The Evolution of Payments & What It Means For Financial Services
How banks and other financial service companies can best prepare for a future of increasingly mobile and invisible payments
Payment is a crucial step in the customer-brand interaction, as it completes a transaction and marks a successful customer conversion. Yet, despite its strategic importance, payment is often neglected by brand marketers as a customer touchpoint. And with new technologies changing the way people make purchases and conduct basic banking tasks, this is a space that deserves a closer look.
The Rise of Mobile Payments & Banking
There is no denying that adoption of mobile payments and banking is picking up speed. Nearly 40% of U.S. consumers have now used at least one digital payment service, according to a recent study from Mintel, and more than 60% of consumers are already regular users of mobile banking app. US consumers are ready for a change in the way they handle their money. The latest TSYS US Consumer Payment Study found 51% of respondents expressed an interest in using a mobile wallet to make in-store purchases instead of a credit or debit card, which marks an increase of 11% from 2016. 68% of those who have started using mobile payments said they expect to use this technology to make at least half of their in-store purchases within two years.
As consumers get on board, so do the merchants. As of December 2017, around one third of North American retailers were already accepting customer payments via methods like Android Pay and PayPal with an additional 15% planning on accepting the payment method within the next year. In January, an Apple executive claimed that Apple Pay was accepted at one out of every two retailers in the U.S.
As impressive and promising as that seems, it is nothing compared to the massive popularity of mobile payment and banking in China. Mobile payment transactions in China reached a record 81 trillion yuan (about $12.8 trillion) from January to October last year, dwarfing the estimated $49.3 billion in total mobile payment transactions in the United States last year.
Fueled by near-universal acceptance of mobile payments and spreading smartphone usage, the leading mobile payment apps in China — Alipay and WeChat Pay — have quickly expanded out of their original use cases and built formidable platforms that integrate with all kinds of ecommerce opportunities and offline services. Whether it is getting a ride from Didi, shopping for a new shirt on Tmall, paying the home electricity bill, or booking a spa appointment, Chinese consumers can simply go to either the Alipay app or WeChat and handle the tasks via the various applets available on these two platforms. The comprehensive coverage further fuels behavioral change, driving a vast number of Chinese consumers to look beyond credit cards, which many of them never used in the first place, and accept mobile payment as their default payment method in everyday life.
The platformization of payment apps is a prominent reality in China’s digital space, but there are signs that some U.S. players are also taking notes. Earlier this month, Apple Pay started testing a new “order ahead” feature for drinks at music festivals, hinting at Apple’s ambition in expanding Apple Pay’s capabilities. Level Up, a mobile payment and loyalty solution provider for restaurants, serves as another U.S. example as it moves to build out the mobile ordering feature of its previously payment-focused app. As of May 2017, the company reported to have one million monthly active users and support over 50,000 restaurant locations across the U.S.
The Disintermediation of Banks
A direct consequence of this platformization of mobile payments is that it disintermediates banks and credit card companies from consumers. As mobile payment apps become all-encompassing service portals, they take control of the user experience and hijack the customer relationship that banks and credit card company used to own.
Indeed, some digital payment companies have started to leverage their direct relationship with users to expand into offering basic banking services such as checking and savings accounts. Alipay, for example, took advantage of the full-scale financial services its parent company Ant Financial offers to integrate with a wide spectrum of financial services, such as money market investment (Yu’e Bao), insurance service (ZhongAn), credit rating (Sesame Credit), and personal credit line (Ant Micro Loan). With an interest rate higher than bank accounts deposit rate, more and more Chinese shoppers are choosing Yu’e Bao as a virtual wallet to park their money in lieu of saving accounts.
In the U.S., Apple is reportedly in talks with Goldman Sachs to create an Apple Pay-branded credit card as it looks to extend the reach of its payment system. Amazon also has an extended history of encroaching on Wall Street’s turf, including offering virtual checking accounts so as to appeal to younger customers and those without bank accounts. Even for something like installment payments, digital financial upstart Affirm is being integrated into the checkout process of many ecommerce sites and pushing out banks and credit card firms by the virtue of integration.
Update 6/25: Venmo is jumping into the physical world of banking by offering its own Mastercard-branded debit card with the ability to split purchases with friends.
