There has never been a more exciting time in payments. Let me re-phrase that. There has never been an exciting time in payments. But if you read tech blogs lately, you’d think we were moments away from revolution. Unless the oppressed proletariat can pay with iPhones, they’ll start pummeling Nobu waiters with pearl-encrusted Prada bags. Screw equality and education reform, give the people what they really want – that satisfying beep at CVS!
Since launching Apple Pay, mall hell has broken loose. Bank of America customers are getting double-billed. Some merchants are blocking Apple Pay and Google Wallet. And like Ben Affleck promoting Gigli Reloaded, merchants are teasing their own, freshly hacked, payments system, CurrentC. It features my favorite abomination: QR codes. Most people would rather chew gum peeled from the sidewalk than fumble with those ridiculous codes at checkout. But fumble they will.
In a battle most consumers couldn’t care less about, there are billions at stake – especially for merchants. That means megatons of cash and calories will be burned to make consumers care. This is my take on what matters and who has the advantage. And in my Strange Bedfellows Matrix (free login), I go deep into analyzing Apple Pay and the many surprising deals its competitors will make.
So set your pacemakers to stun and prepare for a war that’s just like Transformers 5…as directed by Ken Burns.
It’s All About the Physical Merchant
Sure it’s convenient to not carry a physical wallet, but most people weren’t exactly bleeding from the knuckles sliding cards through. For most consumers, tap-to-pay – whether it’s with a phone or a baby eel – is as essential as the average Bravo Housewife. It just happens that we’re at a point of convergence. People love their phones more than 40% of their internal organs. And card companies finally mandated all merchants accept decade-old NFC payments starting next year. Not coincidentally, Apple is poised to pounce. iPhone 6 supports NFC payments with Visa, MasterCard and American Express. In exchange, Apple takes a small percentage of transactions – and control of the experience. (More on that here.)
So if it’s such a nice-to-have, who does care? Offline, real-world merchants.
Let’s not kid ourselves, 5% of retail happens online. The rest happens in places technophiles treat as relics, called “stores”. Consider this slide from a Business Insider report: 1 In 20 Retail Dollars Are Already Online. (OK, I added the underline.) Ecommerce has been growing at a strong but predictable rate. Still, analysts imply that as soon as next week, it’s all over for stores. Drones will shoot fresh chinos through your window and a 14 year old Wonderboy will bankrupt IKEA with downloadable futons.
Yes, eCommerce has been a boon, but mainly for Amazon and Ebay, as well as for digital media players like Netflix. There will continue to be plenty of opportunities in ecommerce, like the recent trends of subscription startups and home delivery, but the big dollars will remain in the real world. [For more insight on what’s coming in retail, register for IdeaFaktory’s forthcoming Amazon Disruption Report and event.]
The silent killer in retail is economics. There are too many merchants chasing too few dollars. The wild, stupid days of easy credit are gone. And stagnant wages and income immobility mean continued store closures and frenzy for big data analytics, multichannel marketing, and loyalty. These don’t exist because they’re great leaps in innovation, but because of a desperate need to unearth customers in every nook and cranny.
Who Solves What Problem?
Here is a chart showing what problems merchants and consumers have, how important that problem is, and how well some of the competitors can solve it.
As I wrote in 10 New Rules for Mobile & Payments Startups, the real problem to be solved in payments is not payments. It’s helping merchants find new customers and get current ones buy more – or more frequently.
1. Retain/ Find Customers– It’s much easier to retain your own customers than find new ones. The best way is with spectacular products and service people can’t resist – or require Dr. Drew to quit. But commodity goods in tight categories leave merchants toying with loyalty schemes, price wizardry, and mind games.
Advantage: CurrentC. Having created a merchant coalition at MasterCard, I know how hard it is to get it right. CurrentC has the potential to get tremendous benefits from creating a mega-loyalty program that offers exclusive deals and perks. Because merchants have so much more margin to play with than payments companies, if they fail, they won’t even be able to blame President Obama.
