A Snarketing post by Ron Shevlin, Director of Research at Cornerstone Advisors
A common trait among emerging generations is a desire to break from the past, and overcome the sins of their fathers (not mothers, because women are perfect, and if they’re not, I, sure as hell, am not going to be the guy who tells them so).
What’s funny about the newest young generation is their interest in disruption within the payments industry. Who would’ve thought anybody would care about payments?
Well, maybe it’s not too far-fetched. I suspect part of the interest is driven by their perceptions that the financial services industry was responsible for the so-called “great recession” (so-called because the Carter recession of the late 70s was a helluva lot worse than this past one). Hence their interest in seeing the titans of the financial industry toppled.
The younger generation is very technology-focused, of course, and potential disruptors in the payments space are often seen as technology companies than as financial services companies.
For better or worse, eventually the younger generation will learn what every generation before them learned at some point: Life’s a bitch and then you die.
OK, maybe it’s not that bad. But some (oh hell, make it most) of the payments disruptors are going to learn that lesson. Because there are some significant speed bumps on the path to payments disruption.
Here are some of the speed bumps:
1. Scalability. Scalability isn’t just an issue on the merchant/retailer side; it’s an issue for consumers as well, who are being asked to use key fobs, new devices, consolidate their cards on a single card, etc. It the long-run, this might not the biggest speed bump out there, but anything that slows down the adoption of a new technology (or system) means the disruptors are burning cash.
2. Privacy/security concerns. There are a number of studies conducted recently that point to consumers’ renewed interest in using cash, in response to the spate of breaches. I honestly can’t see this as anything more than a blip, but the privacy issues regarding the use of consumer data will rear its ugly heads. For every payment disruptor geek out there, there are two privacy fanatics who will make sure we all know that every step we take in a store is being tracked and monitored. The press loves these kind of stories more than stories about new methods of payment.
3. Data management/utilization. Remember when the financial services industry thought that account aggregation technology would give us insight into what customer had, and was doing, and would give us the ability to analyze that data, and make relevant offers, and deepen relationships, and drive up profitability, and enable us to all retire at 40? You think merchants, retailers, and the new technology startups trying to disrupt the payments industry are all that better at managing and using data? I’ve said it before, will say it again: Apple’s Achille’s heel is its inability to manage and analyze data.
4. Offer fatigue. But let’s say a few firms emerge that are really good at data management and utilization (Google it–I think you’ll find one). What are they going to do with that data? They’re going to inundate us with more marketing offers. They have to–that’s their business model. The whole push to payments disruption is about eliminating interchange and lowering transaction costs. How will the disruptors make money if not by pushing offers at us, and showing merchants/retailers they’re driving business to them? This is a shaky business model.
5. Customer service. Think back to the last time you had a problem with an online or mobile search you did, and had to contact Google’s customer service department. How did that go? It didn’t. They don’t have a customer service department. Retailers and merchants who call Square for customer support hear a recorded message telling them to go online. That don’t cut it, folks. Here’s Shevlin’s Law Of Customer Service: The company that makes the money on a transaction has to provide the customer support. If I’m taking 10 cents on a transaction, and you’re getting a dollar, and the customer has a problem–YOU provide the support, buddy. The inability for some disruptors to build and scale customer support services will bring ’em down. It’s not as easy as just outsourcing it to India.
6. Funding source. With all this talk of payments disruption, there’s something I just don’t understand. Seriously, I just don’t get it. If, when a consumer uses an alternative, or let’s call it a disruptive, payment method, if the money has to come out of a traditional bank, is the traditional bank really being disrupted? True payments disruption isn’t going to happen–as far as I’m concerned–until we change how and where we deposit our paychecks.
7. Declining margins. Every other industry in modern history has seen a decline in transaction processing costs as volume increases and technology improves. Except payments. The oligopolies and regulatory environment has propped up those costs for a long time. On one hand, pulling away those props is a boon for disruption. On the other hand, declining margins in payment processing means fewer potential disruptors will reach the scale necessary to profit from slim margins.
8. Consumer demand. Some of you disruptive payments geeks are deluded. You think everyone–let alone everyone your age–wants to use new, alternative, and disruptive payment methods. Far from it. Most people couldn’t care less. Even a lot of Gen Yers. Not saying that demand won’t be there in 10, or even five, years. But it’s not here today–and that’s yet another speed bump on the path to disruption.
9. Regulatory direction. I study consumer behavior. I think I’ve become fairly good at predicting what consumers will do. I have absolutely no clue, however, what the loonies in Washington, DC will do. The regulatory direction is a total wildcard impacting the path to payments disruption.
You might know of other speed bumps that I didn’t include. Great. Only helps me make my case.
Bottom line: I’m not saying we won’t see major changes in the payments industry. I’m saying the major changes are further on down the line than some pundits would have us believe.
If you think I’m wrong, then please–PLEASE–lay out your case somewhere and tell me how all these speed bumps magically (or not magically) go away in the near future.
p.s. If you were looking for a picture with cash coming out of a smartphone to represent “mobile payments,” sorry to disappoint you.