I just returned from a 11-day overseas trip where I never used cash. Instead, I was able to use chip and mobile payment technology to execute all of my purchases, including flights, hotel rooms, restaurant bills and the smallest purchases in a fast and seamless manner. At the same time, I used local and international ecommerce websites to make various purchases on my iPhone (including a new iPhone X) with a minimum of effort.
While cash and cards still dominate the payments landscape, there appears to be a greater acceptance of mobile payment technology, especially by younger demographic groups and for certain types of transactions (P2P). In addition, the acceptance of mobile payments differs significantly between markets, which was evident when I visited Finland, where mobile payments prevail.
Based on a survey of 1,500 consumers in the United States and Canada, Accenture analyzed consumer banking and payments trends and the likelihood to embrace future payment technologies. In their report, “10 Mega Trends Driving the Future of Payments,” Accenture identified the key drivers of change in the payments industry in the near- and long-term. Each of these trends need to be anticipated and understood by banks and credit unions wanting to meet the lifestyle needs of consumers.
1. Growing Impact of Gen Z
The segment of today’s teens and young adults who follow the Millennial generation is projected to make up as much as 40% of U.S. consumers by the year 2020. Similar to the younger aged Millennials, this segment (age 18-21) is all about digital technology and the mobile phone. In fact, 80% would give up television for a day – and 28% would give up friends or money – to keep their mobile phone.
This generation demands immediacy, and highly personalized (and relevant) experiences. Almost 70% of the Gen Z generation use mobile banking apps daily, with 68% wanting instant P2P payments. While being mobile-first, this generation also uses other channels more than other generations.
For instance, 20% of Gen Z consumers visit their bank branch at least weekly, with nearly one-quarter (23%) of Gen Z – more than any other age cohort – accessing banking services through a branch at least weekly, compared with only 16% of Baby Boomers. According to Accenture, Gen Z is also the most likely to use cash when making an in-store purchase, with 28% preferring cash, compared to only 18% of Millennials.
“For college-age consumers whose first jobs tend to be cash-based, branch usage is more a necessity than a choice,” said Michael Abbott, a managing director in Accenture’s Financial Services practice. “Clearly, Gen Z consumers prefer to manage their money on mobile devices, but they still need branches to digitize their earnings.”
2. CX as a Differentiator
The collection and analysis of massive amounts of data provides the foundation for an improved customer experience (CX) in all industries, especially banking and payments. The improved ability to provide payments advisory services and expense management is desired by 70% of the youngest generation, says the Accenture study. These consumers also want an easier way to shop and make purchases on their mobile device.
While payment data has historically been under the control of traditional financial services organizations, more than 60% of Millennial and Gen Z consumers are willing to share their bank account credentials with third parties. This is of special importance during a time of expanded open banking capability and regulatory acceptance.
3. Acceptance of Mobile Payments
The lack of providing added value for mobile payments compared to plastic (and cash) has been the cause for the very modest acceptance to digital payments to date. But, with open banking and APIs providing the capability to enhance the customer experience with rewards, instant alerts, etc. the acceptance of mobile payments could be on the verge of significant growth.
“Younger consumers are demanding an exceptional digital payments experience on all platforms – most importantly on their smartphones – and want to be compensated through targeted rewards, offers and discounts, at a cut-throat rate,” states Abbott from Accenture. “These younger consumers will ultimately force traditional banks and payments players to either think beyond the functional aspect of mobile payment apps and create an engaging customer experience, or risk getting squeezed out of the process.”
Nearly one-quarter of consumers would use a digital wallet offered by a bank or non-bank third party and abandon their current banking mobile app if they could get aggregated account data on a mobile wallet says the study. Interestingly, 45% of Baby Boomers are the likely to ditch their traditional bank’s app.
4. Restructured Rewards
The importance of rewards as a competitive differentiator has never been greater, with 48% of consumers being willing to switch their primary card to receive higher value for purchases and 42% willing to switch for a large up-front bonus. As if that wasn’t enough of a concern for payment industry providers, this heightened competition for give-backs is occurring at the same time as interchange fees are under siege.