(In my next article, I’ll explore why Facebook is an interesting dark horse here. Get notified when it’s out via our newsletter.)
Runner-up: Apple. What it lacks in economics, it almost makes up for in fundamentalist fervor. A passionate base of users and developers will create a universe of loyalty solutions that CurrentC – or Apple alone – never could. The main advantage would be driving new customers to merchants in new and engaging ways, but that will require more data access than Apple has been hinting.
2. Buy More– Tapping your iPhone won’t add cash to your bank account any more than tapping your heals together will teleport you and your dog to Kansas.
Advantage: Credit Card Companies. Yes, someday, Apple (and others) might offer financing, but for the foreseeable future only one class of too-big-to-fail institutions increases a consumer’s capacity to buy: banks. They’re not making loans like the glory days, but most people can still finance purchases they couldn’t cover in cash.
3. Buy More Often– Frequency is less important because it doesn’t always increase sales as much as it pulls demand forward. Still it’s important, especially for building habits. Conditioning behavior like Pavlov, takes delicious treats and few do it better than Starbucks. But, in the long-term, I like the possibilities of what CurrentC can do across merchants, even though I’m mortified by their initial dalliance with QR codes. It’s like seeing John Stamos on a date with Honey Boo Boo’s mom.
4. Check-Out Speed/Convenience– This is important for high volume merchants at busy times, but in most cases, payment isn’t the main bottleneck.Advantage: Applefor it’s elegant solution, closely followed by NFC chip cards.
What Matters to Consumers
Of course, consumers still matter. However, they’ve been tempted, tricked, or penalized into behavior change before. Normally, habits change slowly. When money’s involved, prepare to sit in the car with my dad for an extra hour on the Brooklyn Bridge, instead of paying $8 for the tunnel.
5. Savings/ Rewards– People want deals. Groupon, Gilt, and almost every recent ecommerce startup features some sort of dealicousness. Even people who can afford Prada or monthly boxes full of makeup samples want the perception of savings or exclusivity or membership. Most of it is psychological. But the less money you have, the more psychology becomes reality.
Advantage: CurrentC. As before, merchants have more margins and therefore, ability to shift behavior – even if that behavior is smashing your beautiful new iPhone against the counter in frustration that a QR code won’t scan.
6. Issue Resolution/Customer Service– No truly one appreciates customer service or insurance or their parents until something happens. Sure, we’ve come to terms with booking our own flights, troubleshooting our Gmail accounts, and assembling our own LuberSchlaagenFlaag bookcases from IKEA. But when you’re locked out of your account or kayaking in Liberia you need someone to call. In retail, that means handling refunds and other disputes.
Advantage: Card Companies. As of now, they are the only intermediary with enough incentive to resolve disputes. CurrentC, is effectively still the merchant. And Apple Pay doesn’t yet make enough from transactions to warrant the same level of service.
7. Financing– See #2. Buy More,above.
8. Speed/ Simplicity(aka ‘user experience’) – Advantage: Card Companies. For technophobes, nothing is easier than sliding or tapping a card. Apple Pay adds complexity, with the promise of additional value – along with bragging rights for early adopters. For mobile transactions, it’s hard to beat Uber’s elegant integration of Google Wallet. Opentable’s integration with Apple Pay promises similar panache.
Q: How long do card companies think Apple Pay will feature photos of credit cards in its wallet?
A: Exactly as long as the Compact Disc was the official icon for ‘music’ on every platform.
Yes, the grim reaper is coming for plastic. But first, he’ll drive cross-country and stop at every Wendy’s. In the meantime, expect many intriguing deals (click for full report), new entrants (like Facebook), and lots of competitive gamesmanship.
As for Apple, offering payments (like online bill pay for banks) will increase switching costs for consumers. It will make iPhones even more indispensable than the heroin-encrusted appendages they already are. It will also continue to gain leverage, as long as iPhones retain market share. That means exacting higher tolls and more concessions from retailers and payments companies, as they did with music companies…until streaming players like Spotify and Pandora came along. What will be the payment equivalent of streaming?