Who Doesn’t Have a Digital Wallet?
Last week, both Visa and MasterCard announced digital wallet initiatives. With so many players now in the eWallet space, it’s going to be interesting to see what leads to differentiation. Almost every player is delivering a similar platform with payment storage, instant offers / discounts, and online / mobile functionality. As such, this space is feeling like a land grab - whoever owns the real estate at checkout will win the consumer. If that’s the case, Visa and MasterCard have a distinct advantage (as they force retailer adoption).
This chart from the Boston fed shows consumer adoption of various payment types. There’s a number of interesting trends here:
1. Somehow in the mid 2000’s, 5% of Americans did not use cash. I have no idea how this is possible. But, don’t worry, we introduced cash to everyone by 2010.
2. Debit cards are on an incredible hot streak. Right before the economic downturn, they surpassed credit cards in % adoption and, over the last few years, they’ve started pulling away.
3. Credit card usage is steadily declining. I expected to see a decline after 2008, but adoption actually peaked in 2001. Besides the blip in ‘07, we’ve seen y-o-y declines for the past decade. This should be a major concern for many large banks - credit cards are extremely profitable. And it appears as though debit cards (with their lower fees and interchange) are slowly coming to dominate the marketplace. For credit cards to retain their market share, banks need to find a way to reduce the user friction and create experiences that minimize the “pain of paying”.
4. I don’t know what the BOS Fed means by “checks (blank)”, but it sounds pretty great … and somehow 85% of people use this mysterious financial product.
Leave Your Change Purse at Home
In 2020, your back will finally stop aching. According to a new Pew survey, in 8 years the majority of americans believe that all of their in-store payment transactions will occur digitally. That means: no more cash, no more credit cards, and no more coupons.
The Pew survey found that 65% of respondents agreed with the below statement:
By 2020, most people will have embraced and fully adopted the use of smart-device swiping for purchases they make, nearly eliminating the need for cash or credit cards. People will come to trust and rely on personal hardware and software for handling monetary transactions over the Internet and in stores. Cash and credit cards will have mostly disappeared from many of the transactions that occur in advanced countries.
Given the growth in smartphone adoption and the recent investments behind mobile transactions, its hard to argue with the above conclusion. After all, networks, banks, and merchants are all lining up to support this technology - the retirement of my wallet seems almost inevitable.
However, it’s important to note that 8 years is not too far away. So that means that the companies who currently have no mobile solution must start seriously thinking about filling that void. This may be obvious, but it’s readily overlooked - the banks and merchants with the strongest mobile platforms will be the players with the best foundation for growth once the digital tipping point occurs.
Mobile Opportunity
For some reason, merchants appear to be focused the wrong things when it comes to mobile payments. Everyone is attracted to the shiny object - digital wallets. But, why would I (or anyone) trust a retailer with all my credit card information? Merchants have very little right to win in this space, especially from a consumer trust perspective (of course, apple being the exception).
There appears to be some amazing low-hanging fruit that could dramatically impact performance, which, for some reason, is often overlooked when discussing the mobile payments opportunity.
Checkout Improvement: Millions of dollars have been invested to reduce the online checkout experience from 10 seconds to 9 seconds. However, very little has been invested in reducing the in-store checkout time. Mobile payments represent an amazing opportunity to reduce the in-store funnel, and thereby address a key brick and mortar pain point. For instance, Nordstrom recently rolled out mobile POS in their stores - and its genius. Think about the number of people who are convinced they’ll buy this pair of jeans or that pair of shoes, and on the walk to the register or the wait in line, decide to postpone the expense. Mobile POS enables Nordstrom to bring all of those sales forward. This benefit applies equally to a clothing retailer and a coffee shop.
Customer Relationships: Mobile payments represent the first viable means to immediately identify key consumers and give them the service / experience they have earned. Loyalty cards and points can now be stored on your phone and once a consumer enters a retailer’s geo fence, service representatives can immediately be notified and go to help that particular consumer. This represents a critical opportunity as it further incentivizes loyalty to brick and mortar stores by enhancing the benefit both functionally and experientially.
Although these aren’t paradigm shifting strategies, they are opportunities that could meaningfully impact the in store experience and are certainly winnable for retailers. Many are investing significant resources behind hitting home runs, but it may be more prudent to hit a few singles and doubles.
Square (The New Groupon?)
Square is the hottest payments company on the planet … right now. This quora post got me thinking about whether or not square is actually as great as everyone thinks it is.
