2015 Payments Industry Trends
The credit card sector is a
large, growing, and profitable segment of financial services, but it must soon
address four emerging challenges.
Who would have thought
that the payments sector would be so prominent in 2014? Once a quiet corner of
the financial world, the industry has been on a roller-coaster ride lately.
Data breaches involving more than 100 million credit and debit
cards at big retailers, such as Target and Home Depot, have grabbed headlines.
But there have also been unexpectedly exciting and innovative developments.
In October 2014, for
example, Starbucks said that about 15 percent of purchases in its U.S. stores
were paid through its mobile app and that by the end of 2015 the company will
launch a Mobile Order program across the United States so customers can
preorder — avoiding long queues and wait times. In September 2014, Apple
announced that its new iPhone 6 came equipped with an e-wallet called Apple Pay
that would store payment information and let customers pay for items by holding
the iPhone in front of a reader and placing a finger over the fingerprint
sensor. And perhaps the most striking illustration of the payments sector’s
vitality can be found in eBay’s surprise decision to spin off PayPal in 2015, a
move intended to let the unit take advantage of the many anticipated
opportunities for partnerships with offline and online retailers.
Viewed broadly, the payments
industry (worldbank.org)
(which includes organizations that store, process, and transmit cardholder
data) has three quite attractive attributes: It’s large, it’s growing, and —
thanks to its relatively stable and predictable transaction volumes combined
with low capital intensity — it’s highly profitable.
In emerging markets, the
growth of the middle class and expanded consumer activity represent vast
untapped pools for payments companies, particularly involving mobile money
applications, because cellular penetration in these regions tends to be high.
In more established economic zones, however, like North America, the landscape
is more challenging than in the developing world, for a number of reasons:
·
The shock of the global
recession and the tepid growth since, along with subsequent new capitalization
restrictions, have forced financial institutions to tighten credit standards
and consumers to deleverage.
·
Increased regulation
combined with the zero cost of money has minimized interest-rate spread and
lowered margins, forcing payments players to look for new revenue streams.
·
The competition is
getting keener as several monolines, such as Discover and Capital One, expand
into a broader set of financial services.
·
Large online and offline
merchants continue to increase market share, stiffening the rivalry among
co-branded cards and programs and fueling adversarial relationships between
merchants and financial institutions.
·
Given this complex and thorny environment and the prospect of
reaching millions of new customers in emerging regions, payments firms must be
responsive to customer preferences, prepared to develop valuable new features,
and sufficiently nimble to anticipate and counteract competitive activity in
order to thrive. To facilitate this, we have identified four key trends that we
believe bear watching for their potential to reshape the payments industry in
the next three to five years.
·
Branding battles
·
Increasingly, prominent e-commerce sites such as iTunes, Amazon,
and the ride-sharing service Uber store consumer credit card information, which
speeds up purchases because the data does not have to be reentered upon each
visit. The problem is, customers rarely remember what card is stored at a given
site, diluting the free marketing and brand reinforcement that payments
companies typically enjoy when a consumer takes a credit card out of his or her
physical wallet.
·
However, for credit card providers that are able to have their
products listed as primary cards at the most popular e-commerce destinations,
“stored credentials” can be a significant competitive edge. Consequently,
issuers would be wise to create aggressive incentives for merchants to
highlight their cards through cross promotion deals and increase their chances
of becoming consumers’ primary card choice. Numerous examples can be found of
financial-services firms partnering with hotels, airlines, retailers, and
others to offer rewards for using their credit cards. But credit card providers
should also consider the substantial opportunities available now to be the
leading payment option for e-commerce and other digital startups, which are
targeting a younger and more potentially lucrative, active, and long-term
consumer demographic.
·
Innovation in underwriting
·
Traditional credit scoring is an imperfect measure of borrower
risk, one that keeps many consumers out of the marketplace. A medical student,
for example, who graduates with US$180,000 of student loan debt, a thin credit
file, and a high debt-to-income ratio might not qualify for a loan based on
traditional metrics, but could actually be a worthwhile risk for a creditor.
·
For that reason, companies like LendUp, Kreditech, and Zestcash
are working on models to assess creditworthiness using new criteria, including
rental records, cell phone payments, and behavior on social media sites such as
Facebook. Financing activities also appear in the crowdfunding arena, which
involve extending credit — usually at relatively high rates — to consumers
seeking to raise money outside traditional financial institutions. These
crowdfunding sites, which are effectively self-policing because a nonpayer
faces exile, have proven remarkably good at attracting reliable borrowers.
·
Rewards 2.0
·
In the technology sphere, we see opportunities for companies in
the payments industry to mine customer data and create analytics that can
support increasingly sophisticated merchant-funded rewards programs. These
programs are becoming more and more pervasive, offered by an ever-broader
assortment of national and local retailers, and their success in an era of “big
data” is determined by how well they are integrated with the consumer’s path to
purchase. The customer’s location — physical store, mobile computer or desktop,
smartphone or tablet — as well as recent purchase history, browsing habits,
checkout completion rate, response to marketing impressions, and type of credit
card used are among the many data points that payments providers can help
retailers evaluate to make rewards programs more relevant to individual
consumers. This, in turn, should increase sales per active customer and improve
retailer marketing ROI.
·
Mobile wallets
·
Consumer adoption of mobile wallets depends on a compelling
commerce experience. Mobile wallets need to speed the checkout process and make
a consumer’s life easier, or they must offer some reward. And despite the
existence of numerous mobile wallets provided by merchants, banks, and telecom
providers — and most recently Apple — no single entity has gained significant
traction in the marketplace. To break the competitive logjam and allow
different players to build mobile payment applications more easily, we foresee
more collaboration on open technology platforms.
·
As the payments sector deals with these potentially disruptive
changes, the issue of protecting individual data will only grow in importance.
Incidents like those at Target and Home Depot cast a poor light on the entire
industry and could make consumers less willing to share their credit and debit
information, thus hindering the industry’s ability to innovate. For this
reason, the industry must work together to earn the confidence of the consumer.
But those companies that innovate best around branding, rewards, underwriting, and
mobile usage are bound to realize the greatest profit and market share gains.
http://www.strategyand.pwc.com/perspectives/2015-payments-trends
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