By Bruce Cundiff, Javelin Strategy & Research
Due to recent decline in credit card usage and consumers adopting real-time banking strategies, alternative payment solutions are becoming exceedingly mainstream and gaining market share. Alternative payments vendors are taking advantage of the "perfect storm" of economic and competitive factors affecting the payments landscape, and are continually gaining momentum within our existing payments system.PayPal and BillMeLater-now both under the eBay umbrella-are prominent examples of the success of non-traditional payment systems that have emerged to usurp both revenue and market presence from financial institutions and associate network brands. Upstart hybrids such as Google Checkout and an array of products and platforms from the likes of Amazon.com provide a further quandary for financial institutions. While utilizing traditional online payment mechanisms, credit and debit cards, they also take away brand recognition from those traditional brands (the transaction becomes a Google Checkout transaction rather that a Visa or MasterCard checkout transaction), placing it squarely with a frightening and largely unknown competitor in the payments arena.
Instead of focusing on how much impact these emerging payments systems will have on the overall profitability of financial institutions through disintermediation, banks should be concentrating their efforts on embracing the alternative payment methods and finding an alternative solution that will perpetuate their strengths. To remain competitive in a future threatened by alternative payment providers and to maintain customer relationships and deposit growth, financial institutions must offer dynamic payment solutions that first and foremost meet consumer needs, but also serve the needs of the primary constituents (Triangle of Value) in the system.
These prime constituents include merchants, the payment networks (both traditional and alternative), the consumer, and will soon include wireless carriers. While each constituent of the triangle has definite sources of value, the alternative forms of payments that are able to maintain a delicate balance in satisfying the agendas of each will enjoy successful adoption and widespread market share. The success of alternative payment adoption is dependent upon implementing a solution that satisfies the needs of the Triangle of Value and that coincides with the framework of our existing ecosystem.
Financial institutions For financial institutions, transaction revenue is certainly the most immediate and palpable value a method of payment brings to the table, but is not and should not be the singular point of assessment of value of a bank-centric alternative. Other critical considerations include: consumer utility (being available at a wide array of merchants), consumer familiarity with the transaction process, consumer confidence in the security of the payment method, transaction sources (retaining transaction volume that would go to non-FI alternatives and offering credit and debit card transactions), how the funds are moved (accounting for the security behind the funds movement as well as the cost to the financial institution), and branding. The alternative payment method must not supersede that of the financial institution, but rather enable it to enhance the customer relationship and capture mindshare. Traditional payment methods, especially card networks that have been able to walk a fine line and leverage both the growth of the network brand and also the value of the bank-specific brand, demonstrate how this can be accomplished. Financial institutions still have the advantage of trusted brands and established networks for issuance, acceptance and processing, and need to utilize these strengths.
Merchants The true value of an alternative payment method for merchants is the number of customers it can organically drive, as well as the repeat transactions and loyal customers that can be derived strictly from the method of payment. Proof of this value on the part of emerging payment methods will build the merchant acceptance network and, in turn, drive value for the other constituents. Merchants will not invest time, effort, or funds to drive an unproven or unused payment method, as there is no inherent value in doing so. Merchants must be able to confirm that the payment method "claims" many users and that the signup/registration process is easy and promotes repeated use. Other key factors that derive merchant value are decreased overall transaction costs and security. If merchants are able to save money, they will be much more motivated to steer their customer base toward a more economical payment solution.
Consumers The solutions that will drive the most consumer value are those that walk the fine line between security and usability. This includes low (or no) registration hurdles-optimally the solution allows for immediate usage, potentially leveraging a payments product or infrastructure. Being creatures of habit, customers appreciate familiar processes and have a low tolerance for obstacles that hinder the completion of a new task. Both real and perceived security issues such as fraud protection, how sensitive personal information is handled, and account and asset protection must be proactively addressed to realize consumer value. Alternative payment vendors that can bridge familiar practices with convenient and secure payment solutions will enjoy more registrants and credibility among consumers.
Javelin identifies those companies that embrace the Triangle of Value as the frontrunners in alternative payment solutions. In evaluating imminent alternative payment vendors, Javelin Strategy and Research forecasts those poised for success and defines what makes them more likely to succeed than their competitors. Alternative payment vendors with the right mentality and systems in place include Acculynk, which offers a PIN-debit solution online; eBillme, an online retail solution that uses an FI's online bill payment platform; Moneta, which leverages the ACH for payments direct from consumers' accounts; and Verient, which provides a backbone for the NYCE SafeDebit solution and also for its own financial institution-oriented, flexible issuance solution.