It’s an interesting thought because square has received nothing but amazing press. They have created an aura of inevitable success around the business. However, as you think about the industry, their success is anything but guaranteed. They are playing in an increasingly crowded marketplace and competing against extremely entrenched players. Every great move by square is countered by intuit, PayPal, and others.
Moreover, they are a firm with an incredible design edge, which can be a critical asset for a consumer-facing product. However, the core of their business, is merchant facing. And as noted in the above quora post, many merchants are choosing square for less competitively sustainable reasons - like their ability to settle merchant accounts with 24 hours - not for it’s look and feel.
This will be an interesting space to watch over the coming years. Square is going to battle with a war chest of venture capital, a stable of amazing designers and engineers, and an established base of small merchants. But it’s facing tough competition from much larger financial players with an ability to subsidize losses and out-execute the new guy.
Rewards
Credit and debit card rewards programs are losing their touch. There are now seven hundred different points or cash back options available, and everyone from AMEX to your local credit union are using the bait. Despite the widespread adoption, they are, in my opinion, one of the least impactful motivators of loyalty.
Many businesses fundamentally believe that loyalty = rewards. But, from Apple to JetBlue, we see that true loyalty is inspired by many other factors - experience, personalization, customer service, and so on. After all, think about the restaurants you truly love - are they the ones with punch card programs or are they the ones where the maitre d’ remembers your name or the chef cooks your burger just the way you like it? These non-rewards motivators often result in more effective and long-lasting customer relationships. They are simply more efficient relationship drivers.
Why is that?
From my perspective, rewards, like points or cash back, have been commoditized and are viewed as a de facto currency. Therefore, when people receive these bonuses, it often feels like the brand is “paying” the customer for their business. Obviously, this results in a rather superficial relationship - one that only lasts until a better offer comes along.
On the other hand, the aforementioned loyalty drivers, like personalization, user experience, and customer service are viewed quite differently. They represent a means to truly connect and form a deep emotional relationship with the customer. Dan Ariely calls these factors, social motivators (whereas money/rewards are market motivators).
To bring it full circle - relationships between companies and their consumers are very similar to friendships. One can “buy” a friend by showering them with gifts, which will likely result in a rather superficial bond. Or, conversely, a friendship could be forged through an emotional connection, shared ambition, and so on. The later results in something more sustainable and mutually beneficial.
Many credit card companies believe that money can buy deeper friendships. Unfortunately, I don’t believe this to be the case. Therefore, as one thinks about creating a loyalty program that actually inspires loyalty, rewards can (and probably should) be a component, but they should only be one piece of a larger platform.
Not Raising Money
Over the past few months, I have talked to lots of people about the fundraising process. And, across the board, everyone has told me that when meeting with investors for the first time, solely focus on gaining advice. It’s important to establish early in the meeting that I am not looking for money, just feedback. This makes sense for many reasons - I will not dwell on them all in this post. But, it is important to note one critical factor, solely focusing on feedback sets a collaborative tone for the meeting, enabling the two parties to truly get to know each other and creating an environment where the angel or VC can take an unbiased look at your business. If they are then interested, they’ll let you know and if they aren’t, you’ll at least get some good advice out of the conversation.
I don’t know why, but for some reason, it took me months to realize that this same approach works just as effectively in every other area of my business - from forming partnerships to recruiting. I am creating a payments business, which is a notoriously difficult industry to enter and requires deep relationships with banks, processors, merchants, and so on. Recently, I have taken a step back to assess what has been working and what has not. And I have realized that almost every party that is deeply interested in my business was initially contacted to gain advice. One call led to another which eventually led to an interest in a strategic alliance. The people at these institutions have, over a period of time, gained confidence in me and my business. Conversely, almost every party I have contacted with the expressed intent of forming a partnership has led to an immediate stiff arm - there are cases where it has worked, but the hit rate is significantly lower.
It seems terribly obvious in hindsight. After all, requesting money from an angel or VC and forming a partnership with a processor are actually very similar endeavors. The party across the table is evaluating you and your business and assessing whether or not this opportunity is worth their time and money. In any such situation, I would strongly suggest the “inception” approach - ask for advice, plant the idea seed, and help it grow over time.
Battle Royale in Mobile Payments
Today Eventbrite announced that they are entering the payments arena. They will now be competing against Square, Paypal, Intuit and others for small merchants seeking to accept credit and debit card payments. After being ignored for over 40 years, it is amazing how quickly this space has caught on fire - square was founded in 2009 and since then we have seen a number of major payers follow them into this arena. So, why now? Why is mobile POS suddenly the place to be?
