As technological advances continue to accelerate, what lies ahead for the U.S. payments ecosystem?
Earlier this month, I had the privilege of being joined by Rene Pelegero, President and Managing Director of Retail Payments Global Consulting Group, for a wide-ranging conversation at MRC Vegas 2021.
Our aim was to explore how we in the U.S. payments industry can think strategically to adapt to recent technological and societal changes – as well as those on the horizon.
Even before COVID-19, disruption was increasing in both speed and scale. Merchants were searching for ways to digitize the payment experience and make it consistent for consumers around the world. But the pandemic intensified those changes, pushing remote payments and contactless facilities to the front of the agenda.
Now, merchants have a significant opportunity to create or expand new payment changes, such as the widespread introduction of Buy Now, Pay Later solutions and cryptocurrencies. This will require a willingness to innovate and an acceptance that old systems and approaches may need to change. But the rewards are there for those who do.
No industry stands still. Go back to mid-19th century America and checks were one of the first alternatives to cash payments. Fast-forward 100 years, and the introduction of credit cards was a major moment of disruption. And in the late 2000s, when Square allowed even the smallest of merchants to accept credit card payments, another cycle was complete. All these changes were driven by what was fast and efficient. Those who adopt a similar mindset today are those who will be successful.
There are now three areas of genuine innovation and excitement in the US payments industry.
In the US, cryptocurrency is handled by the federal government. It will be some time yet before crypto is commonplace in our daily lives, thanks to a range of issues that require careful navigation (not least, if we don’t have cash in the bank, how will the bank make loans?). China and Japan are the current leaders in cryptocurrency. The US lags a long way behind.
For those with no or low credit, this is an appealing option. But it poses an interesting dilemma for merchants: do you take increased conversions at the expense of higher payment costs? The key here is planning. Too many are jumping in without proper consideration. It will be interesting to see how this area evolves over the next few years.
Already adopted in Europe, Open Banking allows for the opening of APIs that provide access to a consumer’s bank account(s). It undoubtedly makes banks more open and transparent. But the system of networks operating in the US makes it unlikely to be adopted any time soon – unless providers like VISA and Mastercard make their own moves.
Compare the US payments industry with most advanced economies (and even plenty of growing economies), and the differences are clear. The U.S. has consistently lagged in financial innovation. In India, banks issue wallets for real-time payments. Other top countries by number of real time-payments are China, South Korea, and Thailand.
Yet the US is trapped in a cycle of what economist Clayton Christensen dubbed The Innovator’s Dilemma. Companies with large market shares are afraid to innovate in case they inadvertently harm their revenues. Until the fear of trying new things is overcome, the US market will remain slow to adapt to a new world of payments.
If merchants and retailers adopt a different attitude to US banks and make strategic moves that align with the realities of 21st-century life, opportunities for major growth are there for the taking.
Europe has to deal with asynchronous systems. In the US, there is a need to develop an architecture that is simpler and more flexible. There is a need to build on push payments and enable customers to approve and send payments on mobile. This puts funds directly in the merchant bank – with no fees.
Finally, it’s time to rethink the payment stack with user experience at the center. The number one aim should always be to provide value to the user.
If a customer has a bad payment experience, they will not return. So it is crucial to orchestrate all functions and provide an alternative path (if needed) to optimize value and reduce cost. If merchants successfully orchestrate their payments, offering diversity in services, they will go a long way to meeting the expectations of today’s digital and fast-paced consumer.