Bank consultants get excited about the dumbest things – like the other day when I used my debit card at the KFC drivethrough. I beamed as the helpful employee handed me a PIN pad through the window to ring up my $4.68 lunch tab. What kind of nut carries that much cash these days?
My trip to the Colonel made me ponder how we all stink at predicting the future of payment systems. Remember all the banking conferences over the past five years? Those smart card case studies from Swindon, England? The group salivation at Cybercash and Digicash? The mindless discussion about eCurrencies like Beenz and Flooz? Ugh!
As bankers, we often suffer from the misguided belief that we can shoehorn consumers into our grand designs of the future. We over-engineer new technologies and then lament when the customer is not acting “rational.” Every article about bill pay and smart cards these days quotes some expert saying “consumer demand” is the only stumbling block. The only stumbling block? As we try to develop future payment systems, it’s important to take stock on the hits and misses of the past few years. Therefore, Gonzo readers, let me weigh in on the issue. Let’s start with a quick summary of the payment world today. There are:
Here’s my take on where things stand today:
Checks are like cockroaches and rock star Keith Richards: they simply will not die! The good news is that check volume is basically flat and all transaction growth is electronic. In addition, banks are finally moving in droves to check imaging, and the Fed is planning its own major technology upgrades. There are still efforts under way to convert checks to electronic form at either the merchant counter or the first bank that touches it. These are wonderful ideas, but don’t hold your breath. The concept of electronic check presentment has been around for a decade and still comprises only a minor part of overall volume.
Credit cards own a big chunk of the payment world, growing at a steady 6% per year. However, with hundreds of millions of them in our wallets, it’s clear that growth is beginning to dry up. Today, credit cards rule the Internet, comprising 80% of all Internet payments. However, this position may be vulnerable. The Gartner Group recently reported that one in 20 consumers has been the victim of credit card fraud. Online fraud losses are now 19 times higher than offline losses! There is a lot of movement right now to convert credit cards into smart cards, but these new issuances are primarily being used for loyalty programs, not secure payments.
Debit cards are lighting the payment world on fire. There are now (gulp) 153 million debit cards in the United States, and consumer awareness has tripled in the past decade. The big story here is the ongoing battle between merchants and card providers. I love to see our clients rolling in the debit fees, but it’s easy to see why the merchants are ticked off. You can see their blood pressure rise when banks coach their customers to ring up debit purchases as more costly “credits.” Because of the cost differential, cheaper online debit volumes will continue to grow at 50% per year. Banks will see their average margin on debit transactions start to decline, but overall volume will continue to explode.
ACH is the little train that could in the payment world. While its volumes are small, ACH handles a whopping 78% of the value of all electronic payments. I am bullish on ACH because no one OWNS it – it’s like the TCP/IP or XML of the payment world. The newest gig from NACHA is called Project ACTION, an internet payment strategy using ACH. The concept is cool because it will allow consumers to “push” funds from their checking accounts to pay another party without having to provide personal checking information. While ACTION is only at the conceptual stage, I would love to see the banking industry rally around it.
It is time to come clean on bill payment. A small, somewhat “anal retentive” segment of our population loves this product. The remaining folks – the ones who eat Doritos while grabbing the remote control to watch the Super Bowl – think it’s way too much work. The struggle for bill payment adoption reminds me of salmon swimming upstream. Industry giant CheckFree has admirably worked to reach 6 million subscribers. To get there, however, this company has allied with every company in the country except Chico’s Bail Bonds of Amarillo, TX. It’s ironic that the combined might of CheckFree, Bank of America, Intuit, IBM, Microsoft, First Data, Yahoo, et al, has only been able to nab 5% of U.S. households. MESSAGE: We need to move to Plan B.
So what is Plan B? I have no clue, but I do know one thing. Any payment innovation that sticks with consumers will respect the attention deficit disorder in most Americans. Here’s some key design concepts I would recommend for the future:
#1: Free stuff wins.
Consumers simply will not overtly “pay” to make payments. That’s why $4.95 a month for bill pay gets no interest, and cash-back at the point of sale explodes. Any cost to the consumer must be embedded and not explicit.
# 2: Simple wins.
Most bankers turn up their noses at PayPal, the fledgling person-to-person payment leader. While P2P is risky and loosely regulated, there’s a lot we can learn from PayPal. Look how simple it is. It takes less than five minutes to sign up for the service, which now touts more than 5 million users – a cowboy startup with a user base that rivals CheckFree.
#3: Speed wins.
Look at the Mobile Speed Pass – a little electronic stick that attaches to your key chain. This “proxy” for a credit card (fraught with risk) is now in the hands of 5 million Americans. Why? It’s fast, fast, fast!
#4: Extra effort loses.
Consumers may talk about security, but they will not jump through hoops to get it. The failure of the SET credit card security standard and the dust gathering on most PC smart card readers are proof of this. So any winning payment innovation will avoid putting work on the consumer to keep things secure.
Aside from the debit card’s continued explosion, no one really knows where payments are going. It’s unlikely we will see any breakthrough payment scheme. Instead, we’ll see messy hacks of the ACH, credit card and ATM networks. They’ll be pretty ugly at first, but some will become more secure as they evolve. Instead of ignoring players on the fringes, bankers need to learn from these innovations and use them as design specs for the next generation of payments.