A lot of people are writing about the reduced technical barriers, the introduction of smartphones and other “environmental” factors that are helping to facilitate adoption. However, I’d argue that the strategic rationale is most interesting (and significantly less discussed).
From my perspective, the attractiveness of this space is highly influenced by the increasingly important battle to own consumers’ digital wallets and facilitate their mobile payments. I believe Paypal, for instance, likely sees their Here product as a trojan horse, positioning them to be a more attractive digital wallet and payment “locker” for consumers. After all, if a consumer’s frequently visited stores promote Paypal mobile and offer discounts via this platform, the consumer will be more likely to store their credit card information via Paypal’s medium. I believe Square is taking a similar approach - they are using the merchant as the entry point into the consumer i.e. the square payment platform is leading to consumer facing products like Card Case. As we all know, significant money and data is to had for the players that facilitate consumer spending, so winning this battle is strategically critical.
However, selling payment alternatives into meaningful brick & mortar retailers is a 3+ year endeavor. As with all large companies, change is slow and when money is involved, change is even slower. Since, these mobile players simply cannot wait 3+ years to fully implement their offering, they must look elsewhere to test, refine and execute their vision.
Accordingly, Paypal and Intuit, for example, are migrating downward into Square’s territory, attracting smaller retailers who are quicker to change and more motivated to undertake payment innovations. These smaller merchants also represent a testing ground where the value propositions and features can be fine tuned and critiqued, making the eventual sale into large merchants that much easier.
From my perspective, this space is so hot because it represents a funnel to larger ambitions. It is a critical step, but just one step, in the journey to be a mobile payments powerhouse.
It will be very interesting to see how this competition plays out over the coming years. I believe that the space can likely support several mobile POS players - so we will not see one rise and the others fade away (although one or two may be acquired, combine or die). The more interesting development will be how Square, Paypal, Intuit, Eventbrite, etc. prevent their offerings from being commoditized. Each company’s strategic answer will dictate the long-term profitability of the segment. Right now, all of the players are tightly bunched around a 2.75% - 3.00% fee per transaction - without clear competitive differentiation, these rates could be driven down substantially. From the merchant perspective, this all is great news - competition will lead to increased innovation and reduced processing costs.
The Purchase Journey
Before I write about specific payment forms and technologies, I think it would be helpful to first write a post on the consumer purchase journey. An understanding of the consumer experience is extremely important in the evaluation of different businesses and creation of new payment mechanisms. And as obvious as this sounds, it appears as though many companies have totally forgotten about the consumer (i.e. digital wallets).
Through my work at Fahrenheit, I have spent a lot of time (maybe too much time) thinking about the consumer exploration and decisioning phase of a purchase. As detailed below, this assessment has significant implications for payments companies and merchants, and, as such, absolutely should not be ignored.
Just to be clear, my theory is certainly not fact, but it has been battle tested through numerous conversations with and projects for payments businesses.
The Purchase Journey:
Once a consumer decides that he / she wants a particular good or service, they go through a three phase decision process.
Phase 1: Can I?
This is generally a binary assessment of whether or not a consumer actually can afford a particular product. During this assessment, most consumers think about the cash in their bank account and the availability remaining on their credit card.
However, there a few financial products that can introduce a grey area, most notably installment loans and deferred interest financing. With these purchase tools, payments are made over time. So a consumer can buy a refrigerator today and pay for it over a 6, 12 or 18 month period. These products force consumers to factor future earnings into the assessment and, in doing so, open up a new world of affordability.
If the consumer moves through phase 1, determining that he / she can indeed purchase the product, they progress to phase 2.
Phase 2: Should I?
This step is defined by opportunity cost assessment. At this point, consumers assess the financial consequences of the decision (both today and in the future) and determine if the purchase is truly “worth it”. Just to be clear, I am not arguing that all consumers take a 5 minutes break and plot out the potential positives and negatives of every purchase. But, I am saying that whether it takes 2 seconds or 5 days, consumers do think about the implications of this purchase decision, and based on their own preferences, either pull the trigger or defer.
At this point, certain tools like deferred interest financing or installment loans can have a very powerful impact on consumers. After all, by spreading out the payments, these tools decrease the opportunity cost and risk of a purchase. So a consumer can buy a television and not have to eat ramen for the next 30 days.
This is also the phase where credit cards are the most hindered. Many of today’s consumers are afraid to assume credit card debt and fear the financial implications associated with interest. As a result, the perceived opportunity cost of a credit card purchase can actually be greater than that of a cash purchase.
Finally, if a consumer has decided that he /she should buy this particular item, they move into the third phase.
