This is a continuation thought from 3 blogs I put together last year: ACH, A2A and Marketing Incentives, Acceptance Part 1 and A2A – Threat to V/MA? A great part of blogging is getting feedback. While I’m long in the tooth, I’m not the deep expert in every area. Writing blogs usually leads to feedback from the experts.
Question for today. IF a new payment scheme were developed for eCommerce what are the hurdles to acceptance?
The challenges of launching a new payment scheme are numerous (I listed 15 in A2A – Threat to V/MA). As I’ve stated very often, the beauty of the V/MA model is that there are shared economic incentives for many parties to invest (see Changing Economics of Payments). The best proof point in the world is Europe’s SEPA. A brilliant ECB driven innovation that forced bank adoption. It works.. But there is no incentive for anyone to invest, nor incentives for consumers to use (see KC Fed White Paper). To the consternation of the ECB, V/MA volumes continue to rise unabated. Ubiquity wins.
Today I wanted to drill down more on acceptance in eCommerce. Within the 4 party scheme payment acceptance is managed by an acquiring bank. In the US, few acquiring banks have their own payment processing. For purposes here, acquiring and processing are used interchangeably with acceptance. What are the acceptance challenges in getting a new payment product off the ground? Here are my top 6:
- Merchant Value
- Acquirer Economics
- Technical Integration/Reconciliation/Fraud (see Acceptance Part 1)
- Consumer Experience (including exception management)
- Scaling success
- Merchant Ability to Steer and Control (Power and Operating Model)
I’ve covered this one ad nauseam, so I’ll recap.
- Cost of debit acceptance in US is below $0.20 online (Pinless PIN)
- Merchants value conversion through the marketing funnel above cost. Proof point? BNPL a scheme with higher MDR than card
- Consumer behavior is hard to change, particularly one that operates on on the same account that your debit card is connected to.
- Merchant marketing/loyalty programs are COMPLEX (blog). Merchants DO NOT tie incentives to payment instruments (they don’t own). CLOs are a massive failure (blog).
- Merchants bear risk of online fraud. Top merchants have brought both fraud and payments in house, managing fraud down to 3bps (Apple, Amazon, Target, WMT). Mid tier merchants leverage specialists like Cybersource, 2Checkout, Digital River, …etc. Small merchants rely on integrated bundles from Stripe, Shopify, Paypal, …etc.
- Payments have become part of the OS/Browser. Customer experience/payment instruments in mobile is owned by Apple (ApplePay 80%) and Google (GooglePay 20%). In browser, Chrome and Safari provide integrated autofill and the with the new EMVCo SRC standard in progress. Consumers enter card information less than 15% of all transactions (in frequent merchants).
- Product Search, Social, and Maps are key starting points for the consumer journey. 90% of retail focus is in improving top of the funnel. Payment is the last and EASIEST step in the purchase process. Opportunities in payments to improve the funnel are focused on: 1) customer experience or 2) increased access to credit.
- Merchants want to accept the form of payment consumers prefer. Their interest in taking Zelle, Venmo, or Alipay is not based upon their desire to circumvent V/MA (see Amazon Accepts Venmo).
- Merchants with high frequency develop their own branded payments with bank support (Apple, Exxon, Amazon, Target, Walmart, Starbucks, Dunkin, Airlines, Transit, …). Perhaps opportunity in Grocery.
- Successful schemes have incredible focus within a niche or as the default payment mechanism within a market. For example, LevelUp and TabbedOut in bars.
- See 2013 blog on PayPal’s effort to create a merchant value proposition at POS
In Changing Economics of Payments, I covered acquiring economics in depth. It is important to note that top acquirers have moved from payment processing to vertically focused software platforms that deliver solutions (which contain payments). Global Payments ($GPN) and Adyen are two great examples: each target over 80% of their revenue from services.
PayPal is a great case study in working with acquirers. In eCom, the Braintree acquisition allowed Paypal to process all payments for merchants, with Uber and AirBnB as their biggest initial customers. This was great business for JPMC as PayPal’s acquiring bank, as eCom is the highest margin payments niche. Today, merchants use a range of processors, gateways and specialists. In this heterogeneous world, PayPal became an instrument that must be integrated into processing. PayPal’s current MDR is 3.49%, of which the processor is paid around 0.5% to 0.8%. This processor fee covers the operational costs of integrating PayPal acceptance into the overall merchant acceptance process/ system.
Processors will support what merchants want, but as trusted long term partners, their services expand far beyond payments. Even if properly compensated, acquirers will not introduce any new payment scheme that could negatively impact either checkout or the exception process. Even after passing the “value hurdle”, technology, legal and compliance activities must be completed for internal certification and then customer contracts updated. This is the advantage of JPMC/ Chase Merchant Services.
ChasePay is another excellent case study in the US. JPMC is the largest US issuer (~36% of V) and the largest eCom acquirer (~60%+). My friends at Amazon were not exactly thrilled with the idea of adding a “ChasePay button” below Amazon One Click.. Per my blog, they actually thought it was some kind of joke. The bank that processes their payments, AND promised to take AmazonPay to other retailers, was shilling their own payment scheme. Why would we do this?
