The U.S. is a global leader when it comes to per capita non-cash transactions, with 421/year per inhabitant. But historically, the way this market has dealt with non-cash transactions has been distinctly non-digital; up until the last decade, Americans still flagged check as their favorite non-cash alternative. Consumers and businesses alike seem unable to wean themselves off paper, despite the cost to both parties; issuing a check costs $3 on average (compared to 30 cents for an electronic transaction) and consumers can pay up to $20 for replacement checks.
The long-tail of legacy infrastructure
Why do checks continue in U.S. circulation, when many European banks stopped issuing them years ago? The answer lies in the particular challenges of the American market. The central bank lacks the regulatory power to phase out checks, and the highly fragmented nature of the system compounds the issue; over 10,000 depository institutions. So, if the drive to digitalization can’t come from the Fed, it must come from the market.
The appetite for improved digital payments in the U.S. is clear when we look at channels with low barriers to entry, such as Venmo. The fact that consumers will pay for an improved digital experience is evidenced by the launch of its new premium service, with 25c immediate payouts to debit cards. The free option is still available for those willing to wait three days.
The explosion in digital payment volumes won’t come from P2P alone. Improved digital experiences for retail are poised to play a huge part. A survey of American users found that the average person with an Amazon Echo spent roughly $1,700 a year on Amazon (as of Sept. 30, 2017)
compared to $1,000 for all U.S. Amazon customers. The convenience of ‘invisible’ payments, initiated by voice, contactless devices or biometrics is driving up consumer spending via digital transactions, and the industry knows it; according to the Digital Banking Report, 71% of financial institutions surveyed considered “transferring money between accounts or making payments” as an “extremely” or “very important” part of their future voice capabilities.
Why isn’t the total value of low-friction digital payments increasing in line with the volume?
Legacy retail payments infrastructure is throttling the market. The burden of increased digital payment volumes weighs most heavily on merchant acquirers, as legacy systems struggle to scale to the new volumes coming from increasingly digitized merchants. These existing systems are the bedrock of the American economy, and have remained untouched for 20 years for good reason; because they work!
In payments, downtime, outages, lost and failed transactions are all unacceptable, so any upgrades need to maintain the excellent Non-Functional Requirements (NFRs) of the foundational solutions. The temptation is to take an ‘if it ain’t broke…’ approach, but the risk for these payments players really lies in doing nothing. If acquirers cannot scale to meet merchants’ digital transaction volumes, then merchants will find a provider who can.
In light of this, it comes as no surprise that 31% of banks in the Americas are increasing their concentrated investment in modernizing payments technology, to meet these new demands. This represents an 18% rise from 2016. Those wishing to invest wisely are steering clear of homegrown solutions, given that the primary drivers for retail banks’ investment include increased operational efficiency, reduced risk, and rapid expansion of services to meet customer demands. For retail banks and other merchant acquirers, payments solutions are critical to their core business. They cannot dedicate the necessary resources (financial, technology, or human) to building, maintaining and innovating in payments software at the accelerated pace the market demands.
The path to New Payments Ecosystem success lies in acknowledging the importance of innovating and implementing solutions that enable this without breaking the foundations of your business. Solutions must meet the scalability, availability and reliability that customers demand (consumers and merchants alike).