Make no mistake, the middleman is taking over by the virtue of owning the customer relationship. Similar to the way Facebook commoditized numerous publishers and the content they create, and placed them at the mercy of its algorithms, banks and credit card brands are quickly losing their differentiation points and risking irrelevance to consumers. If and when the mobile payment services eventually build out their banking services like Alipay has, the banks and credit card companies could be in big trouble.
The battle over P2P mobile payment is another good example in this regard. Popular P2P payment app Venmo was early to market and has won over an estimated over 7 million active monthly users with an easy-to-use, mobile-native P2P payment service. Last October, it added the capability for in-store payments at over 2 million retailers in the U.S. as it looks to expand its use cases in the offline world and deepen the financial relationship with its users. Fearing of losing customers to Venmo, the big banks have responded by creating Zelle, a P2P payment service that works across major U.S. banks and is directly integrated into their flagship apps. While it noticeably lacks the social features that Venmo has, Zelle seems to be catching on with users as it moved $75 billion in 2017, more than double the $35 billion Venmo moved in the same period. Still, Venmo has a stronghold on its loyal millennial users that are not leaving it for Zelle any time soon. According to eMarketer’s estimation, Zelle will surpass Vemmo in monthly active users this year. As the battle over owning the P2P mobile payment experience continues, whoever that can offer the best user experience will get the customers.
Invisible Payments
The loss of customer relationship due to disintermediation is not the only threat that banks and credit card companies are facing. As with many a great human invention, convenience is a key driver behind payment innovations, and throughout history, payments have always been engineered to become increasingly frictionless. We switched from a barter system to using cash, then to personal checks, then to plastic cards, and now to smartphone apps, all because we are always looking for a faster, easier way to complete transactions. And now, beyond mobile, payment is getting ready to fade into the background and become invisible.
Amazon’s checkout-free convenience store, Amazon Go, officially opened its doors to the general public in January. The cashier-less concept store promises a fully automated shopping experience by using computer vision and machine learning to let shoppers skip the checkout line and literally just “grab and go.” With the help of AI, an automated checkout system like this reduces the physical act of in-store payment to simply tapping a confirmation button on your phone once you are out of the store. Amazon is planning to open more Amazon Go stores in Chicago and San Francisco this year while Microsoft is reportedly also developing similar technologies to power cashier-free grocery stores and has held collaboration talks with Walmart. Meanwhile in China, Alibaba has already opened several checkout-free convenience stores across the country.
If you consider that to be an extreme case, then consider how “card on file” payment is already shaping the user experience design across industries by making payments invisible. A big part of why the experience of taking a Uber is better than taking a taxi is the simplification of payment, as Uber riders can simply get out of the car when they arrive at their destination without having to fish out their wallets and deal with glitchy credit card terminals. Similarly, the rise of subscription services, be it Netflix or Stitch Fix, is quickly making routine payment an afterthought for many consumers. By making payments a monthly routine, the subscription model even eliminates the confirmation step that the “card on file” payments still require each time a new transaction is made, thus further removing the banks and credit card brands from the customer relationship.
In the not-so-distant future, this sort of invisible payment popularized by the spread of the subscription model across verticals will also likely become the solution that powers the so-called IoT-based commerce, i.e. connected devices that can monitor your supply usage and automatically order them when you’re running low. For example, Amazon already has the Dash Replenishment Service that appliance makers can integrate into their products to facilitate this sort of automated re-ordering. Amazon has also already launched monthly subscription services for categories such as pet food and baby products. When Amazon works out a way for these two services to work in tandem automatically on smart home appliances, payments will further fade into the back of consumer’s mind.
What Financial Services Brands Need To Do
As fintech companies continue to come up with digital products and services that disintermediate banks and shifting payment behavior, banks and financial services have a lot to do to hold onto the customer relationship they have cultivated and leverage that to gracefully transition their services to better handle the increasingly mobile and automated payments.
First, banks and credit card firms need to realize that while the digital payment ecosystem, as it stands, is still very much built atop the existing financial system, the threat of disintermediation needs to taken seriously. It is true that today’s consumers still need a bank account or credit card to sign up for most of the digital payment services, but losing your direct consumer touchpoint and ceding control over the customer experience would spell trouble for any consumer-facing businesses.
