Cell phones, biometrics, prepaid cards, PayPal, microtransactions-these and other new options are the wave of the payments future. But will all of them gain critical mass?
Looking back, it all makes sense. Thirty years ago, Americans began to use a little piece of plastic to make in-store purchases. Twenty years ago, personal computers started to make their way into homes. Ten years ago, mobile telephones began to see uptake and an information system called the Internet became widespread.
The road of technological innovation may seem to go in a straight line. But we often forget the side trips and dead ends. Remember those six-pound car phones that cost thousands? The 'Net before browsers such as Netscape? We are still in the midst of the music revolution where albums became tapes then CDs and now bytes on an MP3.
Some of today's burgeoning payment ideas may well become dominant in 10 years. There's talk of micropayments for small purchases on the Web. A bank account in your cell phone sounds convenient. And issuers and merchant acquirers have been striving to open up more markets for cards, with fast food, health care and movie tickets offering large markets.
The payments industry recently has launched a number of new ideas it hopes will tickle the public's fancy, find merchant acceptance, and make money for issuers, processors and vendors. That's a huge challenge. Then again, so was the launch of credit cards 30 years ago. Maybe lightning will strike twice.
The DaVinci Institute, a futuristic think tank in Boulder, Colo., convened the first "Future of Money Summit" in October to foster critical thinking on that topic. The concept may sound grandiose but the participants were well grounded. The days of starting something vaguely related to the Web and finding easy venture capital are over.
One common thread at the summit was that a successful new payment device must offer a dramatic improvement in cost, convenience or ease of use over existing systems. An incremental step up won't cut it. Why? For one, because cash, checks and plastic are ubiquitous. Second, look up "user-friendly" in a dictionary and you'll see a picture of a dollar bill. That combination is tough to beat.
But it's not impossible. Witness PayPal Inc., the e-commerce payment form that continues to grow. Mountain View, Calif.-based PayPal began in 1998 and has arguably made the Internet auction market possible. Consumers deposit money from their card or bank account into a PayPal account. That account is used to buy items from the 145,000 online booths hawking their wares on PayPal's parent, eBay Inc., the online marketplace with sales of $14.9 billion in 2002.
PayPal acts as a kind of inexpensive guarantor to both sides of a transaction. Previously, a merchant would wait until a buyer's check cleared before sending the purchased item. That could take days or even weeks.
Small merchants flock to PayPal because the market of buyers is huge. PayPal had 35.2 million total accounts and 11.2 million active accounts this September. More importantly, the merchant doesn't get bogged down in Visa and MasterCard rules and regulations, says Todd Pearson, managing director, merchant services.
"We prove that transparent commerce between merchants does not need a huge infrastructure," says Pearson. "The small merchant does not need a credit card account." The average PayPal merchant has sales of less than $1,000 a month, he says.
Next Big Thing
Even better, PayPal merchants don't pay the card associations' interchange fees ("eBay Puts Its Mark on PayPal," April). Instead, PayPal charges merchants from 2.2% of the payment plus 30 cents to 2.9% plus 30 cents, depending on the value of the sale.
Total payment volume on PayPal in the third quarter was $3 billion, up 67% from the $1.8 billion for the same period in 2002.
PayPal's success brings mixed reactions from payment veterans. It builds Web sales, an obvious benefit. But 'Net shoppers see that PayPal bug right next to the logos of MasterCard, Visa, American Express and Discover when they go to make a purchase.
At the Summit, Visa International's Margaret Reid was open minded about the company. "PayPal found a niche in the auction market," says Reid, vice president of consumer products. "General-purpose cards may not fill all niches. Cash and checks don't work in all niches."
PayPal has already vanquished several competitors, the most recent being C2it from Citigroup Inc. The banking giant this autumn said it would shut down the person-to-person online payment service although users have until February to review their accounts.
Earlier, the Beenz and Flooz programs fizzled. Another initiative that flopped in this space was Bank One Corp.'s eMoney Mail, says Elizabeth Robertson, a senior analyst with Needham, Mass.-based TowerGroup. PayPal has been successful because it focused on, and was an early leader in, auction payments. The banks thought person-to-person payments would take off but they weren't prepared for the high rates of fraud and money laundering, says Robertson.
What some call P2P are primarily remittances, where immigrants send money home to friends and relatives, says Robertson. First Data Corp.'s Western Union leads that arena, though Wells Fargo & Co. and Bank of America Corp. have moved into remittances between the U.S. and Mexico. Bank of America allows for the recipient to pick up cash using a card through an automated teller machine.
The futurists point to PayPal as proof that consumers will embrace a new payment form, as long as it fulfills a need and is a dramatic improvement over existing options.
The next big thing could be micropayments on the Web, according to many of the futurists at the Boulder summit. But it's not clear what the potential market is for Web micropayments because so many products could fit under that tent.
There is a crying need for a solution to the problem facing the music industry, where consumers share songs for free with each other via computer. A legal crackdown by the revenue-strapped music industry may close much of that down. In its place, the record labels would prefer to sell songs for $1 or less, depending on demand.
