The Hidden Cost of Digital Payments for Retail Payment Players
It is not exactly breaking news that non-cash payments are on the rise globally, with column inches dedicated to the launch of digital financial-inclusion projects. But going cashless is not only a challenge for humanitarian endeavors, or developing countries. We all agree that removing cash from the system will save payments players big bucks in the future, but we must also consider the immediate impact of digital transformation on the legacy infrastructure of the powerhouses of the payments ecosystem.
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).
Discover your path to the New Payments Ecosystem with our guide to digital transformation.
Related Blog Posts
The Race to Real-Time Payments in Europe
Instant payments have quickly morphed into the new norm, and as individual European nations forge a real-time, digital-first payments environment, they raise the bar for all financial institutions conducting business in the Eurozone. It’s no longer a question of “what’s the business case?” but a matter of how instant payments players can take advantage of the opportunities now being created.
Keeping Up With Fraudsters: A Month Isn’t Enough
As the Government of Canada campaigns for improved fraud prevention and awareness this month, I’d like to do my part as a fellow Canadian, and shed some light on why payments need to stay a step (or more) ahead of fraudsters, today more than ever.
Local Perspectives: Real-Time Realities Across Asia-Pacific in 2019
Money20/20 Asia returns to Singapore this week, attracting payments professionals from around the vast APAC region – and beyond. The real-time and open imperative is one of the reasons why all eyes are on Asia-Pacific when it comes to payments, so I caught up with ACI payments experts representing three of the key countries within the region, to take the pulse of real-time schemes that are in varying stages of maturity.
What it Takes to be an ‘Influential Woman in Payments’ [Q&A]
Coming off the back of International Women’s Day this past weekend, PaymentsSource has recognized the Most Influential Women in Payments, spanning multiple industries including financial services, retail, investment and technology. Among the honorees is ACI’s very own Carolyn Homberger, group president, global sales. Part of the executive leadership team at ACI, Carolyn leads a team of payments professionals operating across all global regions, and plays a critical role in setting business strategy. As an advocate for the leadership and growth of women in the payments industry, Carolyn is also responsible for launching ACI’s own Women’s Initiative.
Instant and Open Payments for Consumer Purchases – Lessons Learned From India and Beyond
Did you know that 65% of merchants want to accept instant payments? That’s because they know the customer experience (CX) benefits will drive growth for their business, and they recognize that this payment type will save their business money.
What it Means for a Bank to be Real-Time Ready – It’s More Than Just Payments
Banks are quickly learning that real-time enablement of the business is more than just a technological upgrade – there is a wider challenge of transforming services and customer experience. Although the banking world faces this challenge with some trepidation, there are success stories from other industries that have overcome legacy technologies and transformed frustrating and opaque customer experiences.
What We Talk About When We Talk About Digital Transformation
The recent headline grabbing announcement that Banco Santander has signed a USD $700M contract with IBM got me thinking… what’s up with ‘Digital Transformation’ these days? Santander’s announcement was all about digital transformation… and they are a forward-thinking bank. The new global technology agreement is designed to increase efficiencies in the bank’s operations, enable it to be more innovative and deliver new products, faster. But not every bank can pony up $700M and not every bank has suitable technology in place. It got me thinking, what is actually needed for digital transformation?
Putting Malaysia on the Path to Payments Innovation
The public launch of the DuitNow instant credit transfer service, in December 2018, provides just a taste of what lies ahead as Malaysia’s Real-time Retail Payments Platform (RPP) is progressively rolled out. Fueled by Bank Negara’s (BNM) increasing support for e-payment platform development, there has been a steady increase in mobile wallet and digital payment usage, setting the stage for 2019 to be a year of transformation for the payments industry in Malaysia.
The Potential of 'Request to Pay' to Revolutionize Payments
How often have you been in a situation where you realize in the middle of the month that you’re late paying an important bill? And then hit with a wave of dread as you check your bank account with trepidation to see if you can pay? Many of us are lucky to not be in that situation regularly, but most of us have been there at some point, and likely know others who are regularly confronted by this situation.
What Can the Re-Regulation of Other Industries Tell Us About Open Banking One Year On?
UK Open Banking just reached its first birthday milestone (on January 13 to be precise) and given my own commentary – including in the ACI blog – on this topic, the first anniversary of Open Banking in the UK certainly won’t pass without a debrief on the progress that’s been made and what challenges lie ahead.