Payment Optimisation - Cash, Cards or Digital Wallets

Payment Optimisation - Cash, Cards or Digital Wallets

Mark Beresford
September 6, 2018

The number of alternative methods of payment available to consumers is growing.  As we have seen with media, digital media has not replaced print media.  Just as social media will never replace real-world interaction.  Different methods of payment are not replacing incumbent methods of payment and are instead complementing the payment mix.  As big retailers evolve to be omnichannel, payment optimisation is a huge strategic challenge.  This article explores the parallels between the evolution of media and the growth of alternative payment methods.

Payment Optimisation - Cash, Cards or Digital Wallets

It's not surprising that in the 1930’s, when radio was rapidly being adopted, it was predicted that it would kill off the newspaper completely.  Go back further to 1913 and you will find that Wolfgang Riepl, the chief editor of Nuremberg's biggest newspaper at the time, stated that newer modes of communications media would never replace the existing modes of media.  Known as Riepl's law, it reappeared in May 2006 when the CEO of the leading German newspaper Die Welt stated "I believe in Riepl's law...Books have not replaced storytelling. Newspapers have not replaced books; radio has not replaced newspapers; and television has not replaced radio. It follows that the Internet will not replace television or newspapers".  This hypothesis is still considered to be relevant, explaining the fact that new media never make the "old" media disappear.

While newspapers have been around for hundreds of years, following the invention of the Gutenberg printing press, radio was the first mass media form of communication that offered near real-time delivery and saw widespread use in most homes.  As we have seen, radio didn't kill off the newspaper, just as television didn't kill off radio.  Another print media, the high-quality glossy magazine, is feeling the pressure to digitalise and move its resources, advertising and their readers to the internet and ‘publish’ entirely online.  While overall print media is on the decline, certain parts of print media are still strong, for example, The Economist is growing its circulation, and a complete replacement by digital media is not yet expected.  But will digital media really replace printed media?  I doubt it.  Radio has adapted for the podcast age and on-demand-services via the internet has meant radio is finding new audiences.  Similarly, television is changing with the continued rise of YouTube, Amazon Prime and Netflix and other on-demand-services. TV broadcast programming will be expected to change drastically in the next decade.

What Does All This Mean for Payments?

In many ways what we have seen with print media, radio, TV and digital media is equally reflected in how different methods of payment are not replacing older methods of payment.  They are adding to the payment mix.  The number of alternative methods of payments that consumers can use to make a payment is continuing to grow.

Plastic payment cards never replaced cash.  Digital wallets have not replaced cards and are unlikely to do so in the foreseeable future.  Comparably, social media will not be the death of real-world interaction.  Cash will be around for a long time and so will cards.  The digitalisation of payments is not expected to be the end of cash.  Real-time instant payments (faster payments) is not expected to replace the card networks. We have some considerable time before cryptocurrencies become a commonly accepted form of currency, however, virtual credit cards, payment apps and e-wallets are making it easier for consumers to transact in a more instantaneous and streamlined manner.  There are more ways to pay today than ever before.

With consumers faced with more choice in the way they pay, merchants must be able to respond to changing consumer payment preferences.  Recent academic research has shown that as the size of choice grows, consumers can become overwhelmed and often choose not to choose. This is sometimes known as the ‘paradox of choice’.  Consumers will want the choice that provides the best results with the minimal disruption or, what payment geeks like to refer to as ‘frictionless payment’.  For an online retailer, any payment friction can lead to abandonment of shopping carts.  An optimised conversion rate is a key performance indicator and a source of competitive advantage for many online retailers.  I suspect that more than once you didn’t complete an online check-out because your wallet, with your credit card in it, was beyond your arm’s reach.  An easy and fast payment is always the preferred customer choice.

Appropriate, Not Alternative Methods of Payment

In stores, consumers will want to pay with cash almost as much as they want to use their credit or debit card. However, in Sweden, for example, the consumer’s preference would not be cash.  A shop does not want to turn someone away just because they don’t accept a particular method of payment.  Online or offline.  You can still pay with cash in a Swedish shop, but they are highly unlikely to have the right change.  I have seen disgruntled consumers in check-out queues because the card reader wasn’t working, or it didn’t accept contactless payments.  Similarly, online consumers will abandon the checkout because they don’t accept a particular e-wallet, such as PayPal, or it does not support Amazon Pay.

