The Death of Plastic Payment Cards: Money’s Next Evolution
Being in the Payments industry, sometimes it is hard to explain to others what I reallydo. I tend to say something like, “I’m the guy who does the magic behind the curtain to move money during credit transactions.”
Normally that suffices — in fact, normally it is just enough before I see eyes glazing over! Recently I was at an event where a new acquaintance asked me to go a bit deeper — being the Payments enthusiast I am, I gladly obliged her request! Seemingly eager to learn, the acquaintance asked many payments questions including the concept of Bitcoin and the blockchain. So as not to overwhelm her with the complexities of the industry, I started from the beginning. No, I don’t mean Satoshi Nakamoto (founder of Bitcoin). Instead, I started with this question:
“WHAT IS MONEY?”
I could tell she was a bit perplexed by the question. I proceeded to answer the question saying, “Money is simply a means of exchanging value.” This is an incredibly critical concept. Money is not cash…money is not gold…money is simply a means of exchanging value for value. You give them something they deem valuable to receive something you deem valuable (whether a good or a service).
Money is simply a means of exchanging value.
The method by which this value exchange occurred has evolved over the years:
- Bartering. Initially the means of exchanging value was bartering. For example, some tribes specialized in hunting while others specialized in war tactics. The barter consisted of the hunting tribe offering food for both tribes while the warring tribe offered both tribes protection from outside enemies. Another example of bartering is exchanging a set number of sheep for a set amount of corn or other produce.
- Commodities. As time progressed, societies affixed value to certain goods known as commodities. These included items such as salt, silk, spices, ivory, gems, etc. Societies used these goods to represent monetary value as payment for other items.
- Precious Metals. Money continued to evolve with the use of metals as the means for exchanging value. Precious metals such as gold, silver and copper were used as payment for items in return.
- Coins. As consumerism soared, raw metals became problematic for ease of trade and societies made coins out of the metals to provide the then-frictionless means of exchange.
- Paper Money. To further reduce friction and limitations of metallic money, paper backed by precious metal was used instead of the actual weighted metal. Eventually, paper was no longer backed by metal, but was deemed an “I Owe You” certificate.
- Credit-On-Account. Credit-on-Account was the initiation of the credit wave. Typically smaller stores allowed high-frequency customers to purchase items throughout the month without requiring payment until the end of the month.
- Plastic Payment Cards. Finally, credit became centralized and major Card Networks (i.e. Visa & MasterCard) were established so consumer accounts could be recognized by any merchant via branded plastic credit and debit cards.
While it may seem plastic payment cards have been around since the beginning of times, it really is only a seven decade concept. Given the average life expectancy of a person ranges between 78 and 81 years, the 70-year-old plastic monetary concept is in the last years of a singular generation. A new evolution of money is required to meet the desires, demands and needs of subsequent generations. So, what is the next evolution of money? Digital currency.
What is the next evolution of money?
Answer: DIGITAL CURRENCY
As the name denotes, digital currency exists entirely in digital form. The absence of tangible representations of that money equate to the decline of cash (ultimately a cashless society) as well as the death of plastic payments cards. As technology continues to evolve, society too will strictly resort to technology-enabled money (aka digital currency).
HOW IS DIGITAL MONEY POSSIBLE?
The global adoption of mobile technologies is not a foreign concept to most. Currently there are roughly 7.5 Billion people on the planet. The Pew Research Center has indicated 43% (3.225B) of the world’s population have smartphones and an additional 45% (3.375B) have non-smartphone mobile devices. This level of digital technology adoption has catapulted the world to a place where digital currency is possible. Now, align mobile adoption with selfish-consumerism (i.e. customers want what they want NOW and in convenient omnichannel manners), this digital technology capability has thrust the world to a place where digital currency is both necessary and demanded.
I liken this digital money evolution to the progression of communication mediums. From clay tablets to letters carried via horse-riders to postal services to expedited snail mail services (i.e. FedEx and UPS) to faxes to emails and now to instant collaborative tools such as Google Docs. The speed demanded by consumers coupled with the advancement of technology has driven communication tools to be real time. Similarly, society is demanding the same be true for money and payments.
