December 3, 2012
I was invited to keynote a closed-door convening in Washington, D.C. last week that was assembled to discuss emerging payments and the role of government in facilitating the development of these new payments opportunities in the U.S. Senior officials from a variety of government agencies, as well as several emerging payments and incumbent companies with emerging payments initiatives, attended. This was a confidential, closed-door session, so I’m not able to provide any specifics at this point, but wanted to share a few insights that helped to generate a lot of the discussion around the table.
The first and perhaps most important insight is that there is an inverse relationship between activity related to innovation in payments and traction associated with innovation. It’s not hard to understand why the government’s perception is that everyone is going to be banking over the Internet and paying via mobile at the physical point of sale in the next year or two, given the intensity and volume of media hype. The reality, as I remarked at the start of the convening, is that any estimate of adoption (adoption meaning a critical mass of merchants and consumers) will be much longer than anyone thinks – so I suggested just multiplying what anyone says by 5 or 10! The availability and diffusion of smartphones across all income groups is surely accelerating the opportunity for innovators to play around with new ideas, but the chicken and egg nature of the business means that an entire massive ecosystem needs to coalesce around it before things change in a material way. Several proof points that I used to support that included the fact that it has taken 17 years for the web to account for five percent of retail commerce, about 25 years after the intro of the debit card in the US for it to take off. Prepaid has been around for about 12 years and is still a minute share of payments. Every prediction of NFC penetration has proved too optimistic – and even the NFC evangelists are backing off if it as a viable alternative, and my favorite of all, people have been predicting the death of cash since the early 1950s.
Another insight was related to how new payments methods fit into the mix. I posited, somewhat tongue-in-cheek, that nothing really ever goes away in payments — it just gets layered on top of what already exists. Well, thank goodness we got rid of seashells and oxen as currency, but cash has been around for 3,000 years – and is the largest payments network on the planet. Checks, try as we might to kill them, are still in the mix, too, although declining in use. And mobile and other schemes that leverage the mobile phone at the physical point of sale will be layered on top of the existing plastic card and online options that we have available today. The consumer decides how and when she will use what to pay – purely as a matter of convenience and habit. And as we have seen with Starbucks and LevelUp, mobile schemes don’t even have to be ubiquitous to be adopted, just useful and simple for both merchants and consumers to use.
I also touched on cash in my remarks, and the notion that as much as people may want it to disappear, and that the government shouldn’t be one of those parties. Cash has been around for thousands of years because it is useful and valued by consumers and merchants and will continue to grow. And, an economy that puts all of its payments eggs in a digital basket might expose it to great risk if there is a terrorism/cybercrime systems failure (e.g. the RBS UK 2-day systems melt down that has cost them nearly $500 million in “make goods” to those affected) or a natural disaster (Hurricane Katrina and no electricity and access to ATMs and merchants that could not accept cards because terminals did not work). Plus, cash remains a valuable payment method to the unbanked and underserved who like and value physical currency over digital forms, at least today.
Another insight that was shared is that changing consumer payments behavior takes time. I was talking to my 78-year-old mother about mobile payments and the notion of using her phone to pay at the store and she reacted as though I was talking about sending her to the moon. My mom doesn’t even like to swipe her own card at checkout because, she says, she “never does it right” and the cashier always has to help her which she doesn’t like. The notion that she would be asked by a merchant to take her phone and tap it — or even punch in a pin code — well, let’s just say, she probably wouldn’t go to that store anymore. Of course, my mom isn’t the target audience for mobile payment initiatives, but other payments schemes that ask her to change even the smallest thing that could be useful, like taking her social security payments on a prepaid card, creates confusion and disruption that she simply rejects. She likes getting her check, depositing some and cashing the rest and then doing what she ordinarily does with her money. A prepaid card means she has to change completely her behavior — and while it makes the government more efficient, it makes my mom less so. That simple thing, which seems perfectly logical, creates a problem rather than solving one for her. At 78, she just says thanks, but no thanks.
But, my mom is no different from the rest of us as we are exposed to new things in payments – among the most personal and sensitive of all interactions. Consumers will change when the alternative presented solves a problem – and is trusted as reliable and secure. [I’ll tell you, PayPal’s digital wallet saved my sanity on a lot of the online sites that I shopped for Christmas presents this season.] That’s part of why the unbanked and underserved still prefer cash and have a hard time sticking with prepaid. It’s also why merchants tolerate the layering that I spoke of earlier. No merchant will want to risk losing my mom, or you, or me as a customer over something as basic as how we would prefer to pay them for the stuff they want us to buy. Merchants can create incentives to try to get us all over the hump to the thing that they like the most, and show us how much better things would be for us if we switched, but most of them won’t draw a hard line in the sand over one method over another.
I guess one other insight that was touched on a little but is really important is the complex business model that underpins payments and commerce. These platforms – like all platforms – have a money side and a subsidy side. The money side – as the label suggests – is where the platform derives the lion’s share of revenue – and is the side that is willing to pay disproportionally because doing so gets them efficient access to the other side that they really value and would have a hard time reaching otherwise. It’s tempting — whether you are a regulator or a competitor — to scrutinize and/or attack the money side. When that happens, though, either through regulation or competition, the subsidy side usually ends up getting the raw end of the deal. Take publishing – another platform business. Digital competition has diluted the price that advertisers are willing to pay for print advertising. Fewer advertising dollars means less revenue. Less revenue means higher prices to consumers who used to get content for free on the Internet from places like the New York Times or the Wall Street Journal and who now pay more for the print edition. Take payments: Regulation has reduced fees that payment platforms get from merchants on debit transactions, which has raised prices on consumer checking account products and eliminated rewards. The message here is that tinkering with business models in payments (or any other platform) can often deliver unintended consequences unless you really understand these nuanced business models.
The convening was an initial conversation about the role of government in a payments environment that is undeniably changing, regardless of whether that change is being driven by an emerging or established player. What I hoped to share with the group was that things might not be moving as fast as they may seem, so maybe there isn’t so much of a sense of urgency to do anything just yet. The analogy that I shared was that trying to regulate the payments and commerce ecosystem now was sort of like trying to regulate the airline industry the day after the Wright Brothers flew their first airplane: things are too new, the future too uncertain to imagine, and therefore difficult to know how things will evolve. But unlike the Wright Brothers, emerging payments is taking flight in an environment where there are established rules of the road to help us keep from crashing and burning: the ecosystems that are driving most of the innovation – payments and mobile – are already highly regulated industries.
I was very impressed by the spirit of the convening and the sincere interest on the part of the agencies around the table in first wanting to understand the changing nature of payments, and second, wanting to know how they can be helpful. Only by getting issues on the table in an open and spirited way can we sort through which complex/cross-ecosystem issues the private sector needs to come together to resolve and which need the government’s help. And, that help doesn’t necessarily need to be in the form of regulation – it can come in the form of access to data or clarity around provisions. I thought it was a great and productive start to what I hope will be a series of spirited and productive sessions to come. Thanks to the organizers for being innovative in taking an important step in working with those who are innovating payments and commerce.