Technological development, business deals, and consumer behavior are all shaping the world of payments. To get a handle on some of the recent evolutions, Ben Jackson, the COO of the Innovative Payments Association, interviewed Krista Tedder, the head of Payments Research at Javelin. They discussed developments in consumer payments, merchant acceptance, and business-to-business transactions. Below is an edited transcript of their conversation.
IPA: Could you start by just talking a little bit about your research and what it is that you cover?
Krista Tedder: Absolutely. Ben, Javelin Strategies is a research firm based in the United States that looks at banking and payment trends across the United States. Whether that is for retail banking or small business, we look at merchant payments. So, when you say Director of Payments, it is all things payments, which in today's environment is a very huge landscape. So, it's a lot of fun. There are a lot of changes that are going on in the industry, and I get to take a look see what's happening behind the scenes and then also get a glimpse of what's coming ahead.
What are the biggest trends in the payments industry?
The biggest trend that I see is companies realizing that they can't do it all on their own. So, for years we had payment companies that did debit processing or credit card processing, or they were bank-focused or merchant-focused.
Consumers are very savvy; they know what technology is available and what's possible. They expect everyone to use it, and when you have that much expectation, you really need to find ways to partner across the eco-system in order to be able to deliver on the expected experience in the way that consumers want to use payments. That's one of the big drivers of payment consolidation. How do they offer more products? How do they expand into new markets? How do they offer over 400 ways to pay at the same time managing their costs?
Is that what is driving all of the deal making that we see right now, and do you think that more of these companies will start buying one another up?
That is the way of Fintech. I call it “innovation by acquisition,” where people are taking a look at who is coming on to the market and how meaningful and agile, they are in what services they offer and what problems do they solve in the industry.
I look back at my 20 years in payments; you take a look at a company I worked at before, which was First Data. That was a series of acquisitions over the years to build it to what it is today, and it’s the same for FIS, Fiserv, and Global Payments. They all grew by acquisition into these behemoths, and now the behemoths are merging. When it comes to the smaller Fintech companies, as services become available, and there is what we call overlay capability, where there's added valued pieces that open banking is making possible, you will start to see more companies getting merged. If you look at even MasterCard and Visa, both of them bought cross border payment remittance companies. MasterCard has also acquired a point of sale loan capability that’s completely off of cards. There is a recognition that the diversification of corporate revenue is very important and that means handing multiple types of payments versus just focusing on one channel and being excellent in that channel. You actually have to become excellent at all the channels to survive.
Do you think it's going to be a case of these companies buy up a bunch of different companies and then some of it doesn't survive? We’ve seen plenty of companies who buy up capabilities but sometimes it seems like either the new capabilities languish or else the purchaser buys another company that does something awfully similar to the first target a little bit later. How do you see this going? Do you think these guys will end up being huge conglomerates of lots of little departments, or will they ever be able get it all pieced together?
I think there is going to be a mixture of both, and, without naming names, I'll explain what I mean.
If you acquire companies that are very similar to yours, and there is not a lot of differentiation except for maybe a few products or services, then you are really buying the book of business, versus buying the technology. You're buying access to the customers; you're buying access to a new country market. That's really how you're growing. Some of the consolidations have been that, where you're growing markets and you're buying just to build them out.
Now, in some of the other acquisitions you are buying things that are very similar and the companies have been built by acquisition. What's happening in some companies is they have twelve platforms that are all pretty much the same thing – they're all core banking. And customers are on all of those cores. These are the companies that are going to have the most difficult time in merging because very difficult decisions are going to need to be made. When we look at the cost of actually running the company, the debt is extremely high, or just the cost of maintaining that many platforms that do something similar.
So, in order for companies to grow successfully, they're going to have to make people uncomfortable and collapse the platforms, and so far we have not seen anyone actually do that. There are a lot of different platforms across all six of the major processors that are merging: Fiserv, First Data, FIS, World Pay, Global Payments, and TSYS. They all have multiple platforms and what will surely differentiate them is if they are willing to take those hard those hard steps and sunset some platforms. But I'm not sure if the willingness to go through that pain is there. At the end of the day, if they would merge [platforms], then I think customers would be so much better off because they would be able to free up resources to actually innovate versus maintain.
How hard is it to capture those nuances between platforms and at the same time sunset an existing platform? What's the risk of disrupting individual customer's lives?
This risk has been really been what has been holding people back, because in order to move processing platforms it is generally a two-year process, from the time you make the decision until everything is completely moved over. You can move faster but those are the implementations where you always see some challenges. So, it's a solid 24-month cycle. That's what people need to plan for, and it's really difficult to get that organizational buy in as a client because if you're using a debit processing or core banking platform that means you have connectors not just in that platform, but in your mobile banking, in your online banking, in your authentication process. So, it's not an easy move to do this.