The publishing industry also would welcome selling its content, much of which has been available for free on the 'Net. The thinking goes that consumers would be willing to pay a minor charge for individual articles, columns, and comics in place of buying the daily paper or a magazine.
"Why get a marriage proposal when all I want is a date? Why buy a subscription when all I want is an article?" jokes Kurt Huang, chief executive of BitPass, a Palo Alto, Calif.-based micropayments vendor that opened this July.
Paying for Content
The BitPass business model is similar to that of PayPal. Consumers fund BitPass accounts through their bank accounts. A user draws upon the BitPass account to buy items priced anywhere from 10 cents to $30. BitPass charges content providers 15% for transactions valued up to $5, and 5% plus 50 cents for transactions over that amount.
Providers that register their content with BitPass can control the length of time the information is available and the number of customer accesses that are allowed, says Matthew C. Graves, BitPass chief operating officer.
Instead of the direct-to-consumer route, San Francisco-based Yaga Inc. partners with publishing companies. It has signed up Time Inc. and Tribune Media Services ("Big Dollars in Micropayments' Future," May). Consumers who visit the Time Web site and want to buy content will be directed to pages operated by Yaga. Consumers can subscribe for various time frames or opt to buy individual or multiple articles.
Convincing consumers to pay for general Web content may be difficult since so much content has been free for almost a decade. A sudden, widespread shift could generate consumer backlash. Some publishers, however, notably The Wall Street Journal, have successfully moved into the paid space.
The Online Publishers Association reported that spending on paid content grew to $748 million in the first half of this year, a 23% increase from the same period a year ago. Subscriptions accounted for 86% of revenues. Nearly 11% of Internet users paid for content in the second quarter, according to the association.
However, this area is so new that the stats aren't clear. Online content sales may overstate micropayments revenues. The Online Publishers primarily follows providers of content related to personals and dating, business and investment, and entertainment. That may not cover all the content of those providers that would work with a firm like BitPass.
One executive claims that digital content could generate as much as $180 billion in annual sales. In contrast, Visa's Reid cautions that the Web has led to hyperbole in the past. Visa projects revenues of $60 billion in 2007 for digital content.
Lots of Gumballs
Another big problem for the expansion of small online payments is credit card processing costs. The expense of running a business and also paying these costs may eat up just about all your revenue, claims PayPal's Pearson. And with credit cards used in somewhere over 80% of Web transactions, processing fees must be watched.
Pearson points to the 99-cent charge per song for Apple Computer Inc.'s popular iTunes service. "Licensing and other expenses are around 65 cents a song. It costs 25 cents for processing," Pearson says.
That leaves 9 cents for a middleman. At present, PayPal is watching the micropayments arena but is staying away, says Pearson.
The main lesson so far? Prospective micromerchants will have to sell a lot of gumballs to make a living.
Biometrics is another long-running payments idea that has garnered attention but not a lot of actual usage. Some firms are trying to change that.
Biometric Access Corp. in Round Rock, Texas has teamed with Kroger Co., the country's largest grocery chain, to pilot its fingerprint-based payment system. Ronald R. Smith, president and chief executive, says that its system will be in 200 stores by the end of this year, expanding from Texas to the Midwest.
It takes consumers three uses to get comfortable with using a biometric system, says Smith. So, Biometric Access has implemented a reward for five uses.
To use the system, a consumer registers one or more of her payment accounts with Biometric Access in the store. Her fingerprint is also recorded. Once she gets to the point of sale, she presses her finger into a recording device, and that is matched to the database of prints. The consumer also chooses what payment account to use.
San Francisco-based Pay By Touch is testing a similar system with a national video chain in New York and Texas. CEO Craig Ramsey says the pilot in five stores has seen a 60% to 70% consumer adoption rate and a 34% reduction in time spent at the point of sale.
Pay By Touch has added to its board Eula Adams, a payments veteran who once led processor First Data Resources. Adams believes consumers will take to biometrics at the checkout because they've seen similar systems in use at airports and offices as security tools.
The Future of Money Summit also saw talk of mobile payments. In Asia, Visa says it has successfully been testing the use of cellular telephones to make payments.
In South Korea, Visa's member banks have sent cardholders a pop-out chip that is inserted into the phone, converting it into an electronic wallet. The phone is waved at a payment device at the point of sale.
Sue Gordon-Lathrop, Visa International's vice president of emerging consumer environments, says that nearly three million cell-phone handsets have the chips installed and that 400,000 payment terminals can accept the radio-frequency signals from the portable phones.
In Japan, Visa and telecom giant NTT DoCoMo Group are in the commercial phase of a wireless payments program that includes 1,000 merchant terminals and 10,000 cardholder handsets. If there is adoption in Asia, Visa would next test similar uses in Europe, says Gordon-Lathrop.
In a separate test, JCB Co. Ltd., Japan's largest credit card issuer, launched in November a pilot that will allow its customers to access their accounts by using cell phones and fingerprint biometrics. Tokyo-based JCB says it is testing to see if a fingerprint will authenticate the consumer, replacing the card number and signature or personal identification number.
