The payments landscape looks far different than it did even five years ago, and it will likely undergo even more rapid changes in the next five. The announcement by Facebook of its new cryptocurrency, Libra, is just one example. We are moving further into the digital age where a large portion of consumers will be from Gen Z, those born after 1996. This group will make up 40% of all U.S. consumers by 2020 and it shops far differently than previous demographics.
Born into the digital age and experiencing the rise of the gig economy and on-demand retail, Gen Z consumers seek instant and seamless online shopping experiences. They have grown up in the digital revolution and because of this, demand superior experiences through technology as it’s all they have ever known.
Financial institutions and the payments industry overall need to follow the lead of other sectors to innovate solutions that meets the needs of the changing consumer base. The rise of direct-to-consumer brands that cut out third-party middlemen is a great example. Uber is the poster child for this trend. Payments must look to chart a similar path.
Gen Z consumers, like their immediate predecessor cohort, the Millennials, are looking for instant gratification in their purchases. This isn’t just a generational affectation. It’s an outgrowth of the digital world they inhabit. If they see an interesting pair of shoes or handbag on the street, they can pull out their phone and order in real time. The payments infrastructure must make this a viable process on every corner of the globe. A consumer in Belgium as well as Texas should be able to order goods in Australia instantly by the payment preference of their choice.
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Channel-First Mindset In Payments Must Go
Too often, the focus on the digital consumer is lost in the entire payments value chain. Payment solutions are created without factoring in the specific needs of consumers in different regions and countries. Consumers should be the first touchpoint in the value chain, not the last.
“Consumers should be the first touchpoint in the value chain, not the last.”
The payments industry must craft solutions backward, working from the consumer out. The channel-first mindset must change as omnichannel thinking is a concept of the past and consumer-centric is the way of the future … and the present. Payment solutions must cater to consumer preferences region by region to keep pace with the next generation of shoppers.
Local payment methods (LPMs) are a key to unlocking global e-commerce and streamlining the payment process for consumers. LPMs are payment options outside of the traditional credit card brands and products. They help facilitate the needs of different geographies and cultures across the globe.
Worldwide, card penetration sits at a shockingly low 18.4%. This is proof that scaling payment globally requires thinking outside of just card payments. The fastest growing markets in the world have large populations who continue to conform and adopt everything digital, including the way they shop and pay online.
The payments industry also has the ability to drive financial inclusion and connect the global economy — only if they keep the end consumer top of mind. Significantly, this one of the stated goals for Libra. LPMs are creating the gateway to a more connected global economy, but it is up to merchants, supported by financial institutions, to offer these payment opportunities. Digitally minded consumers have seen innovations across many industries fundamentally shape how they live and work. It is time for payments to take this same approach.
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Examples of Local Payment Methods In Use
How can banks and credit unions best mirror their services to fit the changing needs of a changing consumer base? One way is to focus on the consumer throughout the entire payment process. By our estimate, nearly half of consumers will end a transaction if their preferred payment method is not available, so being able to meet the needs of the consumer is vital.
“Nearly half of consumers will end a transaction if their preferred payment method is not available.”
These needs vary from region to region, which means offering a cookie cutter solution will not work in all markets or countries. For example, in Asia the preferred payment methods are mobile e-wallets making up 40% of online transactions. While in North America, credit cards are preferred at 57% of all online transactions.
By contrast, Mexico is heavily reliant on cash. The country also has a low banked population at 37%, compared to the global average of 68% (China is at 80%). Oxxo is an LPM created by a Mexican convenience-store chain that allows many unbanked or cash-dependent consumers to participate in global e-commerce through a cash voucher system. Solutions like Oxxo can help further connect the global economy while catering to the specific payment needs of various consumers. The mindset of putting the needs of the consumer first can drive financial inclusion across the globe.
Europe provides another example of how cultural and business differences create stark changes in payment preferences across the globe. In many parts of Europe, card use is far lower than in the U.S. as consumers opt for mobile e-wallets or bank transfers instead. In the Netherlands, for example, an astounding 70% of transactions are completed by bank transfers.
Both online merchants looking to sell cross-border and the financial institutions supporting them need to consider these different consumer preferences when crafting solutions, and avoid forcing different payment options in hopes those become adopted.
Millennials and Gen Z Look For Non-Card Pay Options
Many consumers do not trust card-based payments and prefer the security that other digital methods offer. The new wave of consumers value efficiency and speed of payments, just as much as feeling secure with how they pay.
Local payment methods are the key to globalizing commerce. Data seem to back up this claim showing that by 2020, 80% of cross-border e-commerce will be facilitated by a local payment method. As well, by 2021 U.S. cross-border e-commerce will reach $203 billion, yet only 36% of U.S. online merchants currently sell cross-border. Financial institutions need to work with these customers to help facilitate this shift to global commerce. There are LPM solutions that cater to both cashless and cash-heavy populations.
With advances in technology, it is clear that all industries must shift to become more consumer centric. The payments business is no different. Banks and credit unions and the solution providers and merchants they work with will be left behind if they fail to change their mindset.
The payments industry broadly is tied to innovation. What is needed is more players stepping up to shape the consumer experience from the inside out, keeping the consumer as the primary focal point throughout the payment process. At the end of the day, the payment experience will continue to define which financial institutions and which companies consumers choose to engage with. Those that cater to the needs of digital consumers will capitalize on this global shift, while those who stick with channel-centric strategies will pay a steep price.