For those of us who grew up loving science fiction and hearing futurists speak of societies that no longer use cash, societies in which currency was just debits and credits transferred via computer systems, that future is in close reach.  The payments industry is currently experiencing huge disruptions.  Paper currency continues to decline as mobile payments and digital currencies rise. Digital currencies are being used online, at point-of-sale and via the Internet of Things (IoT).

Major players in the payments industry are focused on payments without paper.  MasterCard has its mission of a “world beyond cash” and Visa states things like “your car is your credit card”.  The consortiums of major banks and technology companies are investing in and testing digital currencies and open ledgers by using blockchain technology.

To-date, the work we have done at Saggezza in the payments industry primarily focuses on digital wallets, prototypes and proofs of concept.  A digital wallet is still a niche product, but as security and adoption improves, it will soon be the primary method of payment among consumers.  Many companies worldwide made big strides in 2015 bringing secure payments to handheld devices. It is important to note the digital wallet goes way beyond making a payment at a store.

Potential applications for digital wallet:

  • Mobile payments acceptance – swipe and processing of credit cards
  • Identity – driver’s license, health info, boarding passes
  • Mobile e-commerce checkout – purchase online
  • Retail point-of-sale purchases
  • Mobile incentives and loyalty programs – coupons, location-based offers
  • Banking and bill payments
  • Peer to peer transfers – pay friends, family and cross border remittances [1]

These days it seems like everyone in the retail space has either built or is trying to build their own mobile payments application.  Credit card companies, banks and retailers are scrambling to build mobile applications and apply the latest technologies and functions to enable mobile payments but to what end?  Why are so many of these payment providers trying to offer their own application?  Why are banks, credit card companies and retailers vying for the consumer to use one application over another?  Motivations can include many factors such as increased revenues, power and influence.

Revenue

Digital wallets could allow companies like PayPal, Apple Pay, Android Pay, or MasterPass to increase the portion of revenue-per-transaction (also known as a basis point).  For example, credit card companies currently get about 2 or 3 basis points (e.g. when a consumer uses a credit card).  But payment service providers such as Apple Pay have been able to obtain 10 to 15 basis points.  It is easy to see that there is a great deal of money to be made; and much to the chagrin of the banks.  A credit card company providing a mobile payments application could increase the amount of revenue it receives per each transaction.  Companies such as Square have also been able to get a larger than normal percentage of each transaction from the merchants.

Power and influence

Market Share – The larger the market share a payment provider has, the greater the influence it can have on the direction of mobile payments technologies and standards.  Various payments providers advertise the benefits of their wallets for either enhanced security or ease of use, based in many cases upon the provider’s method of authentication. Applications currently use a large variety of methods for authentication, with biometrics, bar codes, QR codes, microchips (e.g. EMV chips) and PIN numbers.

Merchants have expressed dismay at the credit card companies pushing NFC, EMV and other new forms of authentication upon the merchants, without receiving input from the merchants.  This lack of control is why “CurrentC” was started.  CurrentC is a coalition of 70 merchants.

Loyalty – Merchants will continue to use loyalty programs to entice consumers.  Some payments industry analysts believe that mobile payment providers (e.g. ApplePay, MasterPass and VisaPay) will utilize loyalty programs too; not just merchants.  Just like there is a multitude of credit cards with many different loyalty/rewards programs, we could see a future in which there are multiple loyalty programs intended to encourage consumers to use specific mobile payments applications.

Data – The value to the mobile payment providers is not just revenue,it is the massive treasure trove of user data.[2] With the number of cash transactions decreasing and the number of electronic payments increasing, the amount of corresponding data is also increasing.  At Saggezza, we see payment technology companies already attempting to capture as much of this data as they can. These companies will need the ability to analyze the data as well.  The coming together of consortiums and acquisitions will increase as players in the payments industry attempt to put themselves in a position to collect, analyze and provide quality, actionable data for banks, merchants and consumers.

EMERGING TECHNOLOGIES

Digital Wallets 

A digital wallet refers to an electronic device that allows an individual to make electronic commerce transactions. This can include purchasing items on-line with a computer or using a smartphone to purchase something at a store. Increasingly, digital wallets are being made not just for basic financial transactions but to also authenticate the holder’s credentials. For example, a digital-wallet could potentially verify the age of the buyer to the store while purchasing alcohol. It is useful to approach the term “digital wallet” not as a singular technology but as three major parts: the system (the electronic infrastructure) the application (the software that operates on top) and the device (the individual portion). An individual’s bank account can also be linked to the digital wallet. They might also have the driver’s license, health care, loyalty card(s) and other ID documents stored on the phone. [3]

Banking and blockchain

Let’s say that one of the mobile payment providers is able to get a huge following of users for its payments platform.  If that provider can leverage technologies such as blockchain to track and record the financial transactions, and if the provider is able to operate as a virtual bank, then it can obtain a much larger share of the revenue per transaction,  while taking traditional banks out of the process. If virtual banks can replace brick and mortar banks, then a whole new world opens up to increase revenue for the payment processing providers and reduce revenue for the traditional banks.

Connected cars and IoT

More than 40 million vehicles in the US are connected to the Internet, and that number is set to increase steadily over the next couple of years.  Sixty-four percent of car owners in broadband-connected households would like their next car to have at least some connected capabilities, such as navigation, roadside assistance, voice calling, vehicle performance or maintenance analytics, music or web browsing. Two years ago, General Motors made a big deal at the car show with its in-car networking, apps in the dash and commerce on the go. [4]

While smartphones have been the short-term connecting device for cars, it looks like the car itself will become its own hub on The Internet of Things. [4] Recently, in the autumn of 2015, Saggezza had an opportunity to provide an in-car mobile application prototype, incorporating many of the features listed above.

Saggezza is working to help its customers understand these disruptors and benefit from early adoption. Digital payments, blockchain, and payments via the IoT are coming quickly, along with the need for analytic capabilities to bring value from the enormous volumes of data. If the companies providing products and services for this industry do not recognize and utilize these technologies, they will struggle to remain relevant in this competitive market.