However, if there were significant benefits for moving from an older platform to a new platform, that's the way for a business case to be made. There are better economics for the client to move over, because if you're on an old mainframe system, those are expensive to run. If you move to a cloud-based infrastructure that is cheaper to run, you can add more products and services. So it's all about looking at the value. In looking at an assessment of do we close a platform and move folks over, people focus on the pain of what that is, versus what they gain – and the gains are probably double the pain. The great thing is, there are so many ways you can improve on the services that are offered that I don't think it would take long to build up a platform that everyone says, “I've got to go there.”
Do you think that's what companies are doing when they take a prepaid platform and tell clients we can build you a prepaid product but we can also build you a debit or a DDA product on this same platform?
Absolutely. Especially when it comes to prepaid and how it’s regulated now in the US. Prepaid programs act very similar to debit card programs, but they also act very similar to credit card programs. In a lot of cases you have a mix of technologies that are running prepaid platforms that are part debit-part credit, and we did the best of both. So that leaves a greater flexibility for pre-paid programs.
I am excited to see how Netspend grows with coming in with Global Payments because with TSYS and Global Payments, you have such a huge market share of quick service restaurants, and that is where mobile payments are really growing. If you look at how Starbucks’ prepaid program is, they don't call it prepaid, it's stored value. You're storing your payments so you can get your rewards. That is something that Netspend will be able to do as they pull into the Global Payments sphere, because they'll have access to that market. So, the Global Payments-TSYS merger that is a market acquisition versus trying to consolidate debt or get completely divergent technology. But prepaid is an area where we are going to continually see growth. It is something that consumers can understand.
For the first time this year when we look at how people are using their payments in stores, payroll cards are actually number three for mobile payments. So that area, prepaid, we're just going to continue to see growth.
Let me follow up on that, when you say payroll cards are number three for mobile payments, do you mean in terms of cards loaded into Apple Pay, Google Pay, and Samsung Pay?
Yes, that number surprised us. When you're thinking about mobile payments, you have this image of young and hip and urban and people who love technology, and they're the ones diving into mobile payments. That's not what we are seeing.
That might be who providers think they're building mobile payments for, but the group of people that really love it we call our “mobile power users.” They're the ones who use mobile payments for P-to-P, they use it in app, they use it in store. They're middle-aged women in the suburbs with kids.
When you look at who is using mobile payments, there are a lot of similarities with who is using payroll cards – it is suburban families. And so, the value proposition on mobile payments is convenience and reducing the amount of time it actually takes to do your shopping.
It is for people who are tight on time, have disposable income or they need to buy their groceries and they're using mobile payments, and payroll fits right in that spot.
Are these people tapping their phones at the point of sale or are they buying things through mobile apps and then going and collecting them at stores? How are they doing this?
That is the hardest part of measuring mobile payments. There are so many ways to use mobile payments. If I'm at Walmart and I'm Walmart Pay, I'm using a QR code. If I go to my grocery store, I'm using a barcode that's on my phone. I can use Google Pay and tap it when I go to get gas, so there is no one way to use mobile for payments.
What does this mean for the designers of payments tools? Do they need to take a step back and re-evaluate their approach and the audience?
I definitely think we can take a step back, because, as technology firms, which is what payment companies now are – they are technology companies – a lot of times you have shiny object syndrome. You see the latest, greatest, newest thing and you're like “oh, I've got to get into that.” But if you take a look at how some of the best products in the market are launched, it's really understanding who you are building the product for and understanding that not every consumer can use the product the same way.
When you look at the development staff, when you look at the demographics of the staff at companies, the demographics are not reflective of the demographics they're serving. So, a lot of times you have people who are building fantastic products, but they don't understand the problems and challenges that the end user is going through, so they are solving a different problem. They are actually building things for themselves.
Taking a look at all the different ways people like to pay – how they like their banking, whether it is mobile pay or going into a branch or using it at a point of sale – there are differences in geographies. When we look at the northeast part of the United States versus the west parts versus the southeast, there are different behaviors there are different concerns about risk. We also see differences of cross rural, urban, suburban areas.
Companies really need to take a look at what problem they want to solve and then ask frankly, “is this really a problem.”
If you look at when mobile payments launched with Apple Pay and Google Pay, it launched with a huge fanfare and everybody was like, “Yay, mobile payments! Everyone is going to use it.” And it's fallen a little flat now, after four or five years of growth. We’ve done such fantastic job of teaching consumers in the United States to get out their cards. Getting out your phone, doing an authentication, putting in your PIN, and then trying to figure out if the device will actually accept it or not, it's just easier to get out or your card.
We actually created more problems with mobile payments than we were solving with someone just using a piece of plastic.
Looking at the payments landscape then, where will we be in five years? Will it be a cashless society, will things look completely different and it will be all mobile, or will it look awfully similar to where things are now?
I think there are going to be a lot more similarities than there are differences.
I mean I am a huge proponent of cash. I live in a city downtown it is a high cash utilization area, cash is still really embedded in a lot of places. I think it also going to depend on how products are launched.
