Bill Hanifin
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The next time you’re out doing your weekend errands, give some thought to what influences how you pay for your purchases. At the moment you probably don’t think much about it at all beyond the basic decision to choose between cash, debit and credit cards.
If you’re a credit card user, and the type who pays their balance off each month, you might think about which of your cards offers rewards. You probably have a favorite currency that you are collecting and that might be the deciding factor between using, say your American Express card or a Visa or Mastercard cobranded with an airline, hotel, or retailer.
The subject of how we pay and why is the leading topic of debate in the payments industry. We are about to witness one of several milestones in payments history. In the next few years, we could see the end of cash in our society, or we could see one or more of the core payment networks, Visa or Mastercard, be displaced by upstart payment systems that are based on a combination of the cloud and the ACH (Automated Clearinghouse) system.
Driving consumer choice in payment methods are three key factors, convenience, safety, and rewards. People expect their plastic to be accepted everywhere and “Universal acceptance” is the hardest won advantage that Visa, MasterCard and AmEx own over the newcomers. Consumers want to get in and out of the cashier line and their choice of payment should not be a stumbling block.
For all the promise of smart cards and contactless cards, neither one has made an impact on how consumers use payment cards because the acceptance network wasn’t made universal quickly enough by those behind the schemes. Granted, the US is on the verge of moving to EMV (smart) cards, but only because it must to battle fraud losses.
Alternate payment systems put forth by Square and Dwolla have promise, but the acceptance footprint has to grow quickly for each to solidify a beachhead in the payments war. Each has a burden to educate the public as perceived security issues, no matter how naively formed, must be addressed to drive consumer adoption.
Merchants have interest in new payment systems mostly as a means to lower their cost of doing business. Groups like the Merchant Roundtable and the NACS (National Association of Convenience Stores) lobby hard for any viable alternative to Visa and MasterCard, but there is a dilemma to address. Merchants will only push for something that interests their customers, and these same customers only care about payment methods that are ubiquitous and above reproach.
That is a catch-22 that is hard to break through, but here’s where rewards play an important role.
Dwolla has integrated its payment backbone with Ion Rewards and may do so with other location based rewards programs that serve local merchants. Square introduced a rewards component, though it is reliant on linking a traditional payment card (V, MC, AmEx) as the payment backbone. Both are banking on the promise that Millennial consumers who rely on their Smartphones as a form of personal concierge, will choose to pay based on the search and discover magic of location based marketing and the ease of an integrated payment method. The rewards offered are the sweetener that could provide incentive for consumers to select to pay for their round of traditional Saturday errands through one of these new systems.
If consumers fall in love with one of these payment/location/loyalty blends, merchants will be the first to know and the acceptance network for Dwolla and/or Square will grow quickly. It will take that type of chain reaction to drive one of these new payment methods into the forefront and truly threaten Visa, Mastercard, AmEx in the long run.
Another scenario could play out and it is highly likely. One or more of the big 3 payment networks could create or acquire a lighter-weight version of its payment network and/or build in a location/rewards element to its core offering. Visa is advancing this idea with its real-time messaging platform. This has to be the end game that the big 3 wish to see become reality and, if it happens, it will end the dreams of the payment upstarts.
