Today's U.S. payments industry is in the midst of both a revolution and an evolution. The revolution stems from the relentless stream of interchange and price-fixing battles being fought via the Durbin amendment and in the courts between networks, banks and merchants. The evolution is the culmination of technological advancements that will enable digital wallets and the simultaneous synchronization of varying transaction types — such as rewards and payments — at the point of sale, utilizing any "form factor" a consumer may have, be it a card, a smartphone or online interface. The challenge for companies today is maintaining the existing customer base while continuing to innovate so they can compete in the future.
Over the last year, a number of articles have been published regarding the speculation of who may win and lose on the new payments frontier. Yet one main question remains: How does an issuing payment company stay relevant and maintain market share as the business metamorphosis occurs? The answer, of course, is through the consumer. It is the consumer who makes the ultimate purchasing decision. They decide not only what will be purchased, but how much will be spent, where the money will come from and what payment device will be used. It is also the consumer who opens accounts and decides how to fund each account.
Therefore, it is the payment account issuer or entity that should consider how to proceed on this new frontier. The company that issues the account is still very relevant in all the new business models moving forward (notice the word "card" was intentionally omitted from discussion because we are talking about the funding source, not the form factor). The entity that holds the funding account is the starting point for the consumer spending event. Merchants may hold the goods and services the consumer wants, but merchants will not steer consumer payments simply because they do not want any friction at the point of sale. Friction — essentially anything that slows down a transaction at the POS — could cause a consumer to think twice about the purchase and the subsequent method of payment. If the consumer has to think about how to pay for an item, he may not make the purchase or may reduce the amount of the purchase. Large merchants, in particular, will want to focus on increasing average transaction sizes.
Merchants will also look to engender greater consumer loyalty, so merchant efforts will be centered on programs that incentivize consumers to increase the frequency and incremental spend within the merchants' stores. That will happen with the seamless integration of reward and discount programs in the payment stream, as well as new consumer marketing techniques and delivery systems that are more timely and relevant than past methods. Innovative companies will work with merchants to make that happen sooner rather than later.
The funding account issuer dilemma will be on how to create new strategies that make their account the primary one in the consumers' existing wallets. They also need to focus on how to make their account the source of funds for new payment tools offered by companies like PayPal and Square. Strategies where account funding firms and merchants collaborate could be the key to success.
Madeline K. Aufseeser is a senior analyst with Aite Group, an independent advisory firm focused on business, technology and regulatory issues and their impact on the financial services industry.