The pace of change in the payments space accelerated dramatically in the first two decades of this millennium. Much of that change is a result of the convergence of mobile devices and eCommerce experiences that are welcomed by generations Y and Z today.
We are increasingly part of a sharing economy, where sharing usurps ownership, renting is more attractive than buying, and self-employed job gigs are a new work reality. These trends are disrupting traditional business models, including that which has powered payment infrastructure.
Convenience & Integration Drive Payments
Among those aged 18-29 in the U.S., an astounding 96% say they own a smartphone, and those 30-49 are just slightly less equipped at 92%. Among the younger group, 58% say they mostly go online using their smartphones.
Despite relatively low penetration of contactless payment point of sale devices in U.S. stores, mobile wallet purchases were projected to surpass 100 million in 2019. Consumers in Asia are further along—leading the way is China, where 86% of consumers pay for transactions with smartphones.
Tokenization, Omnichannel & Value of Payment Data
ECommerce and mobile commerce have forged the path to digital payments, by providing a consumer experience characterized by integration, ease and openness. Data can be readily exchanged among different parties.
In the traditional, physical merchant environment, big tech companies such as Apple and Google, along with major merchants including Walmart and Starbucks, have made mobile wallets readily available and are investing for the future. However, adoption has lagged in the traditional merchant space, hindered by the limitations of traditional payment terminals and a traditional mindset.
While eCommerce still represents less than 20% of total retail sales in the U.S., it is growing year over year by better than 15%, while traditional retail grew just 3.8% in 2019. Furthermore, the COVID-19 pandemic is accelerating the shift from F2F to eCommerce, expected to condense 10 years of change into one, forcing especially small SMB’s to upgrade their business propositions to be more digital to combat the challenges the coronavirus brought upon them as consumers are more satisfied with their digital commerce experiences than their in-store encounters. Merchants must initiate or accelerate the shift to new services such as contactless payment, curbside and delivery transactions.
Traditional retailers, large and small, have little choice but to more quickly expand into the world of omnichannel sales. With digital tokenization substituting for cash and plastic, the payment process is both more secure and adaptable across online and physical retail channels. It also provides merchants with greater opportunity to create customized integrated checkout and loyalty experiences and to finally identify and treat the customers as one across all channels.
Traditional merchant payment solutions have limited the ability of merchants to adapt to these changes. Independent software vendors (ISVs), particularly providers of electronic point of sale (ePOS) solutions, have been able to establish themselves as aggregators of the rich sources of data that accompany payment transactions and other consumer-merchant interactions.
The introduction of the first smartPOS terminal in 2015, began the process of levelling the playing field among merchant solution providers, integrating the nimbleness of the digital world with the familiarity of physical devices. Furthermore, this new generation of smartPOS solutions enables merchants, solution providers and acquirers to grasp the holy grail of finance: the payment and marketing data that consumers readily hand over with every payment transaction.
Payment Facilitators Represent the Evolving Payments Business Models
Increasing mergers of business and payment solutions and the associated success of the integrated payments model illustrate the pressing need to upgrade the traditional merchant account business model.
What once were clearly defined relationships between buyers and sellers must be upgraded to fit into a world of commerce platforms, merchant ecosystems and marketplaces. Traditional merchant acquirers and channel partners such as Independent Sales Organizations (ISOs) are facing new challenges and potential partnerships in the form of intermediary payment service providers, also known as payment facilitators (PayFacs).
The PayFac model is especially appealing for ePOS providers that can offer an integrated suite of services to local retailers, restaurants, spas, and others without becoming visible in the transaction flow. With the gig economy in full swing and marketplaces developing as a core model serving this trend, PayFac’s have become a new prime sales channel into the SMB market for classic acquirers.
The consolidation of business and payment solutions under one solution provider who also acts as the “one face to the merchant” overcomes long-standing merchant complaints about the traditional ISO model. That is, rather than simply packaging a card payment solution, the new merchant payment solution provider can craft a real business solution that integrates payments with other business and consumer experience processes.
To be continued…. Stay tuned for the next blog on this series where we explore the “Future of Payments”.