Traditional methods of payment have reached or are rapidly approaching the end of their useful lives. Users of payment systems are increasingly tech-savvy and ready to embrace new payments technologies. But with that savviness comes an increased expectation of simplicity, security, speed, convenience and lower cost.
A new generation of payment technologies is sweeping through the industry, which have the potential to replace (not just disrupt) the current payments ecosystem.
For the past decade, consumer needs have continued to outpace what the industry could provide. In the past, payment service providers largely dictated the functionality of the systems they offered to their customers, but that power is rapidly being eroded by newer, more attractive payment technologies.
The industry must face a harsh reality: the era of the plastic card is nearing its end. Invented in the 1950s, plastic cards were never designed to work in the highly digital environments of internet and mobile payments. The addition of digital features to plastic cards—like the EMV chip and two-factor authentication—won’t save plastic cards from their inevitable demise.
By continuing to patch up the existing payment systems, the industry has allowed a gap to open up between consumer expectation and service delivery. This gap is most pronounced in online card-not-present (CNP) transactions, where fraud is rife. The industry’s response to CNP fraud has been fragmented and clunky. In particular, it hasn’t reduced the cost of fraud to issuers, nor has it addressed the needs of consumers.
Wherever there’s a gap between expectation and delivery, you can be certain someone will dive in and fill it. So, while the industry pursued a strategy of propping up an ageing payments technology, the innovators were busily developing the next generation. These next-generation payments technologies are faster, easier to use, more secure, and more customizable than any card-based system can ever be.
The innovators have come from all quarters: niche systems like Square for specific payment scenarios, end-to-end systems like PayPal that work outside the existing payments ecosystem, tech-focused systems like 3D Secure/VbV that tackle specific deficiencies in card-based payments systems, and hardware manufacturers like Apple and Samsung that attempt to lock consumers to their brand.
Tokenisation and two-factor authentication aren’t the solution: they are just bandaids. They typically require new hardware or software upgrades, which is often technically demanding and expensive for retailers, banks and governments to implement.
While some cautious players will wait for the card schemes and major banks to get their acts together, many won’t. In the absence of leadership by the industry, consumers are being allowed to choose which technology suits their payment needs best. Consumer choice is usually a good thing, but, in this case, it only serves to erode the universality of payments and increases the cost of maintaining an ever-expanding array of payment methods.
The range of payment and authentication mechanisms continues to grow, requiring users to employ different methods, each with a different interface and set of credentials for each type of payment. Users already need to keep track of an extensive list of usernames, biller IDs, CRNs, PINs, passcodes, and tokens just to manage their accounts and pay their bills. It’s confusing for users and costly for banks and merchants.
Out of the chaos of disruptive technologies, a solution will emerge. There is certainly no lack of alternatives. But what is lacking is leadership from industry. The payments industry needs to adopt and promote a new payments platform for the twenty-first century: one that is designed to meet the needs of twenty-first century users.
Although we might not be able to put a name on it quite yet, we can be sure what the new payments system will look like in 2020:
- It will be digital, designed from the ground up for e-commerce, m-commerce, peer-to-peer, and business-to-consumer transactions.
- It will be universal, designed for every type of payment, from nearby to remote.
- It will be real-time, providing rapid and reliable settlement within any jurisdiction and across every border.
- It will be secure, designed to minimize or eliminate the risk and costs of fraud for both nearby and remote payments.
- It will be portable, designed to work on any mobile or PC device.
- It will be transparent, ensuring consumers and merchants have visibility on costs and have real choice in balancing flexibility with simplicity.
A digital (i.e. programmable) twenty-first century solution will also create a myriad of opportunities for value-adding and enhancing the user experience. Imagine if billers could quantify their debtors risk by knowing what percentage of unpaid bills had been approved for payment at a future date. Or if parents could safely authorise their children to access a bank account in an emergency. Or if retailers could offer variable surcharges based on actual transaction costs. Or if banks could offer incentives for customers to use low-cost and low-fraud payment mechanisms.
The opportunities for improvement are literally limitless. But none of this is possible with a twentieth-century solution. The keepers of these traditional technologies need only ask themselves one question: where is the existing card-based payments system heading? “Nowhere”, of course, is the correct answer, but how long do we have to wait for them to accept that the era of the plastic card is over?