The 451 Take
From card issuers and acquirers to ISVs and gateways, payments providers are working with greater speed than in years past to embrace digital technologies as a way to keep pace with rising customer demands. The result is a dramatic change in how payments products and services are being built, deployed and utilized by merchant and consumer end users. As part of this transition, we are seeing an industry-wide shift in viewpoint, from payments as a commodity service to payments as a strategic lever. We expect this realization to continue to expand in 2018 as more companies look to payments as a critical customer experience factor, a source of business intelligence and an area to increase operating efficiency.
Below we discuss 10 payments trends, some more obvious than others, that will be notable in 2018. In no particular order, they are:
1. Merchant payment empowerment. The traditional retailer mindset has been that payments are effectively a 'cost of doing business' – a necessary evil required to facilitate a sale. More recently, we've seen signs that merchants are increasing their strategic focus when it comes to payments. There is a deeper understanding that payment infrastructure serves as a critical digital experience factor that directly influences customers' likelihood of converting and returning. This is resulting in an enhanced focus on the role of payments in powering digital commerce experiences, as evidenced by wallets such as Kohl's Pay and order-ahead apps such as Shake Shack's Shack App. Of course, the expense and margin compression associated with payments has not been forgotten, either. Digital paves the way for more merchants to get creative with tender steering, as we've seen with Amazon Prime Reload and Cumberland Farms' SmartPay.
2. Pay at the table. Despite the liability shift that occurred in October 2015, most table service restaurants have yet to accept EMV cards. While cost and operational changes (e.g., staff training, tipping) remain pertinent concerns for restaurant owners and operators, obstacles posed by lack of ISV readiness and processor certification backlogs are decreasing. By midyear we anticipate that several large restaurant chains will have equipped their wait staff with pay-at-the-table devices that are common throughout Europe and other mature EMV markets. This will create a new sales opportunity for POS providers such as Verifone and Ingenico, which are eager to see the pay-at-the-table market move along in the wake of declining EMV terminal sales in the US. To keep the momentum going, POS companies and acquirers will need to emphasize the prospect of pay at the table to drive increased table turns and improved customer service for restaurants.
3. Open payments and APIs. For many decades, payment products and services have been driven into the market almost exclusively by issuing and acquiring banks. Digital is reshaping this distribution model, with payments migrating into native apps, POS software, wallets and other connected environments. Banks and payment companies now have a seemingly endless list of partners to align with, running the gamut from application developers and technology partners to emerging payment gateways and ISVs. This more complex partner ecosystem is fueling many trends within the industry that we expect to be prominent in 2018, including heightened M&A activity in merchant acquiring, the growing popularity of developer programs and even changes in the regulatory environment with PSD2 in Europe.
4. Accelerated digital commerce growth. 451 Research finds that digital commerce is growing 3x the rate of in-store commerce, with US online retail sales slated to crest $500bn this year. Activities such as mobile order-ahead, click and collect, and ride sharing are helping to further catalyze this growth by deflecting what would have been card-present transactions into card-not-present (CNP) channels. In 2018, we anticipate the relocation of in-store transactions into digital channels will accelerate, further increasing the rate of digital commerce growth. This will require issuers to spend more time honing their digital top-of-wallet strategies and will demand that processors increase investments in their digital acceptance stack or risk losing more business to specialists such as Stripe and Adyen.
5. CNP fraud spike. Digital commerce transaction volume is growing quickly, and CNP fraud is right behind it. We expect fraud to worsen in 2018 as the increasing penetration of EMV cards and POS terminals in the US further throttles the counterfeiting market, shifting more of fraudsters' attention to digital channels. This will be felt most acutely in areas such as account takeover and new account fraud. On the merchant side, our surveys with digital payment service providers show midsized retailers are most at risk due to a lack of sufficient protection. It's worth noting that the rise in fraud for merchants translates to more than just merchandise losses to include increased costs for chargebacks and manual reviews.
