The ability to use a credit or debit card for most has become a habit now enshrined in the muscle memory of users. From a consumer perspective, cardholders use Visa and MasterCard most of the time without even knowing which brand is on their bank card to make payments in a face to face or online environment. This has become easier over the last few years with innovation in terms of contactless payments and the help of the larger internet companies: Apple Pay and GooglePay.
The innovation tends to stop with these card brands on the consumer side. Merchants on the acquiring side experience one challenge after another, thrown in their direction. These issues date back to over 15 years ago when PCI DSS was originally launched to self-regulate what has now grown into a beast that forces takeaways and nail shops having to fill out multi-page technical documents to prove that they are “PCI DSS compliant, with the relevant SAQ showing AOC”.
Version 2 of 3DS is being released now and bolts on yet another security measure to an already outdated pull payment process. Add to this to the fraud challenges faced with handing a merchant your cardholder information and asking them to pull for a specific amount, once and to then protect your financial information forever, and it’s easy to see why there are so many issues across industries in regard to consumer payments.
If the FinTech industry is making payments easier, the card schemes are definitely trying to readdress the balance. I doubt any merchant has said in the last 15 years; “Oh Visa and MasterCard, what fantastic products these are, I can’t wait to get started!” They are necessary evils and if a start-up FinTech came up with this payment flow today they probably would not see a dollar of investment coming their way.
Payments are supposed to be easy so what does the future hold in the FinTech space and what are the challenges?
The obvious first place to look is real-time bank transfers. There are some fantastic products in the market. iDEAL works perfectly with nearly 85% market share for online purchases in the Netherlands and is a solid solution that could have been adapted in the rest of Europe. The immediate execution, improving cashflow; push payment from consumer reduces transaction fraud (there obviously are other types of fraud that can be utilised here) and reduced costs make this a desirable solution for merchants.
There are three major issues with bank transfer products currently:
- Lack of Global Coverage
- Lack of omni-channel acceptance
- Customer experience / Speed of payment execution.
SEPA is really the only real example of cross border banking transactions but covers just one currency in the EEA. P27 covering the Nordics is a project looking to also include EUR in development of a wider cross border area. Global coverage is an area where the schemes have a huge advantage. If you cannot pay on a terminal in-store, you can get cash to pay relatively easily in most countries around the world with most international cards, using the Visa and MasterCard rails to withdraw cash.
As also alluded to here, there is a problem with omni-channel bank transfers, as they’re only really viable in an online environment. In addition, the current customer experience during checkout processes invariably means, the customer has to leave the buying process to go to their bank account to then enter merchant bank details. This will increase the risk for checkout abandonment, which is a key metric for all online merchants. Waiting for innovation from the major clearing banks especially in Western Europe is always going to be a slow process, hence why the FinTech scene has become so prevalent in the last 10 years, so it’s not worth waiting out for that to happen any time soon.
Why always Crypto?
An area where there is real development around payments currently is within the crypto and blockchain space. Due to the fact that there is no legacy system to bolt new development on, the processes are being built with ease of use and security in mind. This is not to say that we have stumbled on the winning ticket with crypto yet, but the development is putting the process at the centre. There are now products that enable faster settlement and reduced cashflow burdens around security for merchants while also reducing card scheme issues around PCI DSS, fraud, chargebacks and other 3DS version 2 challenges. In addition, customer experience can be slick and a lot faster than current methods.
Choosing the right partners is important and the lack of mature regulation will currently be a concern for more conservative merchants. However, most crypto wallet holders are normally consumers with disposable income, hence investing in a volatile currency in the first place. This is a fast-growing market with an impressive double the average ticket spend of a traditional cardholder.
Challenges and focus areas for development…
The challenges that still need to be managed in the banking and crypto space will be around consumer protection which is managed pretty effectively by the card schemes. I would still recommend buying an airline ticket with a credit card over any other payment method.
The other key fundamental to any payment product in 2021 and beyond is subscription and recurring payments. The card schemes seem to be making things a little more difficult, especially with some of the new non-secure rules around chargebacks for secondary transactions. A consumer-facing product should always bear this in mind. Could blockchain smart contracts offer a direct debit alternative with time periods enshrined? Could smart contracts also govern exposure for airlines and hotels? Which is normally the highest financial risk sector for acquirers.
There is a lot of advancement within the Crypto space as mainstream adoption continues to rise, with the major Altcoins becoming more significant as opposed to just Bitcoin and Ethereum. The likes of Polkadot and Cardano are solving a number of issues that makes development and transactions cheaper and faster than the Ethereum network.
Despite the latest Ethereum announcement to reduce fees, this is still only part of the longer-term move to Ethereum 2.0. As 2.0 seems to be a number of years away, the Altcoin rally continues in this Bull run and pulls us closer to the future where transacting with Crypto is second nature.
Crypto is definitely coming but is not quite mass market yet. In the meantime, piecing together a mixture of cards, banking and crypto products is essential in offering as much relevant payment coverage to a merchant’s customer base. Embracing the newer products in line with increasing numbers of customers opting for faster, slicker and more mobile-focused payment products will also help shape the payment landscape over the coming years.