The Next Way To Pay

A study by the Federal Reserve Bank of San Francisco shows cash still represents 40% of retail payments volume. The study found cash is the lowest-total-cost payment medium for a merchant to accept, simply because the fixed cost is pretty much a requirement for a retail store and the variable cost is almost nil.

The continuum of the automation of checks (MICR, image, remote deposit capture) has pushed the cost of checks down to a minimum. Cards, which make up around 45% of retail transactions, have a relatively high variable cost.

Given merchants’ desire to continually reduce payment costs, what might be the next step?

Changing the Store Payment Model. Does the digital wallet create the first merchant payment type with no physical instantiation, and thus the elimination of the cost of equipment, lost countertop space, and the time-consuming swipe, PIN, or sign process? Not really. The physical mobile phone still interacts with a physical merchant device, and the checkout process is not as greatly sped up as merchants would like it to be.

The use case for a digital wallet rests on the cool factor to mask that it’s still a physical thing the customer must carry to the store. The wallet interfaces with another physical thing the merchant must install, maintain, and train staff to use. How much faster the transaction is depends largely on whether one counts taking out the mobile phone, turning it on, and authenticating, or counts just the “waving” part. A fair comparison with a card would be counting just the swiping stage of the card transaction.

For a long time, merchants embraced cash. Where they couldn’t discourage checks, they automated them. Some large chain merchants issue cobranded cards to get something more back from the cost of a card transaction: customer loyalty and customer data.

New payment methods that don’t involve a bank or credit card account, such as M-Pesa outside the U.S. and ventures like Paytoo, are the first true step away from the bank and card paradigm, transferring money from party to party directly through a system not owned by a card brand or processed by a bank. If such systems are just as secure and just as fast but less expensive, will merchants become a member of these new systems’ networks?

Although establishing a new merchant network seems a formidable task, maybe the music is slowing down in the waltz between merchants and bank-backed cards. It is not yet clear, however, which of the many challengers will get the last dance. Is it only Bitcoin-type systems that seem to have seen the light that the best answer for the merchant might be some way of making cash secure? Would a secure, digital version of cash be the ultimate return to the beginning for merchant transactions?

Merchants are re-purposing their rewards cards as payment cards using the automated clearing house and gaining per-transaction savings. Initial enrollment remains a costly piece of the one-time expense of getting into this model. But once someone figures out how to automate enrollment, the ACH-connected combined merchant loyalty and payment card will present another challenge to the card system.

Would a Faster Payments System Reduce the Cost of In-Store Transactions? Merchants aren’t the only ones who ponder how Amazon can deliver products in an hour but it takes days for a payment to clear. Where is the payment equivalent of the delivery drone?

With the U.S. in the process of creating a faster payments system, merchants may have their best opportunity in decades to get their concerns and interests addressed. Not surprisingly, large merchants and their organizations are actively exploring business models and system-concept designs around the faster-payments work under way through the Fed-sponsored Faster Payments Task Force.

Like cash and checks, the credit card will live to a healthy age, but the growth rates seen in the past may not continue. The next big thing is unlikely to be ways of simply “softening” the plastic card by making it virtual. What is not clear yet is who will own such a system and whether merchants will find that its cost, especially its variable cost, meets their requirements.

The race is on to invent, and successfully market, the next way to pay.

—George Warfel • george.warfel@edgardunn.com