For a new European business, it is easier than ever before to receive your own sort code/account number and IBAN, so customers can pay you and you can pay staff or suppliers across Europe via a Payment Initiation Service Provider (PISP).  Under the second Payment Services Directive (PSD2) consumer payments are expected to adopt real-time bank transfers across multiple sales channels and shopping platforms.  Will this be the start of the end of payment cards?  Again, I doubt it.  It is just another alternative method of payment.  Alternative to the previous incumbent payment method.  No payment method is expected to be replaced by another.  Which means there will be even more consumer choice.  There are probably 300 to 400 different payment brands around the world which can then be further categorised into groups of payment methods such as, cash, debit cards, credit cards, prepaid cards, stored value accounts, bank transfers, direct debit, real-time direct debit, pull-payments (‘request-to-pay’), push-payments, e-wallets, mobile payments, cash on delivery, e-invoices, or Online Banking electronic Payments (OBeP), etc.  This is probably not an exhaustive list of all groups of payment methods.

As we have seen with print media and digital media, the two will survive side by side in harmony. Different payment methods can be very similar and different categories can live side by side in harmony.  Certain payment brands may fail to survive and die out; however, the different categories will co-exist and ‘alternative method of payment’ becomes the ‘appropriate method of payment’.  Appropriate for the consumer.  Appropriate for the payment scenario.  Appropriate for the specific use case and the appropriate method of payment for the particular shopping circumstance.  The consumer will choose.

As a consumer of different payment methods, I may use my debit contactless card in a coffee shop but prefer to use my credit card to purchase an airline ticket.  I will use my Revolut Prepaid Card for foreign transactions while on vacation.  Whereas, I will use my British Airways Amex card for a large purchase, such as filling up the car.  I will use Apple Pay for grabbing a few items for dinner at my local supermarket on the way home.  I will, along with many other consumers, make the decision on the best way to pay.  The path of purchasing resistance must be clear and easy to use.  Frictionless payment is the goal.  The ease of use is the merchant’s objective.

Open Banking

In the open banking environment, Application Programming Interfaces (APIs) will allow for the simple and standardised exchange of data between two software applications.  A key element of the PSD2 is ‘access to accounts’ – this is effectively the ‘APIzation’ of bank accounts that were, until now, concealed behind a security firewall and buried within a core-banking application, invisible to anyone outside the bank.  In the next couple of years, with a few technical challenges to overcome, such as the inconsistent interpretation and implementation of Strong Customer Authentication (SCA), open banking will be prevalent. With technology such as the Internet of Things (IoT) coupled with open API banking, it will allow each device, such as a washing machine, or a wristwatch to become a host within the wider internet ecosystem.  

Amazon Echo or Google Home or an Amazon Dash button are all examples of IoT.  These devices could equally be making a purchase on behalf of their owners.  A commonly used example is the fridge that automatically re-orders items as they run low.  LG, for example, has integrated Alexa into their fridge.  It is these IoT devices where irrevocable real-time bank transfers will be the preferred and most optimised payment method.  You just can’t enter your 3D Secure password for your credit card into your fridge.  Amazon Pay, for example, will be the PISP that initiates the payment from your bank account to the retailer’s bank account, in real-time.  This will be yet another area where the appropriate method of payment will survive.  Faster and cheaper for the merchant and more convenient for the consumer.

Hard Work Not Complex Work

Optimising payment acceptance for omnichannel retailers is a huge strategic challenge.  Payments are not complex, but the choice of payment methods is growing and the ability to integrate and accept them is becoming hard work.  Hard work is not the same as payment complexity, but many retailers are finding complexity in optimising payment acceptance.  

Edgar, Dunn & Company (EDC) has many years of experience of establishing a payments strategy, evaluating and selecting the right payment partners to achieve payment optimisation for leading businesses around the world.

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