Adapting to change in the payments industry
By Alessio Ballesio (European Market Development, MasterCard) and Valerie Nowak (General Manager Belgium and Luxembourg, MasterCard)
There is no doubt regulation and technology are fundamentally changing the financial services industry. This is also true for payments. The EU Regulation1 of interchange fees entered into force on June 8 in all EU countries. The revision of the Payment Service Directive is expected to be ratified after the summer: Member States will then have two years (around Q3/Q4 2017) to transpose it into their national laws. At the same time, with a smartphones penetration rate of over 83% in Western Europe2, technology promises to change the way payments work as it has already changed the way we communicate and interact with each other.
What does this mean?
Electronic payments are expected to continue displacing cash (which in Europe still accounts for ~78% of the number of transactions3). Technology and regulation will not change this trend: likely they will accelerate it. Nonetheless they both impose on financial services players the need to reconsider their model in the same way that a sailing boat needs to reassess the tactic and trim the sails accordingly when the weather conditions change. In order to understand how the industry stakeholders should adapt, let’s first look at what is changing: there are three key implications.
First of all, the current economics of payment service providers are being challenged. This is true in particular for those who issue payment cards. The Regulation will cap the interchange fees4 – starting from 9 December 2015 - at levels of 0.2% of the transaction value for consumer debit/prepaid card transactions and at 0.3% for consumer credit card transactions. For credit card issuers, for example, this will mean a potential reduction of the card payment revenues ranging from 50 to 70%.
Second, competition is increasing. PayPal, which already captures over 14% of all the e-commerce transactions in Europe, is looking to exploit the mobile revolution to expand its reach and acceptance beyond the on-line space. Other multinational companies like Apple, Samsung and Google are launching payment related initiatives. Many start-ups have appeared and more are expected to come with the adoption of the revised Payment Services Directive. This Directive introduces a new type of players referred as “Third Party Payment Providers” (‘TPPs’) and requires banks to provide to TPPs with access to the bank account of the consumer in order to initiate a payment, provided that the consumer has given its consent.
Third, the boundaries of payments are being changed. Consumers not only have many devices (smartphones, tablets, PCs, watches, etc…) that are connected to each other but they also use them for practically everything, including for making purchases and managing money. Therefore payments can no longer be considered as a stand-alone event: rather, it will increasingly become an integral and seamless part of the wider experience, from searching what to buy up to getting rewards or deciding on how to finance the purchase.
So what should financial service players do?
We have identified two main set of actions which payment service providers, both on the issuing or acquiring side, should do:
1. Find ways to enhance the customer experience, recognizing that not all customers are alike
2. Look for opportunities to engage with customers beyond existing boundaries
Enhancing the customer experience
The customer base is a key asset that financial institutions have, compared to other players entering the payment space, in particular the emerging ones. So it is important that they continue to focus on what customers want and then act accordingly. The challenge is that those needs are changing more quickly than in the past: technology is not only helping address existing needs but it is also creating new ones.
Broadly speaking, consumers expect from payments ease of use, safety and security, the possibility to do the payments anytime / anywhere and with any devices in an unified way. As many initiatives are emerging and promising to make payments easier and faster, banks must fulfil the ‘ease of use’ criteria expected from their customers (without sacrificing security) if they want to remain relevant in the payment area. Two key examples where existing and proven solutions can help, though the take up in many countries is still rather limited, are the following: contactless when paying in the physical world, and digital wallets for on-line transactions today and for potentially all transactions tomorrow (especially leveraging smartphones). Both solutions indeed enhance convenience (for example avoiding the need to systematically re-enter the card details or the shopping address) and are therefore increasingly popular with consumers and merchants: for example, in Poland and in Czech Republic, among the first ones to adopt contactless technology in Europe, respectively 39% and 58% of all MasterCard in-store transactions are contactless.
It is also important to highlight that different needs play different roles depending on the customer segment. Therefore it is important that financial services players re-assess their customers’ segmentation and adapt the value proposition and product offering accordingly. This may also help mitigate the challenges on the economic side: recent research conducted across different countries shows that consumers are willing to pay extra for those features which better meet their needs. For example, the study has shown that Dutch consumers, beyond expecting wide acceptance, highly value features that provide additional security, such as ID theft resolution, zero liability, purchase protection and exception handling in store & online. And they are willing to pay more for this.
