Two-hundred and eighty-six is the number of times each year that the average Briton makes a non-cash purchase. In the United States, the number is even higher at 376 and in Finland it is a whopping 448. No financial product is used as frequently or as widely as those facilitating payment – but how exactly are these purchases being paid for? Gone are the days when customers need to carry around wads of cash, limiting their purchasing power at a given moment, and creating serious risks of theft. Waves of innovation from merchant charge cards, to the modern credit card, and now mobile payment solutions like ApplePay have made the act of paying seamless and secure for customers.
Today there is a revolution in financial technology underway with over $12.2 billion invested in “fintech” companies in 2014, triple the $4 billion invested in 2013. So, with a significant share of these funds being invested in finding new and better ways to pay, what can we expect from the future? Over the past year and a half, the World Economic Forum, with the professional services support of Deloitte, has conducted a research project involving over 100 experts and industry executives. The aim has been to better understand the disruptive potential of emerging innovations, including those related to payments. Based on that research, here are five predictions for the future of payments:
A “winner takes it all” environment for payment providers
M-commerce apps like Uber and Amazon promise their users a frictionless experience, and part of fulfilling that promise increasingly involves pushing the act of payment to the back of the customer’s mind. While these apps allow customers to change payment methods on the fly, most use their default card for each transaction.
By solidifying their position as a customer’s default choice, card issuers will enjoy higher transaction volume and gain a more comprehensive view of customer spending patterns. When combined with investments in analytics and innovative loyalty programmes, this data can be used by payments providers to more effectively entrench their value propositions and improve customer retention.
The death of the credit card?
The past 50 years have seen a consistent trend towards the displacement of cash as a method of payment towards cards, specifically credit cards in North American markets. Analysis of customer behavior around mobile payment technologies, for example ApplePay, suggest that this will continue over the short term as small denomination payments, say a pack of gum at the convenience store, are increasingly made through card and mobile payments rather than cash. Over the longer term, however, we could see a reversal of this trend, as the mobile payments sector starts to offer an increasing number of innovative alternatives to credit cards. These alternatives will allow customers to more seamlessly link payment directly to their bank accounts and provide users with advice and insights on their spending patterns.
Customers in need of credit to fund their purchases may increasingly turn to point-of-sale lending solutions such as Affirm, a new company from the founder of PayPal. These solutions give merchants the ability to offer installment payment plans and other forms of credit to their customers. These solutions help merchants to increase scale and access new revenue streams in the form of interest, and provide customers with an appealing alternative to higher interest credit card debt.
If these innovations appeal to customers, they will erode credit card volumes, directly threatening business models that today are built on account balances and loyalty programmes. That would create longer-term implications for retail banks, for whom the card business is a key part of their customer relationships.
The systems that enable digital currencies will modernize payments infrastructure… and more
Digital currencies, such as bitcoin, strive to make the transfer of value even simpler, through a revolutionary process of consensus-based validation whereby a digital token of value (the bitcoin, or other digital currency) is moved within a distributed ledger maintained on thousands of different computers around the world. These systems have the potential to replace the legacy information technology infrastructure that enables payments today, reducing the number of intermediaries between the customer and the merchant. In fact, these systems could be used for much more than just enabling payments, they have the potential to revolutionize the transfer of value across financial services.
By improving both efficiency and traceability in the clearing and settling of transactions, these systems could have profound implications for everything from foreign exchange and international remittances, complex clearing and settlement of securities (the processing that happens every time a stock or bond is traded). Organizations from Visa and SWIFT to NASDAQ and UBS have already begun exploring these potential applications, which could be a first step in the modernization of how financial institutions interact with one another.
Digital currencies won’t replace traditional ones – yet
Given the revolutionary nature of the distributed ledger protocols that enable digital currencies like bitcoin, it may seem curious that they are not in wider use. It is true that in their current form this technology is very appealing for merchants. Payments accepted in the form of bitcoin have a low transaction fee, the funds settle fast – sometimes even within minutes – and they offer a single global standard. But they will only take off if customers also see value in using them, and so far that hasn’t been the case. There are a few reasons for that.
First, customers need an economic incentive to use these digital currencies, but up until now the cost saving has mainly been for merchants. Second, the value of digital currencies can be volatile, which exposes customers to exchange rate risks; as a result, many people hesitate to keep their money in those digital currencies. Finally, a range of issues, including negative press, digital wallet systems with unwieldy user experiences, and a relatively small number of ways to convert dollars to bitcoins make a customer’s first foray into the realm of digital currencies a high hurdle to clear. All of these challenges are clearly solvable, and lots of dynamic start-ups are currently hard at work solving them – but they do present a significant challenge to the adoption of digital currencies by retail customers in the short term.
Of course there is no guarantee that all, or indeed any, of these predictions will come true. Today’s payment eco-system is highly complex, with many parties with entrenched and conflicting incentives working hard to build the payments solution of tomorrow. What does seem clear is that whether tomorrow’s customer reaches for their wallet, their phone, or some other device to pay their experiences will be more seamless than ever before.
Authors: Jesse McWaters, Project Lead, Disruptive Innovation in Financial Services, World Economic Forum; Hwan Kim is a Manager at Monitor Deloitte, and was the Lead Consultant on the World Economic Forum’s research on Disruptive Innovation in Financial Services.
Image: A Bitcoin (virtual currency) hardware wallet and a coin are seen in an illustration picture taken at La Maison du Bitcoin in Paris, France, May 27, 2015. REUTERS/Benoit Tessier