The Future of Payments – Proposed way forward

It is clear that omnichannel commerce is here to stay. MasterCard’s SpendingPulse report is showing that U.S. ecommerce is growing at double digits year-over-year as compared to total retail sales (ex-auto), which are growing in single digits. While stores may be becoming less important, they are not dead and are an integral part of the purchasing process; close to 20 billion people visited US malls in Nov and Dec in 2013[2].  Providing a consistent experience across channels will be critical; our research shows that spend by omnichannel customers, those who shops across more than one channel and value a consistent experience, is significantly higher than single-channel customers, those who shop via one channel across all verticals (Figure 1).

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Of course e-commerce is continually evolving but the biggest change may well happen in store. First stores will likely become smarter. Retailers currently don’t know who walks in the door so its difficult for them to provide a customized experience and individual offers. Beacon technology can solve this issue for stores.  With a larger range than NFC this technology has enormous potential for customers and retailers alike.  Widespread adoption of Beacon technology by stores and customers will make it quicker and easier for customers to access the information and products they are looking for, and for retailers to provide special offers or discounts to loyal shoppers. It may also provide retailers with invaluable insights about their customers’ shopping habits allowing them to make improvements to the store layout by identifying store flow, maintaining service standards and operations that will benefit everyone.

In ten years you may be able to expect to walk past a shop and your mobile will receive meaningful and personal notifications on discounts or deals that you are likely to buy based on your shopping preferences.  If you go inside you may be able to use your phone to pay with offers automatically applied. There may be other improvements. For example, checkout lines will likely become things of the past. By using mobile technology instead of a fixed till, customers will likely enjoy a much more personal experience. Pioneers in this include Apple, J C Penny and Nordstrom in the US but it will likely become a common phenomenon. Similarly, “order ahead” capabilities that allow customers to order and pay from their mobile phones before they even enter the store and generally speed up the sales process will likely become widespread.  Expect the food service industry to lead the way.

The second area of change will likely be in the way customers choose and buy goods.  It will likely be all about choice. You may be able to order online and pick up at the store, order at store and deliver online, get similar offers across channels and yet have the same payment options. The transformation between the virtual and the actual has already begun; in South Korea, Tesco has built virtual grocery stores on subway platforms that have a similar layout to actual stores. Customers can now do their grocery shopping during their daily commute using their mobile phones, pay online and have them delivered when they get home. Of course there are big variances in this depending on internet access and payments solutions like PayPal and Apple Pay are trying to provide a similar payment experience in other markets.

Looking at POI, Uber, which is in 40 countries, is a great example that is revolutionizing the way we think by actually embedding payments in the process and focusing on the customer experience. Another good example is PayByPhone that is revolutionizing paying for parking by focusing on the whole customer experience. No more grappling for coins or making trips to replenish the meter. PayByPhone lets you pay remotely from your mobile phone – even when you have left the car park and are on the train.   Look out for additional value added services like Bill pay and remittances that not only enhance the customer experience but also drive incremental revenue for retailers.  The key for retailers is to consider ways that digital payments can be used to enhance customer experience.  We expect many more digital payments applications in areas where cash currently dominates.  Vending machines are another example.

All of this is of course driven by the supposition that in the next ten years there will likely be a global acceptance of electronic payment products. We are nearly there; Square and iZettle’s mobile point-of-sale (mPos) solutions are demonstrating this by giving the small merchants who are the main driver of cash transactions the ability to accept electronic payments at affordable rates. Such is their success in fact, it is expected that by 2019 46% of POS terminals will be mPOS[3]. For the payment providers innovative ways of determining merchant credit risk, for example by using alternative data sources such as cell phone usage and bill payment receipts,  are critical to open the way for unbanked merchants, particularly those in developing economies where the majority may not have access to traditional banking facilities.

Security and trust are fundamental to the success of e-payments, the one supporting the other.  Given this we expect to see changes in two specific areas; customer authentication and the underlying infrastructure support for transactions.  In the future we expect multi-factor authentication will become the norm for most online and offline transactions.  This has already begun in the physical world think of EMV with chip and PIN which is now becoming a global payment standard.  The online transaction community is likely to follow particularly in Europe where the European commission is keen to add some regulatory pressure. In addition it seems clear that authentication itself will likely become more secure as biometric technology from hand geometry, via face recognition and fingerprints to iris recognition become more mainstream. It sounds a bit Hollywood but in ten years time it will likely be old hat. On top of this, although unsexy and unheralded, the all-important underlying infrastructure that supports transactions is expected to also become more secure. Consider the replacement of magnetic stripes with chips and use of card number tokenization for NFC transactions as illustrations of this shift.

