Executive Thinking on Payments: Addressing Concerns, Taking Action by Vantiv

Executive Thinking on Payments: Addressing Concerns, Taking Action

Executive Thinking on Payments: Addressing Concerns, Taking Action Key Points • Merchant and financial institution executives have significant concerns about costs and implementation with mobile payments and EMV. • Executives are frustrated by a lack of standards and direction for emerging payment methods. • Executives are concerned about mobile payments opening the door to new competitors and operational complexities. • Consumers are more enthusiastic than executives about mobile payments, but the gap is closing. • Many executives see mobile payments simply as an “electronic credit card”—but consumers want a more comprehensive mobile financial management platform. • Executives may be missing an opportunity to use prepaid cards to reach a growing range of consumers beyond the underbanked.

Industry executives are concerned about emerging payments— but they are increasingly ready to move forward to meet rising customer expectations. As merchant and financial institution executives know, the payments field is in an unusually dynamic period. Mobile payment technologies are coming to the fore. A variety of prepaid cards are finding new uses and new markets. Deadlines for implementing EMV-enabled systems are looming. And customer expectations for security, convenience, and the ability to shop and bank in multiple channels are rising. These currents add up to a great deal of complexity and anxiety for industry executives. To find out what it all means to the industry, the Vantiv/ Mercator Insight Series conducts extensive surveys into consumer perspectives on payment methods. These surveys are complemented by indepth interviews with executives from financial institutions and merchant companies. Together, these efforts allow researchers to develop a deeper understanding of both consumer and executive attitudes—and to identify the disconnects between them. This year, the interviews show that executives have serious concerns about how to move forward with new pay-

ment approaches. In some ways, their attitudes are out of step with those of consumers, who tend to be enthusiastic about new payment methods. “These executives are faced with the realities of implementing and paying for these approaches, and are naturally more cautious than consumers,” says Daniela Mielke, chief strategy officer at Vantiv. “But by moving too slowly, they run the risk of missing opportunities to reach their customers.” In today’s payments environment, it can be difficult to know where to invest time and effort—which has often led companies to wait on the sidelines, watching the payments landscape change. However, when compared to last year, the research shows that executives seem more willing to take action and try out new approaches. “We see a growing sense that today’s various payment methods give merchants and financial institutions an opportunity to engage consumers and position themselves for future success,” says Mielke. “It is increasingly clear that consumers expect more from payments, and executives are looking for ways to meet those expectations.”

• An uncertain environment has led many executives to take a “wait and see” attitude—but that is changing, and many now say they think it is time to act.

What Are They Worrying About? As they interviewed executives, researchers asked what their key concerns were with the rapidly evolving payments environment. Although merchant and financial institution executives cited a number of concerns specific to their respective businesses, they also had a number of concerns in common. Not surprisingly, the emergence of mobile payments is a key issue. For their part, merchant executives wonder how such payments will work in their environment and fit with their existing POS infrastructure. They are worried about the cost of implementation and want to avoid the need for expensive, disruptive changes. As a result, many merchants are actively looking for mobile POS options that will fit with their current infrastructure or are developing interfaces that will let new mobile applications leverage that infrastructure. The lack of a universal, standard platform for mobile POS payments is not helping. Merchants are thinking about the mandated move to EMV, and, to keep costs down, they would like to bundle mobile and EMV capabilities into their terminal upgrades. Much of their uncertainty is centered on near field communications (NFC) technology. Some executives said that they expect to include NFC when they make the transition to EMV-enabled terminals. But many were doubtful that NFC will become the eventual dominant standard, which is not surprising, since

alternatives, such as QR-code and cloud-based systems, keep emerging. Merchants are also worried about costs beyond the initial investment in terminals. They are concerned about being charged higher interchange and additional subscription fees for mobile payments—a thought that they find especially troubling because they feel that they will be taking on more risk with mobile payments. They also worry that the shift to mobile will encourage more customers to use higher-cost payment methods. Like merchants, financial institution executives are wondering what it will take to implement new mobile payment processes and technologies. They see that implementation will require significant work, and they understand that consumer interest in mobile payments is growing. Thus, they worry that if they don’t get started soon, they will fall behind their competitors who are moving ahead—and risk losing customers. But that sense of urgency is tempered by uncertainty. With evolving standards, there is a real concern that the technology they select could become outdated before too long. As one regional bank executive said, “We don’t want to enter a Beta vs. VHS battle by implementing a solution too early in the game. Right now there’s NFC and RFID, and most like NFC for now. While it seems secure to me, I don’t know if the perception of NFC is [that it is] secure enough. At this point, is the convenience worth the risk?”