THE ELIMINATION OF PLASTIC PAYMENT METHODS IS ONLY NEW IN THE UNITED STATES
This concept of eliminating plastic card payment in exchange for digital currency is only a new proposition in the United States. Countries outside of the United States have already begun this (r)evolution. A perfect example is South Africa. Historically, the banking institutions had not been prevalent (or trusted) in many parts of Africa. In fact, prior to the introduction of mobile money, most Africans were unbanked — cash reigned supreme over plastic payment cards. FinTech entrepreneurs in Africa recognized mobile technology acceptance in the African countries and introduced digital currency options such as M-Pesa. These options for digital currency have gained popularity to the point that Africa has leapfrogged over the era of plastic payments and gone directly into digital currency. Wow!!! Let me repeat that to emphasize the point: the demand of the African society aligned with digital technology accelerated Africa decades ahead of the Payments realities in the United States and most other countries. Unfortunately, the United States has infused trillions of dollars into its archaic Payments infrastructure. This sunk cost alone is a large enough disincentive to deter the acceleration towards digital currency. However, now is the time to cut our losses, build new rails and align with the future of Payments technology. Just as the United States Postal Service is arguably hanging on for dear life and relevance, Payments industry players will end up in the same predicament unless we embrace a world evolved to digital currency — a world where physical plastic payment cards are no longer a reality.
WHO ARE THE EXISTING ACTORS AND HOW WILL THEY BE IMPACTED?
I could easily write volumes on the implications of the inevitable death of plastic payment methods. However, for the purpose of this article, I have put together a high-level impact analysis as well as some recommendations for how the major actors in Payments can adjust and/or capitalize on this inevitable change.
ACTOR: Consumers (Example: You and I)
IMPACT: The impact here will largely vary per generation. To date, primarily Generation Xers (ages 40–52) and Millennials (ages 21–39) are consistently conducting digital payments (i.e. via mobile apps, text messages or the Internet). They are comfortable with the technology and more at the forefront of the Market in desiring its expansion and acceptance. Older generations who didn’t grow up in the age of technology may not be as comfortable with separating from their plastic cards. For these persons, a paradigm shift of thought will be required; however, that shift is not likely to happen until the industry can demonstrate to these consumers the security protections and overall value proposition of digital currency. The good news is consumers are the cynosure of the Payments industry — they drive the market and will be catered to at every step. So, while there may be impacts, the industry is more likely to hold consumers’ hands until they are comfortable.
- Consumers will have to make known (both vocally and via acceptance) the minimum requirements they have to transition to digital currency — be it security, incentives, options, etc.
- As these demands are known, consumers should sit back and wait for the Market to address their demands.
ACTOR: Merchants (Example: Target, Restaurants, Doctors, etc.)
IMPACT: At some point, merchants will bear the brunt of this change. The removal of plastic cards from the Payments community could require an upgraded point of sale (POS) terminal to accommodate the digital payments. I believe the natural progression will be to bolster use of NFC capabilities via things like Apple Pay and Samsung Pay. Most of the recently upgraded EMV terminals already have these capabilities. However, I think the Pays are simply the first step in this (r)evolution of digital currency. As they evolve, terminals (or terminal-like technologies) may need to be upgraded to accommodate. This will impact merchants both monetarily (i.e. purchasing new hardware or software) as well as operationally (i.e. training staff on the new mediums of payments).
- No merchant wants to introduce any friction at the point of sale that could jeopardize the sale itself. So, while the industry still accepts plastic payments cards, merchants would be silly not to accept them as well. Merchants cannot become overly aggressive in eliminating older technology while they adopt the new. Doing so could isolate a portion of their customer base making them vulnerable to customer attrition.
- Merchants need to follow the lead of the Market — going only as fast as the Market demands — but proactively prepare to invest once the demand becomes tangible.