Acculynk Acculynk brings PIN-based debit to the e-commerce world by replicating a physical world PIN-debit model. The company touts the security of an extra layer of authentication, the convenience of using existing debit cards and PINs, and the ease of use of its "graphical PIN pad" for online PIN entry. Once the customer enters his/her PIN on a floating PIN pad upon checkout, the transaction information is sent through the Acculynk server to the EFT networks as if it were a card-present POS transaction. It uses a very established and familiar PIN-based model, addresses security head-on, and draws in financial institutions that have the option to opt in (active approval necessary) or opt out (tacit approval granted proactively) of accepting PIN-debit transactions on the online channel.
Acculynk creates merchant value by providing a lower-cost alternative to credit and signature debit transactions. With a merchant acquisition strategy that targets large merchants and an integration process that seems relatively easy and straightforward, Acculynk has the necessary supporting components in place. Consumers will have the payment product in their hands (given that the solutions will soon have certification and approval at most large-scale EFT networks), and financial institutions are already linked in to one or more of the networks, creating a situation that could lead to rapid deployment and adoption.
eBillMe Capitalizing on the economic trends toward consumer shift to pay-now methods, eBillMe is an established product with a merchant network of over 800. Its platform focuses on consumer familiarity with its online banking bill payment hub process. At checkout, consumers select eBillme as the payment option and a copy of the eBill is e-mailed to the consumer. Consumers then log in to their banking web sites, go to the bill payments section, follow the instructions to add eBillme as a payee, and then pay for the order. EBillme taps into consumers' desires to use funds on hand as the value proposition for all constituents, providing a means for consumers to initiate these transactions, merchants to capitalize on their behavior, and financial institutions to deepen the payments and overall relationship with their customers. EBillme has a great propensity for success due to its usage of the online bill payment platform-familiar to consumers, less expensive for merchants, and a potential mechanism for financial institutions to extract profit from what has been primarily a cost center.
Moneta Moneta's strength lies in its balance. The company is tactically approaching the market with the value of each of its constituents in mind. As with other solutions, Moneta is leveraging the ACH network for lower-cost transactions, but is aligning itself much more closely with financial institutions, banking on the established trust between consumers and FIs. Customers are able to select Moneta at checkout and enter their user name and password, which initiates a direct debit from their bank account. The funds move from the bank to Moneta, and then to the merchant, with Moneta responsible for verifying the transaction. Customers are also able to register directly through Moneta. The process is secure and easy for all parties involved, creating value for each constituent to confidently drive adoption forward. It is also leveraging the merchant effect, offering rewards, discounts and programs among the merchants it has signed.
Verient Verient has created a platform for financial institutions and networks to issue new and innovative payment products. The company allows for both the physical world creation of a card that has consumer-defined parameters, and also the virtual existence of these payments instruments for online usage with virtual account numbers. Customers have multiple payment options through individual financial institution core payment systems, adding significant value for all constituents in the triangle of value.
NYCE SafeDebit is an EFT network that NYCE has reinvigorated its charge at the online debit transaction with the Verient platform. This uses a virtual account number solution for "PIN-less" transaction to flow over the NYCE network. When customers click on SafeDebit at checkout, they are prompted to find their FI from a drop-down menu asking for their login credentials. Upon login, they are provided with a virtual account number, which is auto-filled at the merchant checkout page, providing for accustomed credit/signature debit checkout and payment procedures.
PayMyWay is the Verient specific payment that is issued by the bank at the behest of the customer, and is any of a wide variety of user-determined and defined products. The customer is able to control their payment platform by choosing the payment product (an extension of a credit or debit card, generally), and then proceeds to generate the PayMyWay card. This card is then physically shipped or the virtual card is delivered via e-mail or SMS. Consumers are able to use their card with the financial institution retaining its role as the arbiter of payment, strengthening the payment relationship between consumer and financial institution, and increasing merchant acceptance.
Alternative payment solutions provide viable and desirable solutions for consumers, inherent value to merchants, and an option for financial institutions to remain competitive in a shifting payments landscape. The relationships among constituents are interdependent and will collectively fuel alternative payment adoption. Vendors must consider the delicate balance of the triangle of value and provide solutions that work within the parameters of our existing ecosystem to establish themselves in the marketplace. The future of payments will be shaped by the leaders of alternative payment solutions that have the ability to further redefine our payments landscape.
Bruce Cundiff is director of payments research and consulting for Pleasanton, Calif.-based Javelin Strategy & Research.