The Green Sheet Online Edition
January 23, 2017 • Issue 17:01:02
Very point of sale:
Payments' accidental ecosystem
When Isaac Newton was hit on the head by an apple or Benjamin Franklin was shocked by a wet kite, either could have shrugged it off and moved on. Instead, the young engineers used these events to test their theories on the laws of gravity and electricity and find practical uses for them.
Some of history's best inventions, from chocolate chip cookies to penicillin, have happened by accident. Instead of just fixing something unintended and moving on, someone took the time to think about cause and effect and experiment with a medication, cookie dough or payment processing system.
As payments evolved from phoned-in authorizations to modem-driven electronic transactions, each subsequent discovery brought new efficiencies and revenue streams to the industry. Over time, a range of ancillary apps, from gift and loyalty to healthcare solutions, rode the credit and debit card network rails.
New and old ecosystems
The payments industry and financial institutions have consistently tried to create environments that nurture innovation. Some initiatives have succeeded more than others. Not everyone warmed to the open floor plans at payment card brands and super ISOs that were meant to inspire group interaction.
However, many budding financial technology (fintech) companies got their start in community and government-sponsored incubators, where mentors and resources help nascent companies achieve self-sufficiency. Contests at regional and national tradeshows place startup companies in the public spotlight as they pitch their concepts to prospective investors.
The payments ecosystem could be compared with natural habitats like coral reefs and wetlands. Properly managed and conserved, these flexible, adaptable microcosms sustain an abundant value chain. When disruptions threaten indigenous wildlife, next-generation species with enhanced capabilities survive and thrive in the altered landscape.
It's generally easier for new life forms to navigate fresh and pristine environments than to muddle through dense undergrowth and complex terrain that typifies older, established ecosystems. Analysts have observed that fintechs in developing countries outperform those in mature markets. Even in mature markets, most merchant service providers agree it's easier to sell a new end-to-end solution than to try to mix and match devices, networks and service providers.
Vast, emerging markets
Many of today's payments innovators are creating solutions that ride existing credit and debit card rails; some are building an entirely new set of rails. Analysts have described fintech companies as new payments industry rails, but the majority are overlays on existing payment networks and infrastructure.
The next-generation of flexible, open-source, self-service models contrasts sharply with traditional payment methods. Mobile banking, restaurant tablet POS solutions and buy buttons on social media are several examples.
As industries enter the digital age, analysts question the sustainability of the traditional financial infrastructure. A Capgemini study, Top 10 Trends in Payments in 2016, found developing economies "leapfrogging developed nations" in payments innovation. The authors contended that emerging regions, such as India, Africa and Bangladesh, have higher mobile penetration because they are unhampered by financial infrastructures and traditional payments instruments.
Developing economies cultivate innovation, Capgemini researchers noted. They found broad government support for financial inclusion initiatives through relaxed regulatory standards and fast-tracked licensing procedures. These measures help fintechs get to market quickly and provide essential products and services to underbanked populations.
Africa's M-Pesa mobile payment system has 19.3 million registered users; Bangladesh's bKash provides financial services to underbanked citizens, and 11 fintechs licensed by the Reserve Bank of India provide a range of services to migrant workers, low-income households and "other unorganized sector entities," Capgemini reported.
Entrenched, established markets
Global consultancy Strategy& found untapped opportunities for fintechs and mobile money service providers in emerging markets due to their growing middle class populations and robust cellular networks. By contrast, established nations represent a "complex and thorny environment" with numerous challenges for fintechs, the company stated in 2015 Payments Industry Trends.
Coauthors Mark Flamme and Kevin Grieve cited the following barriers to entry for fintechs in the United States and other major markets around the globe:
- A global recession created tepid growth and tighter credit standards.
- Increased regulation and low interest rates forced payments industry stakeholders to search for new revenue streams.
- Competition and consolidation prompted financial brands to diversify offerings. Discover Financial Services and Capital One Financial Corp. are examples.
- Dominant retail and ecommerce brands such as Amazon and Wal-Mart Stores Inc. are challenging payment card brands, demanding lower prices for interchange and creating friction between merchants and financial institutions.
Merchant level salespeople (MLSs) working in emerging markets and developed metropolitan communities are on the front lines of innovation. Their relationships with merchants rival those of many other service providers, giving them invaluable insights and a competitive advantage.
The payments industry has evolved in response to the global retail ecosystem. Here are several reasons why MLSs lead with business solutions, not payments:
- Payments are ubiquitous: Credit cards have penetrated former cash-only businesses, from taxis to micro-merchants. Credit card acceptance has become easy and affordable.
- Payments are embedded: Large and small merchants are using intelligent business platforms with embedded payment processing, making a holistic business mindset essential to selling payment processing.
- Payments are subject to security and compliance regulations: MLSs need to educate merchants about payment card security, including the Payment Card Industry Data Security Standard and the meaning and potential impact of the EMV (Europay, Mastercard and Visa) liability shift.
- Payments are social: Mass adoption of all forms of mobile technologies has made payments more social, as consumers use smartphones to comparison shop, as well as share images and transactions with friends. Many payment systems have integrated social media into their apps, POS equipment and ecommerce solutions.
- Payments are international: Consumers are shopping everywhere in the world from their mobile phones, using preferred payment methods. Merchants need the ability to accept multiple currencies and cross-border payments.
As they grow more adept at building their portfolios, many MLSs recognize that each merchant relationship is a distinct ecosystem with its own unique environment and needs. This holistic perspective helps them identify opportunities and guide their merchants through a dazzling array of digital resources to create customized, innovative business solutions.
Dale S. Laszig, Staff Writer at The Green Sheet and Managing Director at DSL Direct LLC, is a payments industry journalist and content provider. She can be reached at email@example.com and on Twitter at @DSLdirect.
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