Payment tech: The future of payment in U.S.
On January 9th, 2007, Steve Jobs came onto the stage of Macworld, and in front of thousands, he said, “every once while, a revolutionary product comes along that changes everything”. You probably guessed it, he was introducing iPhone. That was the start of smart phone, which got every one addicted to now a days, but more importantly it cemented Apple’s place as one of the most important and valuable technology company in the world (by market cap, Apple is only behind Amazon).
I believe The next key to technology prominence and dominance is figuring out how to become the super app. While I will write another article on super app, one of the key ingredient to super app is payment because of usage frequency and data (I have wrote a couple of articles on that). But looking at payments, it’s inevitable to ask the question: why is U.S. behind in payment compared against other countries?
How is U.S. behind
My context is when I look at B2C payment in Asian and Europe compared to the U.S.. In Asia, the rise of “super app” companies have enabled moving payment from cash to mobile and reduced under-banked population by leaps that we haven’t seen before. There is GoJek in Indonesia, Grab in Singapore and Maylaysia, Paytm in India. But the most prominent is probably wechat pay and Alipay, which handles over 90% of the B2C payment in China. As a result, Alipay has become the largest private company in the world valued over $200 billion with over 700 million active users.
But many have argued that looking at Asian is not a fair comparison. Most of these countries have leapfrogged from cash society to mobile, and skipped the credit card system that the US has adopted and enjoyed. To a certain extent, I agree. Just like it’s hard to criticize incumbent banks for not innovating fast enough compared to fintech start-ups when start-ups have the luxury to build its technology stack from the grounds up without the debt of the legacy system. But this is not the root cause of the problem.
So, we look at Europe. It didn’t leapfrog as most of the Asian country did, yet it’s adoption to new payment technology (either mobile or tap) are still ahead of U.S. A very good article written by Karen Webster from pymnts.com pointed out that:
The success of UK’s fast adoption to tap payment is due to the centralized banks and acquirers, and that it’s a much more difficult for execution for the US, which is decentralized and a much bigger system.
Karen certainly has good points and I will add that the U.S. started much later on the NFC (near field communication) POS system than Europe did. In 2015, U.S. retailers went through mass upgrade of their payment terminal with new regulation and upgrade to EMV chip. The upgrade of these terminals also supported NFC. NFC started in UK in the early 2010s. If we were just comparing the US to UK, then this probably explains what’s going on and US’s gradual move toward adoption of NFC tap and go. But this is not the complete picture.
The US did try to start transformational change in payment with MCX (merchant customer exchange) consortium in 2011, and in 2012 officially announced CurrentC, which promises to launch digital wallet that lower fees for merchants, and with almost all the largest retailers on board. The concept looked great on paper. For merchants, it’s a way to save on the $90 billion they spend each year on processing payment. For consumers, it’s US version of wechat pay and alipay that can bring the US into cashless society and solves financial inclusion along the way. However, it failed. As a matter of fact, a number of other digital wallets also failed during this time including Chase pay, Google wallet 1.0, ISIS (by the big 3 mobile carrier), BPay (Barclays), and Square wallet (Though a number of them have pivoted, so the final verdict is still out. I meant that they didn’t achieve their initial intent in B2C payment).
While the US payment system is ripe for disruption, and why the above mentioned attempt failed probably warrant another article with deep analysis, the most fundamental reason for why U.S. is behind in payment is that: the value offered in U.S. is not great enough to cause change in consumer behavior.
The US credit card system is already a cashless system. So by offering tap instead of swipe or insert or even allowing virtual credit card with the phone, I argue does not offer that much value that the customers wants to make such change. For example, when I was in Shanghai, if I didn’t have wechat pay or Alipay, it would literally inconvenient my life. I wouldn’t be able to get a taxi, buy train ticket from the machine, and order food delivery. Wechat and Ali not only built the payment rail, they also spend billions to help user adopt to the change. It was reported that Didi (the uber of China, backed by both Ali and Wechat) spent $1.7 billion in subsidy in 2018. And have spent a couple more $ billion before that for subsidy. Part of the reason is to get people used to wechat pay and Alipay. It was a great time for consumers because taxi rides were basically free. These use case scenarios or convenience provide enough value that made me download Alipay as one of the first app on my Chinese mobile phone.
On the other hand, it wasn’t clear what kinds of benefits CurrentC offered to customers, and worse it charged merchants up to $250,000 to $500,000 up front fee, which erode any benefits CurrentC is supposed to bring to merchants.
The next step:
So, with that said, what’s likely to happen next in payment in U.S.? And what will likely cause a revolutionary change in payment U.S.? For the first question, we see the following trends in payment in the near future:
- Continue adoption to contact-less and mobile.
- Voice activated.
- Embedded payments with more connected devices and more channels such as cars or other home devices.
- Merchants become payment companies.
Contact-less & mobile: The first one is the most obvious as we have seen the continue roll out of contact-less cards, virtual cards as well POS devices that accepts these payment methods. Leveraging the current infrastructure is easier mostly likely for the near term.
Voice: Voice-activated assistant devices have become more prevalent in U.S. such as with Amazon’s Alexa and Google’s Google Home. As consumers adopt to these devices, we will see more usage and application. For example, Capital One starts in 2016 to allow its customers connects their account to their Alexa device. Users can pay their bill directly through their Alexa device instead of having logging into their account either on their computer or mobile device. I believe we will see more application of voice activated payment.
Embedded payment: Kind of related to voice activated payment, another area is embedded payment. As our purchasing / ordering behavior change from traditional store to online, then to mobile, and will soon to much more kinds of devices with connection, such as cars, IOT devices, and home entertainment center. Payment will become more friction-less as it will be embedded with these devices to ease the check-out process; whether it’s ordering dinner delivery in our car as we drive home or ordering grocery from our IOT refrigerator.
Merchants become payment companies: After the failure of MCX, what’s happening is that merchants are starting to build their own payment app to resolve the problem of paying too much in traditional cards payment processing fee. Walmart and Khol’s have already rolled out theirs, and more will likely follow. Walmart is large enough to build its own payment infrastructure, but most of the retailers won’t have such extra capacity. Hence, we will see technology / payment companies that provide such solution to merchants.
The second question is harder to answer, but much more interesting. I think we will see disruption in payment in the next couple of years because 1. we have been in the credit card system since the 50 and 60’s. 2. global trend looking for more cost effective digital payment technology. While I don’t know exactly what our future payment will look like yet, I do think the following:
- Our new checkout will be bio-metric based as it’s the most convenient.
- Cheaper real time payment rail, and moving more away from cash
If we think about what’s more convenient than tap is probably bio-metric because we don’t have to take out anything. The current form bio-metric payment that I am aware of in wide use is facial payment in China. Other that has flow around is payment by finger print. Currently in U.S. both ACH and RTP are cheaper rail than offered by credit card. Perhaps we will see bio-metric with RTP that gives us much more acceptance than current credit card and drastically reduce the need for cash, or perhaps what might be easier is for credit card companies to lower the cost of their debit rail. And develop technology based on the debit rail. It’s hard to know exactly how it will play out, as there are a number of factors that will affect the payment, such as regulation, merchant acceptance and implementation cost. Either way, there is certainly opportunity for innovators to disrupt the space.