The most obvious route to circumventing this hurdle is to partner with service providers within midsize eCommerce (ex Stripe/Shopify). Globally, eCom specialists must accommodate local schemes (ex iDeal in NL, or UPI in India). Thus adding a new scheme is rather straight forward. The issue remains economic incentives to sell and service. If PayPal offers Stripe 80bps, what will Plaid or banks provide to encourage their sale of a new payment instrument with no active consumers?
As mentioned, successful processors have transitioned from selling payments to software and solutions. As such, solution focused efforts predominate retail customer sales engagement. Pitching a new payment product, separate from solution sales, would be like JPMC pitching ChasePay to Amazon.
Stripe set a new standard for “making payments easy”. Their technology and APIs support a community of 100,000+ developers. Global eCommerce requires integration with local schemes. Stripe leads the market in enabling eCommerce payment in 47 countries and 135 currencies (see Brazil example). Beyond the checkout process we see, Stripe’s APIs allow embedding payments AND financial services into core processes of other software platforms (see Embedding Payments – #1 Growth Vector).
There are few issues with the technical integration of a new payment scheme. Financial risk management, settlement/reconciliation, auditing/enforcement, fraud operations/case management, tax reporting and customer support are complex. Adding a payment method brings on new processes for each of these functions. Small retailers tend to rely on integrated providers that can manage all these functions (ex DigitalRiver in digital goods). Larger retailers focus on reducing costs and owning the data insights necessary to drive performance (reduce risk).
More detail on technical integration is in Acceptance – Part 1. Key point today is that there are substantial costs involved in adding a new payment instrument. Instant payments like PIX (BR) or iDeal (NL) place the bank in the center of the customer support/dispute process. For the last 30 yrs, merchants have been frustrated by the lack of bank data to support their risk decisions. Instant payments flips the table. The merchant will hold all of the consumer data, but an A2A or instant payment scheme will leave the bank holding responsibility for managing the fraud.
Story – Post 3DS – UK Airlines.
In the late 90s Banks were not prepared for Card Not Present (CNP) Transactions. Their fraud systems (ex HNC Falcon) were not tuned for this type of transaction. Retailers were thus responsible for CNP fraud and invested in both data and fraud systems. Retailers developed the best insights into consumer behavior (blog) given their responsibility for eCommerce risk. In 2003, V/MA/Amex developed 3DSecure (3DS) (See Wiki – VBV by Visa – MSC by Mastercard). In the UK, Merchants were provided with incentives of 5-10bps to adopt the 3DS and SHIFTED LIABILITY to banks.
Rollout of the scheme in Europe was a disaster (see UK Guardian). Banks now owned a mountain of new fraud losses, with no data or tools to manage it (3DS technology was broken). The only bank tool within the network scheme was to Decline Transactions. UK airlines were the first to experience declines, with customers being contacted by bank to verify transactions. The experience was awful and led to airlines to turn off the service.
See last week’s blog on the Marketing Funnel and Role of ID. Consumer behavior is very hard to change. How hard? Google spent $2B on payments, and integrated both advertising and free delivery… they also owned the phone OS and hardware spec. Even if there is a great consumer experience, consumer behavior does not change without frequency of use. Thus high frequency categories are key for any new payment type.
In my RIP MCX blog, I explained how 20+ retailers collaborated on a new payment network. Everything worked.. But CMOs were not about to let their finance/treasury payment geeks touch the consumer experience, steer, or construct any kind of rewards around a payment instrument.
There are 4 categories of successful new payment schemes (more detail in A2A and Fed Now).
- Retailer Led (Amazon, Alibaba/Taobao, Target, Starbucks, …etc)
- Central Bank/Bank Consortium (SEPA, UPI, iDeal, PIX, …etc)
- P2P/Social (Venmo, WeChat, MPesa …etc)
- Expanded Credit (Klarna, Afterpay, Affirm, …etc)
Per last week’s blog, keys to success
- Solving a problem (typically unbanked/underbanked)
- Ability to influence large consumer base
- Customer Experience
- Lower cost than alternatives
- Customer support/reputation/fraud management
New payment instruments require network effects which encourage both merchants and consumers to adopt. Network effects are driven by economics drive, and a well defined operating model, which allow other parties to invest. I’m negative on both SEPA and PSD2 because of their economic incentives. One of the world’s greatest payment innovations is UPI in India. As discussed, there is some irony in the fact that 85% of UPI volume is driven by 3 US companies: Amazon, Google and Walmart. Indian banks have no incentive to use, in fact they benefit from off loading payment transaction volume to those that can derive value.
If we look at the fastest scaling new payment instruments in the world there is something that stands out. See KC Fed White Paper on interchange fees and network effects.
- UPI – $0 cost
- PIX – $0 cost
- AliPay/WeChat Pay – 55bps
- SEPA – ~$0.50 flat fee
More discussion in Feb 2022 blog Interchange is Going to $0… So What.
Merchants know they are in a powerful position to decide what is accepted. A top 5 retailer said it this way “Tom Visa and Mastercard are the devil I know, they are efficient networks. Consumers want to use them.. I must accept them. Why on earth would I add a new payment instrument? If I enable consumers to use a new payment product, what control do I have over future pricing? The payment problem I see today is that Gen Z has no idea what a plastic card is for. They use Venmo or Zelle.. That is what I’m open to accepting and either of those P2P schemes. Of course pricing must be similar to debit [25bps]. Unfortunately that price point doesn’t seem to work [I’m not up for renegotiating Durbin]. I’ll encourage consumers to use their debit card until then.”