THINK MOBILE PAYMENTS WILL BECOME COMMON (Consumers and executives)

Consumers

1/3 in 2 years

2/3 in 5 years

Financial Institutions

1/3 in 2 years

2/3 in 5 years

Merchants

1/2 in 2 years

1/2 in 5 years

Sooner, Rather Than Later In general, about one-third of consumers think mobile payments will be common in the short term, and executives—who have tended to see longer timelines—are increasingly likely to share that view.

THINK MOBILE PAYMENTS WILL BECOME COMMON (Consumers, by age) AGES 18-34

35-64

65+

41% in 2 years

36% in 2 years

26% in 2 years

78% within 5 years

64% within 5 years

51% within 5 years

Youthful Enthusiasm Younger consumers have especially high expectations for adoption—higher than those of executives or older consumers. As they become the core of the consumer population, adoption is likely to accelerate.

On another front, financial institution executives are thinking about emerging compliance and regulatory issues that are related to mobile payments, which can fall under the jurisdiction of a variety of federal banking and consumer-protection agencies. Currently, the underlying credit or debit card account on file determines which underlying regulations apply. But mobile payments using intermediary accounts for transactions—such as prepaid accounts—might confuse the picture.

Common Concerns: Wallets, Security, Competition For financial institutions and merchants alike, much of the uncertainty associated with mobile payments has to do with mobile wallets, which provide consolidated access to an individual’s cards and accounts for payments. Most merchants said that they are evaluating mobile wallets for their businesses, but many complained that the current technology is not user-friendly—or that it slows down the checkout process. At the same time, merchants are being confronted with a long and changing list of mobile wallets and wallet technologies being offered by a wide range of providers—more than 200 mobile wallets are now on the market or in development. But there are no wallet standards in place, and these offerings provide varying functionality and security levels.

Merchants find it hard to make a choice, and they often feel that many wallets don’t meet their needs. A number of executives pointed out that they feel pressure to accept multiple card products, but many current wallets don’t incorporate all the cards that consumers carry. Financial institutions are facing that same confusing wallet landscape, and they understand the interest in being able to use multiple cards—and even multiple wallets. “We’ll have to support more than one wallet because not all customers have the same preferences,” said one national bank executive. “We’ll probably have to support five or six wallets including one of ours that we’ll develop ourselves. We will want to offer our own solution so that our cards will be top of wallet.” However, that kind of approach will drive up costs for institutions. Meanwhile, security remains a key concern for executives—especially mobile security. Merchants want protection against fraud, but they don’t want to slow down their associates and customers at checkout. Many also think that if mobile payments could include stronger authentication capabilities, the increased security could help lower acceptance costs. As for banks, “the biggest concern with mobile is security and fraud and the ability to return items purchased with a mobile phone,” said one regional bank executive. Interestingly, even though they

see problems with current security, executives are fairly optimistic about the industry’s ability to use methods such as multifactor authentication and tokenization to secure smartphonebased payments. At the same time, however, executives are worried about a particular security initiative—the rollout of EMV. The real concerns are about the cost and timeframes of implementation. “Merchants appear more focused on being equipped by the 2015 key compliance date, but with the high cost of implementation, they are trying to integrate it into their planned point-of-sale update cycles,” says Ken Paterson, vice president of research operations at Mercator. Financial institution executives are also thinking about the liability shift, he says, “but they complain about the lack of clear timeline guidance from the networks and the added cost of issuance. No one wants to be the first to adopt EMV, because the technology is more costly than current methods. But merchants and banks fear they will be a target for fraudsters if they are the last to adopt.” Both merchant and financial institution executives see the potential for emerging payment methods to bring new, nontraditional players into the market. “Merchant executives are worried about new players with deep pockets, such as Google, PayPal, and Apple,” says Mielke. “The concern here is that when such players offer mobile pay-

ments, they are in a position to gather a wealth of information about merchants’ customers. This could result in merchants having less control over their customer relationships. And these new intermediaries would be in position to use that data to provide marketing and advertising services to a merchant’s competitors.” Financial institution executives are also worried about that kind of disintermediation, and having their brands lost in the clutter of mobile offerings. For them, a key issue is the possibility that these competitors will cut into their network-based interchange revenues. So far, this has not been a large problem, because most mobile payment solutions have been based on traditional card accounts. But executives worry about being disintermediated by providers that let consumers carry balances and perform account-toaccount transfers and bill payments. As a result, many hope to see the card networks provide card-based wallets.

