Payments 3.0: Acceptance Is the Key

Creating a new payments form factor is one of the ways the industry likes to add excitement to its innovations for consumer transactions.

Whether it’s mobile phones, watches, or (shudder) implantable chips, a new form factor can offer a way to stand out from the competition and build in tools like location-based offers, instant rewards, or combining payments with access control.

All these tools can seem exciting on a demo stage, but customers are disappointed when they walk into a store and their new device isn’t accepted. Merchant acceptance is critical for the adoption of any new payments technology, so providers need to design products that make it easy for both consumers and merchants to use. Otherwise, the inertia of legacy systems will prevent adoption of new tools.

Given that inertia, it’s not surprising that growth in new payment types has come from outside the traditional payments system. The most successful example of this is, of course, the Starbucks payments app. It managed to combine payments, loyalty, and rewards in an intuitive app that led to Starbucks sitting on billions of dollars in what was once a gift card program. It helped that Starbucks could control its own environment.

For multi-merchant solutions, LevelUp, a Boston-based fintech, provides an example of how one company solved the acceptance problem. Its system enables users to make payments and receive special offers for patronizing participating businesses. It bundled coupons, rewards, and payments into a single, seamless transaction. To accomplish this, it developed a QR-code-based system for smart-phone users.

However, merchant acceptance still needed to be sorted out. To resolve that issue, LevelUp supplied its clients with branded QR readers that would connect to their point-of-sale systems. This way, a customer who got an offer and wanted to try a place for the first time could see instantly where the QR code would be read (assuming the terminal was prominently displayed).

LevelUp’s parent company, SCVNGR Inc., was bought by Grubhub Inc. in September 2018 for about $390 million. In its press release, Grubhub said that LevelUp’s point-of-sale capabilities were a key part of its decision because that integration would help Grubhub supply restaurants with additional data on customers and give it a comprehensive ordering tool for customers.

Readers may be thinking that acceptance will not be a concern going forward because contactless payments and QR codes are gaining rapid adoption and may soon be ubiquitous.

But the growth of cryptocurrencies shows up the fallacy in that way of thinking. Bitcoin is the most common, though there are a number of others. However, their value lies more in their use as a commodity investment than as a transaction tool. Low acceptance is why crypto has become more a store of value than a medium of exchange.

A digital currency seems like a great idea, given how much commerce happens online. But with limited acceptance, Bitcoin and the other cryptocurrencies are not competing as currencies in general circulation. Many merchants do not want to accept cryptocoins because it is not easy to do, especially in an offline environment. They need to create their own systems for storing and securing the cryptocurrency, and they can’t be sure that they can use it to pay vendors and suppliers. On top of all of that, because the value fluctuates, every transaction carries a currency-exchange risk.

Crypto is a perfect example of how payments players must keep both sides of the coin in mind when designing a product. Ease of acceptance is the cornerstone of ease of use, which is the cornerstone of payments success.

—By Ben Jackson, bjackson@ipa.org