These mobile systems may find success in East Asia but the U.S. culture is different, says William Sequeira, a principal with Evergreen, Colo.-based consultancy Axon Hillock. For one, Asian consumers are more open to new technology, he claims. And virtually everyone there uses cell phones, says Sequeira. But in the U.S. much of the telecommunications infrastructure remains wired.
Further, the infrastructure is different in the States with multiple, though large, phone companies. NTT DoCoMo dominates Japan, making it easier to roll out a nationwide system.
The bottom line is the big question, says Sequeira. Do mobile devices provide that giant step forward in payments that will bring mass consumer adoption? Sequeira says no, for now, as long as consumers have to sign a receipt to authorize a purchase. He theorizes that Americans might use their phones for smaller purchases but they won't throw out their plastic cards.
On the other side is James Van Dyke, a consultant to financial institutions and a frequent traveler. He thinks a hand-held device that combines payments with a phone and a Palm Pilot-style information system could become a huge success.
"It would become the new wallet," says Van Dyke, principal and founder of Pleasanton, Calif.-based Javelin Strategy & Research.
Consumers could put several payment accounts on the device to draw upon as the need arises, says Van Dyke. The technology is here to install a biometric for authentication. Further, it could be used as a contactless device for mass transit.
The major telecommunications providers in the U.S. would have to decide on national standards so travelers could use the devices everywhere, he acknowledges. "It will be a while. And there will be some false starts," says Van Dyke. But the utility is so great that consumers would adopt the contraption, he claims.
Put a catchy name on such a device and you could really draw attention. How about ... the PayPhone?
While the futurists are busy theorizing, the rest of the card industry has been putting together some intriguing deals. And some solid transaction numbers released recently demonstrate why this business has a future.
The decline of paper payments continued with the Federal Reserve Board reporting that check volume through August 2003 was down 4.8% compared with the same period a year ago. Meanwhile, transactions routed through the automated clearing house (ACH) were up 13.2%. The numbers were driven by consumers switching to online bill payment and debit cards, according to a spokesperson at Herndon, Va.-based NACHA-The Electronic Payments Association.
In October, American Express Co. announced it would issue a plastic card in addition to its trademark paper travelers checks. TravelFunds, a reloadable prepaid card for travelers, is available in dollars, euros and British pounds, and can be used wherever AmEx cards are accepted.
"The product is a plastic form of travel money, and it offers 24-hour replacement if lost or stolen," Peter Vaughn, an AmEx vice president, told CCM sister publication CardLine.
Sales of paper travelers checks have been declining for a decade, says Derek Pearmund, Visa International senior vice president of travelers cheques. Pearmund estimates that the market was worth about $60 billion 10 years ago but will come in around $30 billion this year.
Each paper travelers check costs about $1 in printing, shipping and other costs, says Pearmund. It's much cheaper for a bank to sell the consumer one prepaid card instead of the usual 10 paper checks, he says.
Some markets still prefer paper so that product won't go away, but Europe and the U.S. are shifting to plastic, says Pearmund.
Other new markets that seemed to finally crack open this year were the $110 billion quick-service restaurant field and the $6.5 billion movie-ticket business.
Another promising space is health-care payments. According to federal statistics, personal health care was worth $519 billion last year. Government or insurance companies pay more than two-thirds of that.
But the remaining 30%, or about $155 billion, is paid out of pocket by consumers. Checks dominate, claiming 72% of that spend. Cards are used to pay for 18% of health-care payments or $28 billion, according to Andrew Rueff, vice president of strategic acquisitions at TransFirst Holdings Inc. "That represents a significant market to be captured through competition and by displacing checks," says Rueff.
Dallas-based TransFirst is a merchant processor that formed a health-services division to build market share in the space. This year the division will process about $1.2 billion in health-care payments, a growth rate of 30% from 2002, says Rueff.
Many physicians and medical provider organizations don't realize that cards are a viable payment option, says Rueff. In addition, physicians now devote time and resources to hiring collection firms to track down patients who bounce checks.
The rise of the Internet is growing more card uses. Howard Dean, who is seeking the Democratic nomination for president, raised $14.8 million in political contributions during the third quarter, including $7.4 million made with credit card donations over the Internet. In the last year, Dean grew from a relatively unknown governor to a leading candidate, partially due to the speed of payments over the Web ("Small Web Donations Have Politicians Thinking Big," page 22).
This year also saw the pairing of MasterCard International and First Data in hopes of snaring business-to-business payments. Celent Communications has estimated that sales on purchasing cards alone could reach $190 billion by 2006. The entire B2B field was worth $31 trillion in 2001, according to Celent. Here again, standardization of communication systems would help card payments to grow.
Taking a long view one has to be optimistic for the card business and its online cousins. New uses came to fruition this year. And there are plenty of ideas in the works that could generate tremendous transaction volume.
Cash and checks are the entrenched competition. But consumers need something that can be used in person, over the phone, through the computer, and worldwide. Paper is pass?. Plastic is progressive; the digital derivatives even more so.
Authoritative analysis and perspective for every segment of the payments industry
Authoritative analysis and perspective for every segment of the industry
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