To regain some control over the user experience, banks and financial services will need to negotiate with digital platform owners to add some brand identifiers into the mix to reassert your brand presence, such as a unique sound that plays when one completes a mobile payment with a certain credit card, or better tools to help customers manage recurring subscription payments. For example, a credit card company can offer a valuable service to its customers by adding a feature that singles out recurring subscription payments on a monthly statement and offers to help customers cancel the services they no longer need on their behalf.
Banks and financial services should also explore voice and AI-driven solutions to make their service more frictionless and more accessible. Studies have shown that people prefer bots to humans when it comes to banking and other money matters. Some forward-thinking banks, such as Capital One and Citibank, have created Alexa skills to help Echo users to handle some basic banking tasks via voice. Bank of America even went one step further and developed its own voice assistant named Erica to improve the mobile banking experience for its customers.
Better integration of banking into other digital experiences should also help improve the user experience for financial services. For example, U.K. challenger bank Monzo has launched an integration with If This Then That (ITTT) to let customers connect their bank accounts to hundreds of apps and services, such as getting their Amazon Echo to play a certain song every time they get paid. Other banks would soon be able to replicate such integrations on iOS devices with the newly announced Siri Shortcuts.
As we slowly move towards becoming a cashless society, banks will also need to put some thoughts into what to do with ATMs. Bank of America and Wells Fargo have updated some of their ATMs to support Apple Pay and Google Pay, which will serve as a useful bridge for customers who need cash but don’t have a bank card with them. With branches closing due to the adoption of online and mobile banking, banks are starting to rely on the ATM network as distribution points for services.
Banks and financial services can also work on the brand trust angle to maintain their relevance to customers. Mintel’s American Lifestyles 2018 report found that 56% of consumers say they trust digital payment services such as Venmo and PayPal, meaning that nearly half of consumers today still think the contrary. As a leverage to earn back the control over customer relationship, banks and financial services should consider offering 24/7 customer service, classes to educate consumers on personal finance management, or actively engaging in corporate social responsibility.
While the hype surrounding cryptocurrencies is intensifying in the financial service sector, now is simply too early for any immediate practical usage of cryptocurrency on a mass scale. Still, some forward-thinking banks and financial services have recognized the value of blockchain, the underlying technology powering cryptocurrencies, and started to incorporate elements of blockchain’s distributed network design to revamp their services. For example, more than 100 banks have signed up with Ripple, a California-based crypto firm, to transform cross-border transfers with blockchain. AmEx is piloting a blockchain-based loyalty program with Boxed to offer more personalized rewards for customers.
At the end of the day, banks are the natural owners of the payments space, as non-cash payments are the most frequently used services that banks offer, and they often serve as a gateway for consumers to enter a deeper financial relationship with their banks. But that doesn’t mean they can simply rest on their laurels. To stay competitive, banks and financial services will need to become, in a way, fintech companies themselves to keep up with the shifting behaviors in banking and payments. Either it is developing digital financial products in house, or investing in promising fintech startups, they need to find a way to deliver user experiences that can rival the digital services created by the tech giants or risk losing customer relationship and becoming commoditized service suppliers.
Update Aug. 03, 2018:
This week, both Stripe and Square announced new initiatives that will further expand the reach of their payment solutions and further disintermediate the banks and credit card firms from the modern checkout process.
Stripe is rolling out a new solution called Stripe Issuing that lets businesses create and issue their own credit and debit cards. With this program, companies, especially startups and SMBs, now have a much easier and faster way to issue branded payment cards to their customers to facilitate loyalty programs. Issued cards can be used with Apple Pay and Google Pay as well, and companies can also opt for virtual cards for online payments. MoviePass built a whole (unsustainable) business by mailing branded MasterCard credit cards to subscribers to allow them to buy movie tickets, and similar businesses can be built with a similar mechanism with Stripe Issues.
Earlier this week, Square announced its first SDK that will allow developers to directly access its payment platform and customize the checkout experience. It makes in-store payments more efficient for customers while also providing businesses new customer insights from purchase data. This is not only a great tool for small local businesses and retailers wanting to modernize their checkouts, but also for other industry verticals like transportation, quick-serve restaurants, and hotels that is looking to update their POS system to offer a better customer experience at checkout.