The Executive-Consumer Gaps In comparing consumer and executive responses, the Vantiv/Mercator research found key areas with potential disconnects. For example, most industry executives believe that when it comes to choosing a payment method, consumers put the highest value on convenience, rewards, or both. But the Vantiv/Mercator research found that consumers actually say cost-of-use,

CONSUMERS WHO PLAN TO BUY MORE PREPAID IN THE COMING YEAR (Base = Expect to buy any prepaid, top 2 box)

Either general-purpose or retailer cards

43%

Retailer-specific prepaid cards

General-purpose cards

36%

26%

0% 10% 20% 30% 40% 50%

Prepaid: Finding Favor with Consumers Executives are not always aware of the growing opportunity to leverage consumer interest in prepaid cards. Among consumers who bought prepaid cards last year, more than 4 out of 10 plan to buy more in the near future.

with 80% citing it as a key factor. In addition, 79% said that the worst payment experiences are unauthorized, unexpected, or added fees.

A shift in attitude Merchants and financial institutions have a range of concerns about implementing mobile payments, and the uncertainty of evolving technologies and standards has had a paralyzing effect. But during the last year, many have shifted their thinking toward taking action. They may not know exactly what to do in today’s changing environment—but they know that they need to do something.

Here, executives may be underestimating the impact of raising fees on accounts or payment transactions. If merchant surcharging becomes an option in the U.S., consumer pushback could be strong. In Mercator’s consumer research, 44% of credit card holders said they would take their business elsewhere if faced with a surcharge, and 40% said they would use a different payment type. In addition, says Paterson, “merchants may be missing an opportunity to point consumers to lower-cost payment methods such as closed-loop prepaid cards that can help consumers control spending.” Executive expectations for the emergence of mobile payments are also out of step with consumer expectations

LAST YEAR

THIS YEAR

“Customers are really not asking for mobile yet. They aren’t using it in our [mobile payment pilot] programs. It’s going to be years before it’s common—at least five years.” —Apparel retailer

“We are considering merchant tablets through store operations... We would also like fixed-place kiosks with tablets to connect to our e-commerce website.”—Footwear retailer

“We are taking a ‘wait-and-see’ approach for mobile until a clear product becomes available and there is clear demand for it, with a clear leader or solution. It’s not there yet.” —Credit union

“It’s definitely on the radar screen, but we are not in any discussions with any specific vendors. It won’t be this year—more like within the next two years. We would be crazy if we weren’t.” —Midsized bank

“Right now, there is no value proposition [for mobile payments] from a consumer standpoint and no common standard platform…. It’s a chicken and egg—merchants need to support it, and the issuers need to offer it.” —Regional bank

“We absolutely want to attract the younger generation and will need to offer these types of products to attract the younger consumers. We are looking at mobile wallets now but will have to start evaluating an implementation and risk assessment within the next year.” —Community bank

“How should we allocate our resources in the payment world that is changing so fast? We need to move more quickly in some areas, but how?” —Community bank

“There is a strong interest in mobile tablets from upper management.... We are testing the iPads for credit applications in our custom merchandise stores.... It will hook into the Internet and show customers the different special order choices.”—Apparel retailer

“If the technology continues like it’s going today, it’ll be 10 years before mobile payments become common. The products available now don’t make it easy to use for the customer or merchant.” —Drugstore retailer

“I think mobile payments will be common in the shorter run—two to three years. Customers are always using their smartphones and will come to expect mobile payments. There will be a big push.” —Footwear retailer

to some degree. In general, consumers are interested in mobile payments; 66% percent think they will be common within five years, and 36% think that will happen within two years. Executives, however, have generally predicted slower growth and have put a longer timeframe on adoption. But that prediction could be changing. In last year’s Vantiv/Mercator research, about one-sixth of merchant executives thought that mobile payments will be common within two years. Now, about half think so. This shift may be due in part to their exposure to mobile device usage in stores, as consumers use smartphones and tablets to shop, download coupons, and use showrooming techniques to compare prices from other retailers. Among financial institutions, one-third of executives see a two-year timeline for widespread adoption, a slight increase over last year. “This is probably because financial institutions see good consumer usage of mobile technology through mobile banking offers such as mobile check deposit and expect that mobile payments could be a natural evolution of mobile banking and current card operations,” says Dean Siefert, SVP of Product Strategy at Vantiv. In general, executives seem to be responding to the heightened consumer interest in mobile payments—and the research suggests that this interest is likely to accelerate in the near future. Among younger consumers, 78% of