6. P2P evolution. Dinner bills split between friends and payments made to the local dog walker are, for certain pockets of the population, increasingly made with virtual money instead of paper. According to our Voice of the Connected User Landscape (VoCUL) Representative Consumer Survey, 16% of respondents aged 18-24 are using P2P apps at least weekly, and 23% of respondents aged 25-34 are doing the same. While P2P apps in their purest form do not make money for their providers, they are often leveraged as a head fake for a more strategic initiative. This year, we expect to see more P2P providers parlaying their services into a C2B payment option in an effort to generate revenue. Square Inc and Venmo began testing the waters with this approach last year, and we wouldn't be surprised to see Early Warning Services (Zelle) do the same in 2018.
7. Contactless cards. We expect contactless cards, which are wildly popular in the UK and Australia, to show early signs of traction in the US in 2018. Contactless cards offer issuers a potential opportunity to drive top of wallet, displace cash (particularly for cash-dominant small-ticket transactions) and prepare cardholders for large-scale contactless transit rollouts that are set to launch in the early 2020s in Boston and New York. Given that little more than one-quarter of respondents to our most recent VoCUL Leading Indicator survey plan to use digital wallets over the next 90 days, contactless cards may serve as a bridge technology that could increase consumer comfort with tap and pay.
8. Real-time payments. The US has a long road ahead in driving real-time payments toward ubiquity, but an important first step occurred in November as The Clearing House launched RTP, its real-time payments system. As seen in the UK and Singapore, real-time payments stand to benefit businesses and consumers alike by improving cash flow and streamlining a range of payment use cases including insurance claim payouts, bill pay and P2P. In 2018, aside from watching the infrastructure move into place, it will be interesting to see if/how banks and payment providers will be able to monetize real-time payments, as Square currently does with its Instant Deposit option (charging merchants 1% of the total deposit amount). It will also be important to monitor Visa and Mastercard's respective Visa Direct and Mastercard Send products, which use their debit networks as a real-time payment solution for businesses.
9. Alternative financing. Financing alternatives to credit cards have existed online since at least 2000 with the launch of Bill Me Later (now PayPal Credit). While traction has been somewhat muted, interest is pouring back into the space thanks to newer entrants Affirm Inc and Klarna. Square has also jumped into the fold with the unveiling of its Square Installments service last year. Our research indicates there is room for these players to grow because more than one-third of US e-commerce businesses have indicated they are planning to begin offering purchase-financing options to customers in the next 12 -24 months. The interest underscores the efforts retailers are taking to cast a wider net in an attempt to appeal to more shoppers and improve conversion rates. As more retailers adopt, the question remains to what extent this will impact credit card issuers.
10. NOT the year of the wallet. While nearly every year since 2012 has been proclaimed the 'year of the wallet' by industry observers, digital wallet adoption continues to be relegated to a small subset of the population in developed markets. Our VoCUL Leading Indicator survey shows that planned wallet usage has remained stagnant since Apple Pay's launch, growing from 24% in December 2014 to just 26% in September 2017. While contactless POS penetration rates are undoubtedly increasing in the US, the value proposition for digital wallets remains undeniably nascent. This will take time to evolve, and will require converting the next wave of consumers, who are perfectly content with cash and cards, which work well and are accepted ubiquitously. What we hope to see this year is work by wallet providers to better align with emerging use cases such as voice commerce, along with an enhanced focus on becoming digital identity and authentication solutions.
Jordan McKee is a Principal Analyst leading 451 Research’s coverage of the payments ecosystem. He focuses on digital transformation across the commerce value chain, with an emphasis on the major trends impacting payment networks, issuing and acquiring banks, payment processors and point-of-sale providers. His research helps vendors and enterprises assess the key implications of emerging technologies driving the digitization of the end-to-end shopping journey.
Research Director Sheryl Kingstone focuses on improving the customer experience across all interaction channels for customer acquisition and loyalty. She helps operator and enterprise clients make decisions regarding the use of technology, business processes and data to boost revenue and optimize business performance. She also assists vendors with custom research projects, messaging and positioning, as well as product road map evaluations. Kingstone researches and writes on the top trends in mobile marketing and commerce along with cross-channel customer experience technologies.
Keith Dawson is a principal analyst in 451 Research's Customer Experience & Commerce practice, primarily covering marketing technology. Keith has been covering the intersection of communications and enterprise software for 25 years, mainly looking at how to influence and optimize the customer experience.