The Cashless World

The World Economic Forum, a Swiss nonprofit foundation most known for their annual Davos world leader summit, recently released their report, “The Future of Financial Services.” The report focuses on the impact that disruption is currently having on the financial services industry. Most interesting, however, the report speculates on potential future scenarios that these disruptions might bring about.

The report covers a broad swath of the financial services category, including insurance, deposits and lending, capital raising, investment management, and the topic of this post, payments.

The report asks the question, “How will customer needs and behaviors change in an increasingly cashless payments landscape?” If you are involved in any aspect of the payments ecosystem, this is a question that should be on your mind.

Both the benefits of cashless/electronic transactions (convenience, efficiency, traceability, and protection) and challenges (merchant adoption, accessibility for the underbanked, small denomination convenience, and fraud) are discussed.

The report distills innovation in payment down to four categories:

1. Mobile payments (Apple Pay, Square, Paypal)
2. Integrated billing (Uber, iBeacon)
3. Streamlined payments (location-based payments, machine-to-machine payments)
4. Next generation security (biometrics, tokenization standards)

The impact that these innovations are having on the existing payments systems is examined. Three models emerge and they make the point that these models work within the existing ecosystem rather than seek to circumvent it.

1. Open-loop mobile payment solutions which enhance the customer experience at the POS (Apple Pay, Visa Checkout)
2. Closed-loop mobile payment solutions that consolidate the POS, acquirer and payment network functions (Paypal, CurrentC)
3. Mobile merchant payment solutions/ integrated payment apps/ streamlined payment solutions that look to enhance/ replace the current POS infrastructure (Square, Uber)

They do a nice job of setting up the context for the best part of the report, which is the discussion of three potential future scenarios:

Scenario 1: Consolidation of the Payment Market

• The key to this outcome is the rise in importance of the “Default Card”
• As customers lose visibility of their payment choice by identifying default cards in mobile wallets and integrated apps, spending gets concentrated on a single card
• Issuers respond by enhancing loyalty and other benefits in order to gain default card status. Large issuers, who are more able to increase their value offered, squeeze out smaller and niche players resulting in a reduction in the number of issuers.

Scenario 2: Fragmentation of the Payment Market

• The opposite outcome of Scenario 1
• Customers are no longer limited by the need to carry physical plastic as their cards are virtual within their mobile wallets
• Niche and specialty purpose products appear and offer the ability to optimize the customer’s economics (financing, rewards, discounts) at the individual transaction level
• Decision support systems are developed for mobile wallets that allow the customer to utilize the most advantageous payment method for every transaction

Scenario 3: Displacement of Credit Cards

• This scenario imagines the replacement of credit cards with a combination of payment solutions that link directly to bank accounts and POS vendor financing/merchant loyalty
• This displacement stresses issuer credit card P&Ls and impairs issuer ability to maintain competitive value propositions eventually marginalizing the card business.

The report makes an interesting case for all three scenarios as possible futures in payments. Of the three possibilities, Scenario 3 seems the least likely. The main reason for this is that it seems to offer the least benefit to customers. Both elements of this scenario exist today in the form of debit cards and various merchant financing options. The benefits to the customer seem slight and are heavily predicated on the assumption that merchants will pass on the savings they realize from cutting out the incumbent players onto their customers.

Scenarios 1 and 2 seem more likely outcomes, primarily based on the fact that they offer more meaningful customer gains. In Scenario 1, customers will realize the benefits of enhancements as issuers battle for the coveted Default Card position within mobile wallets. In Scenario 2, the customer benefits from a seamless optimization of payment choice at the individual transaction level. 

Of these two outcomes, Scenario 1 seems the more likely to occur. Many of the requirements to make it happen are already in motion. Scenario 2 is heavily reliant on yet-to-be-developed mobile optimization applications, without which little customer benefit will be realized. To the extent Scenario 1 begins to take hold and consolidation occurs, it will be difficult to undo and reverse, as Scenario 2 would imply.

Regardless of exactly how things shake out, change is happening and the question for you is, how is your organization going to deal with it?