If you take a look at P-to-P payments, they're 10 years old. We've had P-to-P capabilities for a decade, and American's are just now catching on. We have to take a look at what benefits really increase the adoption.
One of the challenges with mobile payments is that I cannot access my mobile payments through my mobile banking app. I have to have another application or I have multiple applications. Looking at countries where mobile payments are significant, China is significant because of the volume because of the number of people that are there. But when you look at who is using mobile payments it is about 17% to 18% percent of the Chinese population. You look at a huge number and you're like “wow, that's fantastic,” but you haven’t reached the point where we call “we're jumping the chasm.”
If you look at a technology adoption you have your early adopters, then we have the practical people. Mobile payment has not reached the practical people yet and that comes at 50% of the population. There is not a market anywhere in the world that has that type of penetration.
I think there are some things in the United States that are starting to trend. We will see social payments where you can use your social media feed as a source. For example, the Instagram utilization and integration with the PayPal platform, being able to do a PayPal from a picture. You have Amazon enabling merchants to use Amazon Pay in other merchant applications through a partnership with Worldpay. A merchant would be able to have their own payment app and then be able to use Amazon Pay as a point of sale. That is a way where online commerce is starting to blend with point of sale.
The United States right now is task oriented – I've got to fix this one issue – but now we are moving into our collaboration area. That's where different companies say, “how do we work together, how to grow business, how do we take the best of both and make something even better?” That's where we will see more adoption, but it is going to be a long time before we get rid of cash and checks.
We pay a lot of attention to the consumer payment side of this, but is enough attention being paid to the merchant side of the equation? Are we keeping up with the acceptance of these new kinds of payments?
They don't. And, the standard justification for that is the conversation of chicken and the egg. Merchants won't want to go through the hassle of upgrading their software [for a new form of payment] if there is no capability for the consumers to be able to use it.
The thought has been we will make [new payment forms] available for every consumer and see what kind of adoption is going to be possible with a handful of merchant systems and then the rest will come. The whole “build it and they will come philosophy.” However, it makes it extremely difficult for merchants who are focused on not losing a sale.
I think about the restaurants. Right across the street from where we live there is a restaurant and I can see Uber Eats, GrubHub. There are so many different delivery companies that go to this restaurant, and I talked to people at the restaurant. They have a different process of accepting orders and taking payment for every single one of those, and they're reconciling their records by hand. Depending on how the payout goes for Uber Eats versus Grubhub, they aren't being paid on the same day, and so they are struggling.
Recently Square has announced an update that will allow all of those delivery services to be in one payment application. That should have been available for years with all of these delivery companies.
There is so much invested in getting the consumer excited, but I really believe if you get the merchant just as excited to accept new payment methods, they will tell people. They will say this is my preferred way of paying and they will drive it to that channel. There is a lot of missed opportunity because we don't think about the end user experience from the merchant's perspective.
We've talked about consumers and merchants but what about the business to business space? Is there room for innovation there as well?
This is probably the area that is ripe, because if you take a look at contracts a lot of times there is a 30-45 day pay window. [A b-to-payments] has to go through the procurement system. they have purchase orders. They go through this process, and then at the end of the month the check is cut and then the check goes through snail mail. There are some cases where it is done by wire, or in some cases it might be pushed onto a corporate card, but again a lot of times payment is at a certain time of the month or a certain day a week. Thursdays are huge in the weekdays at a lot of companies.
Smaller companies are borrowing money on their credit cards, they're using their personal finances, to have enough cash flow to be able to buy more inventory, to pay their staff, to be able to get the new technology they need. There is a liquidity challenge that they're focused on. We are starting to see more businesses offer instant payout or next day payout. That's going to be huge.
I was reading an article last night about how Walmart's inventory system has a way for companies to increase their prices, because now that we are dealing with tariffs, the price of goods are in flux for businesses. They have to figure out: Are we going to eat the loss? How are we going to pay for the tariff? Are we going to increase the prices? So small businesses right now have a lot of stress on them, and mid-sized businesses as well. If we can find ways to speeding up the way that they are paid that would be a huge relief.
We've covered a fair amount of ground here, but is there anything else that you think is showing where payments innovation is going or is paving the way to a brave new world of payments?
We're currently looking at a few different areas where we think there will be surprises. We have recently received survey results our 2019 payment survey data, and we are going through and taking a look to see at how people pay their bills. There are going to be changes in how products are built, because we are finding that some of the problems aren't being solved.
We are finding for example that people who have used different types of mobile payments, the power users, are also people who use p-to-p a lot where its Venmo and Zelle, so they’re not loyal. We find that they have the highest rate of going to check cashiers, using remittance companies, using payday loans. We are taking a look at all the merchant payment methods to see what type of payments can come back to banking versus third parties. We are also looking at how tech companies are really changing the game.
Are people ready to say, “Hey, Alexa, pay my bill?” I don't think so. We are monitoring to see when the trend will start occurring. Some of them might be happening sooner than people think.
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Readers who want to learn more about Krista’s research and Javelin can find information at their site.
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