Most Important Payment Race: Consumer Behavior

In the US, we are set for a once in a generation shift in consumer behavior in payments. The dynamics are extremely complex, and the desired behavior is very dependent upon the players you talk to. Five years from now, what do we want consumers to do?  Dip, chip, pin, tap, QR code, touchID, ApplePay, authenticate …?

I can tell you US Banks had a very, very solid plan here 4 years ago. They wanted to leapfrog EMV toward a token scheme (See Business Implications of Tokens). EMV has big problems, although the POS transaction is very secure, the card number still goes in the clear within a chip transaction (see Secure Element, NFC, HCE, EMV, Tokens and Cards). Which means I can take that primary card number (PAN) and use it online.. We thus see EU fraud rates disappear for POS transactions.. but remain at parity for online. The goal of any new scheme must be to take the PAN away … to make it useless… This is what tokenization does..

So many people here mis understand the fraud rates in the US.. Please read the US Federal reserve payment study. Fraud rates on US GP credit are only 3.72 bps.. the real fraud comes in when these card numbers are used for online purchases (stolen in one channel, used in another).. Banks are 100% correct in their mission to rid the system of stored PANs.. and tokens do just that

PIN Fraud Rate 2013 volume

ApplePay is the best, most secure payments mechanism ever released. But it is Visa, Mastercard, Amex, Issuers and FirstData that did 90% of the work. Apple’s add? touch ID.. This new token standard is available to any other company as well (See EMVCo Spec).

In the midst of all this is a battle for Chip and PIN, vs Chip and Signature (see TSYS Article), banks ability to have payment embedded into their own applications with HCE (which also uses tokens, see blog), and merchant’s own desire to have a starbucks like card of their own. What do I want consumers to do? well that depends on WHO you are.

If you are a bank, key factors are: control, brand, usage, cost (issuance/service), incremental rev, fraud, ability to leverage data. That means HCE, or Chip/PIN or Chip/Signature

If you are a network brand, the EMVCo tokenization approach is best for all of the same reasons. The reason Apple was able to roll this out so effectively was that they worked with the networks first to establish the “approach”… then gave it to the banks as a take it or leave it..

If you are a merchant.. you want to let the consumer choose the way they want to pay. You want the consumer to have access to instant credit when they need it, and you don’t want to pay for the Issuer’s card loyalty programs. You would love to have your best consumers use a starbucks, or Target Redcard like payment method in your store. You also don’t want anyone else’s brand in there but the one you control. You may be willing to pay someone that BROUGHT THE CONSUMER IN.. but if they didn’t .. then stay out. You are also concerned about cost of acceptance, and ability to known who the consumer is (loyalty program). Merchants also want ubiquity.. support of the 90% of consumers… nothing special for any subset unless they are in your loyalty program. This means acceptance of the common standard. Merchants love chip and pin and will support it.

My view is that merchants would also support contactless if there was a 100% commitment by banks to equally support debit and credit cards in new mobile schemes.. 100% of the time. 50% of the resistance to contactless acceptance is related to “credit only” support, the other resistance is in building a mobile platform where they can interact with the consumer.. and payment is a key function they would like to be involved with.

I wrote a rather long piece on consumer behavior earlier this year, and right now I think EVERYONE is a little myopic. Consumers will not change consumer behavior until there is incremental value. Moving a card number from consumer to merchant in a different technology is not consumer innovation. The only entities that can possibly deliver the 20% incremental value are merchants.. so any successful solution must have a merchant friendly aspect. American Express knows this… I also believe Google, Amazon, Square and Visa know this.. Thus I see a future where our entire payment system begins to tilt a little more toward the merchants.. as payments become ubiquitous and consumer identity is brokered by new entities that will also allow for more efficient risk management. The battle for payments is now wrapped up in the “war” of rewiring commerce, with consumer and merchant data as the keys.

7 thoughts on “Most Important Payment Race: Consumer Behavior”

  1. Tom,

    You’ve talked a lot about Apple missing the mark on ‘coordinating commerce’, especially as it regards to giving merchants tools to interact with consumers, in ways that they see fit.

    How likely is Apple to roll out ApplePay ‘2.0’ in 1-2 years, with a toolset for merchants that includes BLE and the API’s needed to build their own mobile experiences. Their pitch would be: Use 1.0 without any upgrades and you get contactless payments, or use 2.0 and get the ability to build your own programs on top of ApplePay.

    Do you believe this is Apple’s plan? And if so, what are the biggest challenges?

    1. I hope that is the plan.. but right now.. they just rolled out 7 year old technology.. with no incremental merchant or consumer value.. The seem to be adding a new product team (http://bankinnovation.net/2014/09/apple-poaching-talent-from-amex-paypal-google-for-loyalty-program/).

      Apple is great at making products for consumers.. but doesn’t really play well with others.. this is what commerce is. Organizationally it is a huge challenge, and their last “similar” effort was iAd..

  2. Can I ask a rookie question to clarify something. I have seen debit cards with NFC — are you saying that merchants don’t like them when tapped as they don’t require a PIN and get treated as a credit transaction and thus have higher fees (ie only debit PIN transactions are beneficial to the merchant)?

  3. Tom – I think for (mobile) online commerce/payments ApplePay with Touch ID delivers the 20% incremental value vs credit/charge card for us consumers aka not having to enter numbers etc. As for physical retail, the AppleWatch single touch might also create value vs getting card/cash out of wallet where speed and one-handed operations are possible? Then there is the marketing of it, Apple loudspeaker is in full force and even banks are playing game here for them (just got email from Capital One telling me about the new Apple Pay coming this October).

  4. Tom,

    I’m curious: Why do you say that merchants are the *only* ones who can deliver incremental value to consumers?

    In my view, there is innovation possible everywhere, and an issuer with the courage to do something truly different could add significant consumer value.

  5. Tom, a bit late to comment but wanted to respond to your comments about Apple loyalty.

    My team has been testing Passbook is various exotic forms for the past 2 years. Our conclusions after talking to a lot of shoppers…they want something significantly different than Apple is promoting.

    As you said Apple is pushing an old model of loyalty that ignores what modern shoppers want (they want RELATIONSHIPS and super-quick information, not just more points and coupons).

    Also the Apple people we’ve talked to seem unable to comprehend that well over 90% of consumers refuse to download mobile native apps, or even web apps for that matter. All these cool technologies, like iBeacons, are worthless when the customers refuse to download retailer’s apps.

    The solution for this is Passbook! Passbook can already be used in ways that are dramatically different, dramatically improved. It’s got the architecture to support whatever people want from it. It’s just a question if smart marketers and advertisers really start to unleash their creativity to build superior Passbook/iBeacon content.

    When we ask these questions at retail conferences, we are greeted by blank stares. “Creative on Passbook? What? We thought it was only for coupons!”

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