respondents expect mobile payments to be common within five years, with 41% saying it will only take two years. These younger consumers are an indicator of tomorrow’s mainstream consumer attitudes, and it is clear that they will want mobile payments—so mobile payments may be coming sooner than expected. The research also uncovered some differing opinions around the role that mobile payments will play in consumers’ lives. Industry executives tend to think of mobile payments as a vehicle for using traditional card accounts— essentially, as an electronic form of plastic—and little more. Consumers, on the other hand, are thinking more broadly. They are interested in mobile apps that not only handle payment transactions but also help them manage receipts and coupons, track spending, and integrate their transactions, online and off. “Consumers want mobile technology that will bring more information and convenience to their entire purchasing experience,” says Siefert. “Mobile platforms that play a broader role are likely to be more appealing than just payments alone—and delivering them is a key opportunity for the industry.” Looking beyond mobile payments, the research also found disconnects in attitudes toward prepaid cards. Consumers—especially younger omniconsumers—have been buying general-

purpose prepaid cards in growing numbers. They see prepaid as being secure for in-store purchases, helpful in budgeting and useful for online purchases. Looking at consumer interest and awareness, the Vantiv/Mercator research concluded that prepaid card usage is likely to keep growing. In fact, 43% of prepaid card buyers expect to buy more cards in the coming year than they did last year. Industry executives don’t always share that enthusiasm. Merchants are highly familiar with closed-loop cards, and they are aware of the recent growth in those cards. However, they generally don’t view prepaid as a primary form of payment or as a potential tool for reducing cost of payments, and they usually don’t link their loyalty or rewards programs to prepaid cards, including their closed-loop cards. For their part, financial institution executives have historically seen prepaid as a way to round out their portfolios with a solution for the underbanked, and that is still a common view. But some are now seeing a broader market, especially among younger consumers. In addition, says Paterson, “changes in regulations and fee structures are driving financial institutions to expand their prepaid programs. Many are in the planning stages with their general-purpose reloadable card programs and are beginning to think about issues such as reloading capabilities, online usage, and inclusion in mobile wallets.”

CONSUMERS WHO EXPECT TO USE PREPAID AS A SUBSTITUTE FOR CHECKING 2012 All

18-34

16%

23%

2013 All

18-34

21%

32%

0% 5% 10% 15% 20% 25% 30% 35%

Prepaid: A Changing Equation Many financial institutions still see prepaid as a tool for the underbanked, but prompted by regulatory changes in their debit business, are now seeing prepaid’s benefits for existing customers such as more secure online shopping, budgeting, travel spending, and sending money to teens or kids at college.

Getting Beyond “Wait and See” As the research shows, there are some significant disconnects between executive and consumer attitudes. That should not be too surprising in a rapidly changing environment—particularly one in which consumers are increasingly informed and technologically oriented. But executive attitudes are evolving and, in some ways, getting closer to those of consumers. Indeed, this year’s research reveals an increased bias toward action, rather than the “wait and see” strategy that has been prevalent among executives. Last year, a number of respondents reported disappointing results with mobile wallet pilots. But this year, those executives say they have learned from those pilots, and some are looking at engaging their customers in more mobile channels. Executives talk more about being willing to start experimenting. “Some merchants are trying out in-store tablets to take payments and assist shoppers on the floor because they see tablets as a kind of wedge for expanded mobile payments,” says Siefert. And most merchant executives now say they are evaluating mobile wallets for their businesses. Meanwhile, financial institution executives are looking to build on what

is already a position of strength in mobile banking. According to Mercator customer research, 10% of banking customers now make transactions via mobile devices, and 26% access banking information through mobile technology. With such adoption in mind, some banks have been implementing or considering new features, such as mobile check deposit, on their platforms. And a number of financial institution executives, leveraging consumer trust in their FI for payments, plan to introduce their own version of digital wallets within the next year to compete with digital wallet providers that may circumvent their interchange rates and may not use their cards. Across the industry, these efforts are far from complete, and there is still a lot of uncertainty as payments evolve. To move ahead while minimizing risk, merchants and financial institutions can take incremental steps, and a number of companies have been testing and piloting new approaches. Some are also partnering with other members of the payments ecosystem to access the growing range of skills and technologies needed to meet consumer expectations. “These kinds of actions are becoming more and more important, because there is a lot to learn—and a lot of opportunity for those that learn it,” says Mielke. “Now is the time to be laying the groundwork for the future.”

About Vantiv Vantiv is one of the leading integrated payment processors in the United States. Known as Fifth Third Processing Solutions since 1971, the company, headquartered in Cincinnati, Ohio, changed its name to Vantiv in 2011 and became a public company in 2012. Vantiv’s credit, debit, prepaid, and mobile solutions help businesses and financial institutions of all sizes get the most out of payment activities.

Source for all charts: Vantiv/Mercator Insights research 2012, 2013

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