Pay attention to two scenarios that demonstrate the dominance of social commerce. First, imagine Isabel, a 35-year-old professional. She opens her tablet. First stop is her homepage, from which she administers her universe. She has her favorite brands, her product wish list with the prices she’s prepared to pay (information she has shared with those same favorite brands) and an easy-to-manage dashboard defining what the outside world sees about her. Certain brands she trusts enough to share quite a lot about herself. These favorites, of course, know the most about Isabel, so that she can get exactly what she wants from them. Others aren’t as fortunate. They know only what Isabel wants to share with them — which isn’t much. If a brand is not on her list it won’t ever find out more, because she’s perfectly able and willing to control her digital information. In her digital life, she will “switch on” areas of interest and consider relevant offers.  She will also block out the untargeted, low-value offers and emails she receives all the time. Isabel, you see, values control and monetizes her personal data by the way she manages it. Isabel is a segment of one.

The second scenario takes the power shift to the customer a step further. This builds on the notion of the “Internet-of-things”, a scenario where household objects, fashion accessories and other objects can transmit data about themselves. For example, the water filter of your refrigerator may send a signal to your preferred suppliers when it its time to replace it with the supplier that satisfies the price point subsequently fulfilling the request. While it is too early to say which areas will be affected by this change, it is very likely that “things” in the home will be connected and be able to send and receive information in order to other “things”

Optimizing the intersection of digital payments and big data is critical for merchants to serve the new powerful customer. Data has become multichannel, multi sector, multifaceted and for retailers being able to understand the behaviour of their customers not to mention their fragmented media existence will likely provide a whole new level of understanding and opportunity. Take for example the recent experience of a retailer interested in reaching last-minute holiday shoppers in (for argument’s sake) the luxury sector. By analyzing aggregated purchasing behaviour, with last-minute holiday spending, the company was able to conduct a better, more targeted campaign as a result. The reward was a 31.7% lift over the performance of a control group.[1]

Cross-border commerce is growing faster than domestic commerce and so will likely become increasingly important and influential. In fact, based on McKinsey’s research, cross-border flow of goods, services and finance could increase three folds from $26 trillion in 2012 to $85 trillion in 2025 representing a 10% average growth rate. Innovations in digital payments and technology such as payment cards, eBay, and AliPay will fuel this by simplifying cross-border commerce.  Small businesses (SME’s) are likely to benefit significantly.  Consider that 90% of commercial sellers on eBay are SMEs who export to other countries vs. less than 25% of traditional SMEs[4].

Emerging economies are and will likely continue to be the main beneficiaries. China and India are the main drivers especially through trade with other emerging markets. Between 1990 and 2012 the share of trade of global goods between emerging markets quadrupled whereas between developed markets almost halved [4]. Similarly, share of trade of global goods between emerging and developed markets increased 40% during the same period [4].

Payment for transit by overseas travellers is one area of opportunity. Solutions like the one rolled out by London Underground that enables travelers to use their existing contactless bank cards (e.g., supporting MasterCard PayPass) without having to buy the local Oyster card are expected to continue to gain traction.

Merchants are also expected to become smarter about engaging cross-border customers using transactional data. As an example, many types of merchants – including airlines, hotel chains and luxury fashion brands – have established relationships with travelers through loyalty programmes. Analyzing the spending patterns of frequently traveling members of the program can help identify the merchant types with which members engage most often. This may uncover new partnership and ancillary revenue opportunities.

There will likely be several types of digital payments like payment cards, mobile money or digital wallets for different markets and applications. One area in payments that is likely to see significant transformation is low value payments (LVPs), everyday, high-frequency purchases for which cash is used (typically sub $10 transactions) and make-up the bulk of cash transactions today. Digitizing these will most likely require new payment solutions. It’s not simple.  Any payment solution must create equitable value for all parties to a transaction. And value is a confluence of factors such as faster checkout, sales increase, information, safety, not just a function of pricing. Existing payment solutions are successful because they arbitrate a wide range of stakeholders to ensure equitable distribution of value. Digitizing low-value payments will likely require the same approach to create new payment constructs/business models.