The move away from cash to plastic has long been predicted, but it now appears that the use of credit and debit cards in their traditional form could also be losing favor with customers. The World Economic Forum (WEF) has reported on the Future of Financial Services, suggesting that the payment industry is undergoing a new revolution that has major implications for providers and customers alike.
What is changing?
Innovations are currently focused in two directions. First, payments are becoming increasingly “virtual”, with electronic transfers replacing hard currency in even the smallest transactions. Secondly, these new payment platforms are becoming increasingly data-driven, using information about each customer’s purchasing habits to develop new services and functions that drive engagement.
What are the predicted outcomes according to the WEF?
Looking at current and future changes in the payment processing marketplace, the WEF research identified three potential outcomes:
1. Consolidation of the payment market
Systems designed to simplify purchasing for consumers are already removing the payments hurdle for customers, in line with the ‘on-demand economy’. Peer-to-peer foreign currency specialist WeSwap exemplifies this change; at the time of account creation, customers are encouraged to link a debit card or bank account to the service, ready for loading currency. Future currency purchases can then be completed with just a mouse click or two, with the electronic movements of money taking place seamlessly in the background.
Customers benefit from a fast, streamlined process, thanks to the removal of physical steps such as entering payment details. Meanwhile, payment providers could see direct business benefits, as default cards will enjoy an increased share of wallet, potentially affecting smaller providers’ profit margins.
Further into the future, the WEF expects vendors to offer new, innovative financing schemes that customers can take advantage of at the point of sale. This could see some credit card companies reducing market share as customers are pushed towards platforms and apps that deduct payments direct from their bank balances, or to a single payment provider by virtue of the default card setting.
Following these developments to their logical conclusion, the WEF expects there to be a reduction in the number of traditional credit card providers. Meanwhile, those that do survive the market consolidation will benefit from increased customer ‘stickiness’.
2. Fragmentation of the payment market
The second proposed scenario suggests that new digital technologies will further fragment the payment processing marketplace as digital wallets replace physical cards. These digital wallets are capable of storing a wider array of cards and account details, ready for use by the customer.
With a greater selection of options instantly available, customers will be able to select the appropriate payment platform for each transaction. The ability to ‘carry’ more cards in a digital wallet will provide customers with access to favorable interest rates, loyalty programs and greater overall control of their spending. Platforms like Google Wallet and Apple Pay can centralize payment cards, making them available across many devices ready for use any place, any time.
Further fragmentation of the payment market is also good for new start-ups; adding a new payment channel to a digital wallet is relatively simple, encouraging customer take-up, and helping new providers gain a foothold. However those providers will be forced to develop more competitive or innovative offerings if they are to attract the attention of new customers, probably by working closely with banks to improve the account linkage required. Under this scenario, incumbent providers are at greatest risk of losing out if they are unable to collaborate with leading digital wallet platforms.
3. Displacement of credit cards
Increasingly payment providers are encouraging customers to link their bank accounts with their platforms, to avoid the merchant service charges levied on credit card transactions. The WEF expects this trend to continue as digital wallet providers incentivize users to opt for bank accounts as their funding method of choice.
In future this could see credit card providers experience a continuing drop in transaction volume and value, coupled with a reduction in customer loyalty. Merchants will be able to profit from a reduction in merchant services fees, and the opportunity to control a greater proportion of the transaction process.
This scenario is of greatest interest to technology companies capable of designing and deploying next generation payment networks. These platforms can then be leveraged by multiple vendors, and can even be extended to provide new lines of credit to consumers based on their purchasing behavior – such information can be mined for a better understanding of financial health and habits.
What do these outcomes mean for the industry?
The move to “virtual” transactions will see the payment industry becoming even more data-driven. Whether there is a consolidation or diversification of providers, the data systems that underpin every platform will enable greater insight into customer habits and preferences, allowing for greater customization of products, services and offers.
In an increasingly diversified market, this targeting will be essential to help payment providers establish loyalty, trust and the mutual benefits demanded by customers. This can in turn be leveraged to encourage customers to use those platforms more frequently, increasing value to the merchant and the provider.
There is also a shift in the relationship between merchants and payment service providers underway, with the sellers beginning to acquire more power. With so many options available, financial institutions will need to partner with merchants and digital wallet providers early to avoid significant loss of revenue as customers move across to the new payment methods available to them.
As the WEF report highlights, the future of payments is being changed and shaped almost beyond recognition. The only certainty is that new technologies and platforms will broaden options for vendors, providers and customers alike. Forward-thinking businesses will need to begin investigating their options sooner rather than later, or risk being left behind.