Consumers not only want simplicity in earning rewards, they want simple ways to redeem these rewards (preferably at the point of sale). According to the survey 66% of consumers want to redeem rewards as they swipe at the POS terminal. Going a step further, more than half of those surveyed would share personal information to receive personalized offers. Bottom line, the customization of rewards is the battlefield of tomorrow for payments providers.
5. Expanded Payment Networks
Collaboration between financial institutions and between financial and non-financial organizations holds the key to an expanded payments ecosystem and an improved payments experience. Instead of independent P2P solutions, collaborations such as the industry’s development of Zelle, provide more consumer benefits than could be possible with a proprietary network.
Instead of building from scratch, the building of partnerships within and outside the traditional financial services industry through APIs and digital technologies will provide enhanced experiences for consumers and outside providers. Blockchain-based solutions will further the capabilities to deliver unique experiences.
6. Fintech Collaboration
Once considered threatening competition, smaller start-up fintech firms now provide much of the innovation backbone in the payments industry. Better positioned to create new consumer-focused digital solutions, these agile fintech firms are the perfect partners for legacy financial services organizations who need to become more responsive to the digital consumer … yesterday.
According to the Accenture research, “Chase Pay has turned to scanner company LevelUp to expand its footprint in quick-service restaurants. Working together, Bank of America and PayPal are making it possible for the bank’s customers to link their cards into PayPal to pay in store. TD Bank and Moven came together to bring Moven’s money management app to customers in the United States.” Partnerships like these will be the future of payments.
7. From Cards to Code
Traditionally, payments accounts were identified by a series of numbers embossed on a card or stored in a firm’s database. With the introduction of EMV, each account becomes the foundation for code that changes with each transaction for security purposes. Eventually, the power of code will overtake the purpose of plastic cards. Payment credentials will become virtual.
The transition made possible with advanced codes will impact the way blockchain, augmented reality (AR), the Internet of Things (IoT) and biometrics impact the payments process. This in turn will impact the way consumers view the payments process as well as how the government regulates the industry.
8. Payments Everywhere
The payments industry has very quickly transformed from an infrastructure of cards and terminals to one that is dominated by phones and fobs … with the next stage being phone-to-phone dominance. Payments are now made at the point of sale, online and between individuals using an app.
Today’s payment industry is quickly being dominated by organizations like PayPal, Venmo, Square and Stripe where payments can be made between people (P2P) or between people and businesses (P2B) and even between businesses (B2B). Eventually, everyone will be able to make and accept payments when (and where) they like.
9. Increasing Importance of Security
As fraud continues to escalate, the need to stay ahead of the fraudsters becomes more difficult and important at the same time. Adding to the pressure being felt by the industry is the need to balance security with the simplicity desired by the consumer. According to Accenture, the industry could expect $31.3 billion in global card losses in 2018, which have increased by 18% every year since 2013.
The industry must out-innovate fraudsters. This may take the form of new biometric security features upon the initiation of a payment, or may include enhanced behind-the scene features not impacting the consumer experience. With geolocation information, banks can compare the location of the device with the cardholder’s stated location to determine the potential of fraud. Some firms are even using acoustic analysis to verify a payment location.
10. Replaced Infrastructure
Yesterday’s payments infrastructure was not designed for real-time, digital payment processing. It was also not designed for an API integration or modern fraud detection. Throughout the industry, the need to transition from paper to digital processing is an imperative.
Replacing outdated payments infrastructure will be required to compete in the future. Systems in the future will be open and flexible in design, with the ability to adjust to rapid changes in the industry.
Preparing for the Future
We can’t use the present as a guide to the future, however. According to Accenture, payments usage remained relatively consistent during the past three years, aside from an increase in debit cards and mobile wallet apps aligned to retailers, such as Starbucks.
63% of consumers said they use a debit card for payment at least weekly, up from 53% in 2014, while cash usage remained stable at 66%. Mobile wallet usage was flat in all areas, except for retailer apps, which increased 4% over the past year, from 16% in 2016 to 20% in 2017. All other mobile wallet app usage remained flat at around 14%, with no distinct preference between types of wallets – whether provided by credit card companies, tech giants or traditional banks.
All that said, complacency is the biggest enemy being faced in the banking industry. Just because change has been slow in the past does not mean it will remain that way. And, as was found with mobile banking, when the transition of consumer preferences changes, the transition will be quick.