Phase 3: How Do I?
At this point, the consumer literally decides which form of payment to use when completing the transaction (i.e. cash, debit, credit, installment loan, cattle, gold bullion, etc.). At this point, it is absolutely critical to understand that the assessments completed in each phase are not done independently. Therefore, the forms of payment that came to mind when assessing the Can and Should questions are going to have an enormous advantage at the How stage.
What does this mean for payments companies? If you want to gain consumer adoption, you cannot be first introduced at checkout (or the How moment). If you are, you will never win. You must be considered early in this purchase journey, thereby helping with the Can and Should decisions. This can be done in many ways i.e. reducing the cost, providing payment flexibility, delivering credit to those without it, and so on.
As an example, one of Bill Me Later’s more impressive strategies was to buy banner ad space on its merchants’ homepages. Therefore, when consumers first landed on the page, they would see an ad for 0% interest for 6 months on any XYZ purchase. Viewing and internalizing this ad would clearly impact a consumer’s assessment of the subsequent items they could / should have purchase. And when that consumer got to checkout, they would then be more likely to look for the Bill Me Later payment option.
As I begin to further develop my payment platform, keeping this journey in mind and finding ways to move beyond the checkout page are critically important. As a new payment service, solely competing at checkout is an impossible battle.
As I will further discuss in a blog post to come, a good payment tool should also impact the moments before and after the purchase journey. So, for example, a payment mechanism can help improve the post-purchase experience (although few do) and can help drive consumer demand, impacting what a consumers ‘wants’.
The Opportunity
I’ve recently decided to take the seemingly insane leap to start my own business. This decision was catalyzed a few months ago, after I developed a complete fascination with the impending innovation in the financial services space. I worked at a firm called Fahrenheit 212, where we created new businesses and were compensated based on their success. I ended up working for a national retailer, helping them launch a retail bank and with a few credit card companies, helping them develop digital strategies and new payment tools.
This process made me realize that people hate banks. Today’s consumers fundamentally believe that the large financial institutions are evil - they are out to ruin the US economy and their personal savings accounts.
In fact, Forrester Research asked 4,500 banking consumers if they agreed with the phrase, “My financial provider does what’s best for me, not just its own bottom line.” As expected, the large financial institutions scored lowest in the survey. Amazingly, there was an across the board trend which showed that the more customers you have, the lower its consumer advocacy ranking will be, further displaying the growing mistrust of larger banking institutions (which are associated with the recent recession).
So what does this mean? Other than the fact that people hate Bank of America, how do we interpret this trend? From my perspective, it means that the barriers to entry in the financial services market are crumbling. Ten years ago, consumers were solely focused on a bank’s brand and its balance sheet - they wanted to know that their money would be “safe”. Rightly or wrongly, consumers believed that a financial institution’s size and brand directly correlated with the safety of their money.
That premise has been completely destroyed. The financial downturn exposed the large banks and proved that they were, in fact, just as risky if not more so than the “little guys”. Further compounding consumers changing attitudes, banks’ subsequent behaviors, from higher credit card APRs to added checking fees, have proven that these institutions are solely focused on improving their bottom line. They are not looking out for the interests of their consumers - hence the horrendous Forrester survey results.
This all means that consumers have shifted their preferences when assessing financial institutions. In this uncertain world, “safety” is impossible to guarantee. Therefore, finding alignment is critical - consumers want to know that their financial institution has their best interests in mind. I am not saying that safety is unimportant, but it has become commoditized - FDIC insurance is required but anything above that means little.
So whereas ten years ago, it would be impossible for a start up to enter the financial services space (due to balance sheet and brand barriers to entry), today the industry is completely exposed to disruption. We see Simple enter the retail banking universe - they are proving that a balance sheet is unimportant - Simple is solely focused on the consumer experience and providing that consumer-bank alignment.
Moreover, as discussed above, the new barrier to entry is becoming consumer alignment. This means that the existing players could be boxed out of their own industry! Consumers simply do not trust the Bank of America’s or Citi’s of the world to provide new savings or credit products. They have been burned too many times before. This means that the impending innovation must come from start ups because it cannot be addressed by the “insiders”.
I believe that over the next few years, we will see a wave of start ups enter and disrupt various aspects of the financial services space - from retail banking to payments to micro lending. Never before has there been an industry so large with so many established players, left totally exposed. Billion dollar businesses can and will be created as a result of this fundamental change.
I am working on such an opportunity now. It’s a difficult industry to navigate, but the opportunity is absolutely massive for those that do it successfully.
