The global economic slowdown, which is driving down consumer spending and credit card purchases, could prompt banks to adopt alternative payment systems.
Retailers have become increasingly interested in recent years in offering customers alternatives to credit and debit cards. These systems often exclude the traditional payment providers, and the main benefits of these transactions — revenue, customer relationship enhancement, or brand equity — flow to companies other than banks and card networks.
But many financial companies are wondering whether the economic downturn will fuel faster adoption of alternative payment methods and, perhaps more importantly, how that could impact their own payment revenue.
I argue that it is not a matter of whether alternative payments will gain steam as a result of economic difficulties. Rather, in the face of economic difficulties, financial institutions must embrace the alternative.
We must understand the value proposition, and the motivations, of various players in the retail payment ecosystem.
- Why do consumers choose one method over another, and how is that changing?
- What motivates retailers to prefer one method over another, and even to engage in such egregious tactics as steering customers to certain methods that the merchant thinks may offer some benefit?
- What are the goals of alternative payment providers?
- How should banks react to this shifting paradigm?
Banks have reacted to alternative payment companies as threats. However, if they want to retain the valuable customer relationships (and maintain deposit growth), financial companies need to offer dynamic tools that not only meet consumers' needs, but also serve the needs of other constituents in the ecosystem. The prime constituents are merchants and the payment networks, and they soon will likely include wireless carriers.
The prime factors banks must consider are competitive and economic, and from an economic perspective, the jury is already in. A sizable percentage of people are using their credit cards less.
In a recent consumer survey by Javelin Strategy and Research, nearly 40% of consumers said they have cut down on credit card purchases as a direct result of the current economic conditions, though they are often choosing other traditional payment methods.
Consumers are spending less, and credit card spending has been hit the hardest; 29% of consumers said they are finding it harder to pay off their credit card debt, 40% said they are putting less money into savings, and default rates on outstanding balances are going up.
Card issuers must concern themselves with these issues, because the increased risk in their portfolios can turn very bad, very quickly.
Financial companies, especially those with robust card-issuing businesses, face the challenge of altering their payment strategies, their risk management tactics, and their customer relationships across all product lines.
Consumer spending is not disappearing completely. Analysis shows transactions that would have used credit cards in the past are migrating to debit cards and other "pay now" options, as well as "pay before" methods such as prepaid cards.
Payment products that are linked to existing networks, including stored-value cards and private-label cards, provide a substantial revenue opportunity for banks.
All these alternative payment methods are showing huge growth, according to Javelin's consumer surveys, and they present the opportunity to link with specific merchants and generate revenue from business-to-business services, ranging from acquiring to deposits and cash management.
But banks must fight harder to make sure these opportunities do not migrate to other companies, and to ensure that the payment alternatives remain bank products.
From a competitive perspective, banks and traditional payment networks still have the upper hand. They are the established leaders, they have the physical infrastructure, and they control the vast majority of transactions at the point of sale, since most of the alternative tools work only for online purchases (with some notable forays into the mobile space).
Brands still matter, and consumer trust is paramount. More flexible platforms and products that meet consumers' payment needs — even if they change in real time — will be required from financial companies.
The migration from siloed lines of business to an enterprisewide strategy within banks involves more than simply installing a processing system that eliminates redundancy. It is about leveraging a bank's brand so customers can execute the type of payment they want, through the chosen channel, and with the desired parameters. Customer control of the payment tool will be the saving grace for banks and will enable them to maintain brand awareness, competitive advantage, and a central role in consumer payments.
The evolution of the mobile channel from banking to payments will be a double-edged sword for financial companies. Mobile payments represent an extension of existing revenue streams, as well as a broadening of the spectrum of opportunity for financial institutions. But they also provide a venue for payment tools that currently function only online to make the leap to the physical world. And they introduce the wireless carriers as constituents in the ecosystem — another mouth to feed from the revenue stream.
Consumers eventually will use their mobile phones to manage their finances, make payments, and take advantage of customized offers — services that will enable them to replace their leather wallets with mobile ones.
The current stalemate between the powers of the mobile payment ecosystem means it could be years before this happens. Nonetheless, we can expect more upstarts to attempt to deliver interim wallet offerings that will provide tempting clues about how our relationship with cash and currency will change — and why the wireless carriers will work hard to ensure these ideas remain niche solutions for the foreseeable future.
Several vendors have said in recent months that they are trying to take advantage of this perfect storm of economic and competitive factors affecting the payment landscape by providing dynamic solutions, incorporating the mobile channel, and doing so in a manner that fits with the times (minimal up-front investment and relatively little impact to core and legacy systems).
Financial institutions must take advantage of this opportunity to strategically advance products and services in a way that ensures alternative payment methods work in their favor.
Mr. Cundiff is a director of payment research and consulting for Javelin Strategy and Research.
