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

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.