By Nikki Baird, Managing Partner
10/2/2007
A revolution is coming to retail payments, which for my purposes I’m defining as everything from payment types to the backend architecture that supports payment transaction processing. The changes coming from every direction in this space have the potential to transform the way people pay, the cost structure of the payments that retailers accept, and the way retailers manage their payments infrastructure.
This is a topic I’ve wanted to cover for a long time – ever since the rise of Pay Pal and consumers’ increasing use of gift cards. But a couple of recent events have really accelerated the activity in this space. First, there have been a huge number of announcements and activity around both alternative payments and mobile payments. Google launched Google Checkout, Pay Pal has been testing a mobile SMS-based payment option with retailers like Target, and there have been a host of pilots between card issuers and wireless carriers designed to test “mobile phone as credit card” options. This past weekend, Mocapay, a Boulder-based mobile payments company, tested a limited pilot of its technology at the University of Colorado football game.
Second, I recently attended Micros Retail’s user conference, and sat in on a session about alternative payments, and another session on PCI. Retailers’ sentiments in both of those sessions could not have been more clear: the interchange fees associated with payment transactions are squarely in retailer sites, and PCI requirements continue to weigh heavily on retailers’ minds. Here are all of the elements at play in the industry today:
- The payments “legitimacy factor”. In Micros Retail’s Alternative Payments session, Peter Tahmin, the COO & VP of Ritz Interactive, spoke to the value proposition of having multiple payment options. He brought primarily an online perspective, where there have been a proliferation of payment alternatives like Google Checkout, Pay Pal, Bill Me Later, Amazon, and eBillMe, among others. For consumers coming to a website from a search, and where they may not be familiar with or have an existing relationship with a brand, having a multitude of payments relationships helps give consumers a higher comfort level with doing business with the retailer. The retailer probably isn’t a fly-by-night operation if they take more than just credit cards.
- Alternative payments’ return on investment. For online retailers, alternative forms of payment like Pay Pal and Bill Me Later offer more merchant protection than card issuers, which does more to protect them from fraud. And lower per transaction fees are extremely attractive. Additionally, as the alternative payments industry gets more competitive, payment providers are offering marketing co-op and advertising help – so that a retailer can offer a promotion like “Use Pay Pal and get free shipping,” something that Ritz Interactive has found to be very successful.
- Mobile phone as POS. Alternative payment providers know that the real volume isn’t online – it’s in stores. If they can figure out a way to bridge that gap into the physical world, the market opportunity for Google and Pay Pal would increase ten-fold. Pay Pal is already making inroads through Pay Pal Mobile, a text message-based payment option that they tested last year with Lucky Magazine and Target. Google, having just launched Google Checkout, is making sure that the new offering is well-established before moving on to that natural evolution. The retailers in the audience at the Micros Retail session were particularly interested in this option’s evolution – for the same reasons they like alternative payments online. It offers better merchant protection, and it costs retailers a lot less per transaction. And there are PCI implications – but more on that in a minute.
- New technologies and architectures. Payment technologies have lived in an arcane world within the deepest darkest depths of the financial services and banking industries, and the technology used has reflected it. For retailers, it has meant lock-in for merchant services – adding or switching merchant service providers meant a very expensive and lengthy effort because of integration requirements, which often were complicated by customizations made to the POS. SOA and other advancements in integration architectures have opened that up, giving retailers choice, speed, and most importantly, a lower cost of ownership. It will eventually pose a side benefit, by allowing retailers to consolidate their payments infrastructure – for most retailers, there is very little visibility between online and in-store when it comes to payments, and retailers offering specialty services like business-to-business often have additional payment infrastructures to deal with. Consolidation gives retailers a better bargaining position with service providers, easier reconciliation, and an opportunity to be strategic in the payment services they offer to their customers.
All of these developments are compelling forces at play in the industry, but there is another that has the potential to trump them all: PCI. Part of the value proposition of alternative payments from the consumer’s point of view is that it provides them a measure of privacy when interacting with the retailer. The flip side is that the retailer doesn’t end up actually holding any credit card information as part of the transaction. The consumer places their trust in Google or Pay Pal, and the payment provider just sends the retailer an authorization code that says it’s OK to ship. After retailers nearly lynched the representative from Chase Paymentech at the PCI session at Micros Retail’s user conference – demanding that the provider do more to offload the burden of PCI requirements by offering services that work more like alternative payments do – it’s clear that the retailers who have done the most around PCI are rapidly coming to the conclusion that the best way to meet PCI requirements is to find ways to not handle credit card data at all.
When you couple that with the burden of interchange fees, which according to the Food Marketing Institute, cost retailers more than health care costs in 2006, and have been rising much faster than those costs, it’s not just a wind of change that’s blowing in retail payment services, it’s more like a hurricane.
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