- Merchants need to push Acquirers to develop POS devices (or software technologies) that are scalable and forward-thinking enough to accommodate them for years to come. Merchants cannot forget they are the customer of the acquirers. As customers, they have the right to demand solutions that don’t require paid upgrades every year.
ACTOR: Issuers (Examples: Wells Fargo, Bank of America, Capital One, etc.)
IMPACT: In my opinion, Issuers have the most to gain in this monetary evolution and Payments (r)evolution. Granted, there are still vulnerabilities, but I think they are best positioned to handle this change in the Market. First, let’s talk about their pure role. Issuers are the financial institutions with whom consumers maintain bank accounts or have been extended credit. Issuers associated with credit cards are fairly safe. Replacing them would require other institutions to expose themselves to the risks associated with granting credit. I don’t think many institutions have an appetite for that and will leave credit issuers alone. On the other hand, Issuers associated with debit cards could easily be replaced by non-bank institutions. This is consistent with the surge of services like PayPal that provide bank-like services without granting a full fledged bank account. Second, Issuers will benefit greatly by no longer bearing the expense associated with issuing plastic payment cards. Per the Nilson Report, as of 12/31/2015 there were 10.25 Billion plastic cards (credit, debit and prepaid) globally. Before the introduction of EMV technology, the average cost of issuing a plastic payments card was roughly $0.50 per card (not including postage). At 10.25 Billion plastic cards, that is a $5.125 Billion price tag. The problem is people don’t keep their cards for a lifetime — they get stolen, lost, chewed up by the dog, rendered useless by washer machines, etc. So, Issuers have the expense of reissuing these regularly. Now, with the introduction of EMV, the per-card cost soared to $3.50. That 700% increase in cost makes the elimination of plastics favorable to Issuers.
- If debit card Issuers are to remain relevant in the Market, they need to offer more services customers desire. Checking and savings accounts are table stakes right now. As such, banks need to produce other offerings to retain their customer base.
- Credit card Issuers should take a forward stance in marketing the benefits of a world without plastics. This societal education requirement is not to be taken lightly. Customers will need to be educated on the security and benefit of parting with their plastics. It was a major paradigm shift initially getting consumers accustomed to using plastic payment cards particularly via the Internet. It will be another uphill battle to transition them exclusively to digital.
- Issuers need to ensure compatibility with technology enablers of virtual cards. There are still some credit and debit cards today that cannot be loaded into Apple Pay or Samsung Pay due to Issuer limitations. In a plastic-less environment, that simply can’t happen. Issuers will have to ensure their cards can be used in an omnichannel manner. They will have to reinvest in their technology to keep up with the digital currency enablers of the future.
- Issuers should consider bringing in-house any outsourced portions of their payment processing. As the expense associated with issuing plastic payments cards is eliminated, on-hand capital should increase enabling Issuers to take on the full responsibility of their processing. If nothing else, the overall value of Issuer Processors diminishes when the production of cards goes away. So, Issuers who don’t want to bring things in-house should negotiate for decreased pricing.
- Issuers should incentivize merchants to accelerate digital currency acceptance. Similar to cardholder rewards, perhaps a Merchant Rewards program could be created that reimburses a portion of interchange on a sliding scale based on volume.
- Issuers could introduce software to disrupt the Acquiring industry and obtain some of the market share. New digital currency software such as the Zelle application is a perfect example. Zelle is a competitor to Venmo that has been introduced by the major banks. Once it expands to Peer-to-Business capabilities, Issuers may be able to squeeze market share from Acquirers.
ACTOR: Issuer Processors (Examples: TSYS, B-of-A Merchant Services, etc.)
IMPACT: The intermediary companies such as Issuer Processors have the most to lose in this Market shift. One significant revenue source for these intermediaries is simply adding penny-costs to the issuing and processing of the cards on behalf of the Issuers. As the cost of the physical plastic is eliminated, that source of Revenue is likewise eliminated. Also, the likelihood for Issuers to bring the remaining processes in-house (see above) will become a threat to the Revenue of Issuer Processors. Customer demand for better, faster and cheaper will result in the elimination of intermediary expenses — that could mean the fundamental value of Issuer Processors goes away. Alternatively, Issuer Processors who don’t reinvent themselves will become candidates to be acquired by the larger Issuers (or other players in the Payments ecosystem).
