangible value to shoppers, have universally grown loyalty levels at grocery chains.
Retailers can channel a portion of their credit card fee savings into a similar benefit, such as a fuel rewards premium or a basket discount. There is a competitive advantage awaiting retailers, especially first-movers, which properly position and market their payment alternative to traditional credit cards.
I strongly believe that it is the mobile wallet that will transform the use of mobile devices (smartphones) at retail. When the use of the phone eliminates the checkout line, shoppers WILL use it to scan/pay as they go.
As far as NFC is concerned, I absolutely believe this will ultimately be a winner, but there are other, half-way approaches that may sweep the market first. Whether this will impede or accelerate adoption of NFC, I’m neither a prophet, nor the son of a prophet. Somebody has noted that it is VERY hard to predict the future, particularly when it comes to saying what will happen. 😉
However, there is another point that may be even beyond NFC. When it comes to identity, why does possession of a couple pieces of plastic, validate who you are? I know, I know, it works. But my dog is much better than those cards. My point is that at some point, electronically connected detection will be able to definitively “recognize” us. At least as well as we recognize our family and friends. When that happens, it is “Katy bar the door,” as far as an explosion of big, BIG data!
To a degree, the payment system that will prevail in the next 18 months or so will depend upon the store format, e.g., mass merch/grocery, and specialty apparel.
The biggest hurdles are consumer adoption. I actually don’t believe consumers are waiting on the sidelines. They are speaking up right now with their actions. If NFC is on life support, that’s because the consumer doesn’t like it or doesn’t understand it. That isn’t because it’s not available.
One hurdle not yet mentioned is what becomes of the physical cash wrap? Do changes in payment types mean designers need to innovate to create a physical space that is as contemporary?
The biggest pile of dollars in business is in cottage industry, and small and medium businesses. Amazon, Google, eBay, and PayPal get this and are all aimed at these markets. Ease of use, high reliability and fast payment make them and their business plan winners for the foreseeable future.
That said, the foreseeable future in any aspect of IT is 15-18 months. Long term in IT is 2- 5 years. Change in the IT industry is sudden and without notice. The IT history books are filled with forgotten “big” company names and “revolutionary” technologies no longer useful. Some of the names and most of the technologies mentioned in this article will no doubt be added to the IT history books in the next 5-7 years.