Engaging beyond existing boundaries
In addition, payment service providers should continue to explore ways to engage with their customers beyond the usual boundaries: this opens the door to opportunities which are new or not fully exploited yet.
One clear area is the use of data. This is an important asset still under-utilised across the industry. Clearly, data analytics can help issuers identify those customers that are more likely to value and respond to specific offers from their bank. But payment data can also be the basis to further engage with consumers on a larger scale and make issuers attractive partners for merchants. The ability to leverage payment data, together with the other customer data held by financial institutions, allows running more targeted offers/ marketing campaigns (i.e. card-linked offers). This possibility is very interesting for merchants as it represents a more effective way to attract new customers or retain existing ones.
Another opportunity, closer to the expertise of financial institutions, is related to instalments. A recent survey across multiple countries in Europe demonstrates the wide appeal that instalments have among consumers. Card based instalments are a payment solution which best meets all of the consumers’ payment needs in terms of flexibility, convenience and control when compared to payment card transactions, personal loans or other forms of credit (e.g., overdraft).
So far, few issuers have addressed this opportunity, leaving the space to offer financing at the point of sale or after the transactions to specialized consumer finance players or the merchants themselves. Luckily, there is now the chance for them to enter this space. Technology can make things easier for issuers to play a role and to improve the consumers experience by eliminating paperwork – consumers often perceive often perceive the existing processes as too burdensome - and everything that this entails (e.g., consumers ‘walk of shame’ to the financing booth in the shop). It is indeed possible to activate the instalment capability either directly at the POS or after the transaction is done by leveraging the card infrastructure not only to recognize and score the consumer but also to post the different instalments to the consumer account.
The need to evaluate how to engage beyond existing boundaries with customers is also true for the acquiring side. There are many small or medium-sized merchants, including professionals like doctors, lawyers or plumbers, who, even when they use cards for their professional purchases, do not accept card payments. Today only about 25-40% of those merchants accept cards. Nonetheless, they all have a bank account.
Banks should therefore not miss the opportunity to invest in the on-boarding of small merchants and develop solutions to address their needs. Together with the grey economy, which governments in the EU have started to tackle more and more, the lack of relevant solutions and the high cost of acceptance are key factors for merchants not to accept electronic payments. The interchange reduction and the adoption of MPOS terminals5 are helping to remove such hurdles, thereby further increasing the benefit of accepting card payments while reducing costs. The cost of an MPOS terminal is limited while its perceived value is high.
In addition, MPOS allows increasing the return of investment on the terminals by:
- expanding the breadth of value added services which merchants can provide to their customers and thereby creating new revenue opportunities;
- providing solutions which help small merchants manage their own business and cash flow.
Banks are the best positioned to address this opportunity: having an existing relationship with those customers makes it easier for them to satisfy the “know your customer” requirements and therefore to reduce the cost and burden of on-boarding small merchants.
Example: How can other financial services players use card payments to solve business problems
MPOS opens opportunities not just for banks to better serve SME-customers but also for other financial services players to optimize their management of payments. A relevant example is what a leading European insurance group has done together with MasterCard and other key partners in Hungary. All sales agents have been equipped with a MPOS with a fully customized application both on front and back end to ensure a complete integration with the company systems. By using the application, not only can customers pay directly the insurance premium to the sales agent with their credit or debit cards, but the cardholder also receives an email confirmation of the payment.
This solution has enabled the insurance group to achieve important benefits including:
- Increase efficiency of sales agents
- Reduce significantly new business cancellation
- Avoid generic cash acceptance issue, with all the problems related to anti- money laundering requirements
- Reduce operating and administrative costs
- Improve cash flow management
Regulation and technology are changing the payment industry. This change represents a challenge, but it also provides many opportunities to those who will be willing to proactively take action. It is therefore critical to remain focused on ensuring the best possible customer experience. Increasing agility and flexibility to adapt to the “weather” conditions will also be very important factors considering the intensifying competition and the faster pace of change.
1 Regulation (EU) 2015/751
2 Source: ComScore’s MobilLens 2014
3 Source: Euromonitor 2014
4 Interchange fees are fees which the issuing payment service provider receives from the merchant payment service provider as contribution to the costs the issuer sustains to enable and guarantee the payment. As such it is a crucial mechanism to ensure electronic payments systems work in the most efficient and fair manner
5 Mobile Point of Sale (MPOS) is a merchant acceptance device that enables accepting card payments using a mobile phone or tablet.