- Issuer Processors must change their business models and proverbially get in the game. They need to identify another role in the Payments ecosystem and align their strategy to that role — whether an actual Issuer or an Acquirer. This could be done organically or via acquisition, but it must be done.
- Issuer Processors need to exhibit thought leadership determining how they can continue to provide value to the Payments ecosystem in the new world — a plastic-free world.
ACTOR: Acquirers (Examples: Global Payments, First Data, WorldPay, etc.)
IMPACT: Since Acquirers represent the merchants, they will need to provide solutions for merchants to accept the varied forms of payments at the point of sale. As cardholders push the merchants to evolve with the times, the merchants will push the Acquirers. Acquirers shouldn’t take for granted their continued existence in the payments process. Initially, merchants will need to be represented by Acquirers both to the card networks as well as to handle the onerous behind-the-scenes process associated with payments. However, if services like Zelle or Venmo’s Peer-to-Peer (P2P) network expand to a Peer-to-Business (P2B) model, the need for acquirers could be eliminated altogether. Acquirers need to work now to identify their value in an evolved and decentralized Payments system.
- Acquirers need to ensure they are consistently producing technologies (at reasonable costs) for merchants to capture sales — anywhere, any payment type, any medium, any time.
- Acquirers need to remain nimble and make it easy for merchants to do business with them. Part of this ease of doing business will require being at the forefront of P2B technologies. To do so, they should partner with start-up firms and perhaps become venture capitalists in the evolving Payments technology space.
- As plastic payment cards go away, so will the days of hardware POS devices. This prophetic reality is seen clearly when you look at companies like VeriFone and Ingenico who specialized in hardware POS devices, yet have had declining Revenues for some time now. Acquirers need to (re)position themselves as software companies and develop software technology that enables payments apart from POS hardware.
ACTOR: Card Networks (Examples: Visa, MasterCard, Discover, Amex, etc.)
IMPACT: The initial impact of this move away from plastics will be negligible for Card Networks. However, plastic cards made the Payments network closed loop in many ways. The introduction of the mobile platform for digital currencies means the Card Networks may have competition. It isn’t inconceivable for major mobile companies to begin competing with the Card Brands to provide their own network more capable of accommodating the needs of digital currencies. A case study for this could be what has transpired in Russia. Due to the sanctions placed on certain Russian financial institutions by the Obama administration, the country created a closed loop payments system. The system circumvents all of the major Card Networks for credit & debit payments made within the country. Eventually, Visa and MasterCard came back on the scene, but when they got there they found an environment that didn’t need them and successfully lived without them. The downside for Russians is anyone who travels outside of the country must likewise have a payment method accepted by the major Card Networks. However, digital currency overcomes that limitation with the capabilities of the mobile platform.
- The Card Networks need to take serious the David’s of technology perfectly poised to take down the Goliath networks. Right now it seems…at least publicly…the Card Networks are oblivious to the reality that they could be removed from the Payments process. That hubris needs to be humbled and strategies put in place to protect their position in Payments.
- The Card Networks need to become a partner in these changes. They will have to take a forward stance in aligning with the potential players of tomorrow by putting contracts in place today. Doing so could protect their position in Payments — ignoring it will cause their sure demise.
The bottom line is digital currency will entirely disrupt the Payments industry. I predict the death of issuance and acceptance of plastic cards within the next 10 years. This monetary evolution to digital currency aligns perfectly with technology capabilities and Market demands of the times.
Will it hurt? To a certain extent, yes.
Is it more proverbial cheese that has moved within the Payments industry? Indeed.
Is it the right thing for the evolution of money? Absolutely!
Even though you won’t be using your plastic payment cards in 10 years, make sure you keep them. That way we can add them to the Payments history museum appropriately positioned next to the knuckle buster credit card machines of old!
Originally published at SME.