Executive thinking on payments: disconnects and opportunities

Executive thinking on payments: disconnects and opportunities

Part of the Vantiv Insight Series 2012, featuring proprietary research performed by Vantiv LLC and Mercator Advisory Group

© 2012 by Vantiv LLC. All rights reserved.

Merchants and financial institution executives devote a great deal of at-tention to keeping up with changing payment methods. They are constantly weighing everything from mobile and prepaid strategies to the rollout of new security technologies and the emergence of new competitors. Faced with shifting and even contradictory currents, they find the ultimate direc-tion of events is not always clear. As a result, they are often hesitant about moving forward with new approaches.

That is one of the key findings of recent research conducted by Merca-tor and Vantiv. Researchers conducted in-depth interviews with dozens of executives representing merchants and financial institutions to explore their thoughts on payment trends. These in-terviews were part of a larger research effort—the Vantiv/Mercator Insight Series—that also surveyed some 1,200 consumers to gauge their awareness of and interest in various payment meth-ods. The result is a multifaceted view of the payment landscape.

The interviews found that executives are concerned on many fronts—about

EMV implementation, ensuring security, and costs associated with emerging payment methods. But they also see opportunities to increase revenues and strengthen customer relationships.

However, the research revealed that executive attitudes about payments are not always aligned with customer attitudes. Comparisons of the two sets of responses indicated that consumers are often out in front of merchants and financial institutions when it comes to enthusiasm for new approaches to payments. And organizations that move too slowly may find themselves losing customers to competitors that are able to meet rising customer ex-pectations for fast, convenient mobile payment methods.

What’s Keeping Executives Up at Night?

Today, mobile payments are very much on the minds of merchant and financial institution executives. In general, they expect mobile payments to become mainstream, but they have a number of concerns about how they will work and what it will take to get there.

While consumers await new payment technologies, merchants

and financial executives are being cautious—but at what price?Cautious Timelines

“Customers are really not ask-ing for mobile yet. They aren’t using it in our [mobile payment pilot] programs. It’s going to be years before it’s common—at least five years.” —Apparel retailer

“We are taking a ‘wait-and-see’ approach for mobile until a clear product becomes avail-able and there is clear demand for it, with a clear leader or solution. It’s not there yet.” —VP, credit union

“There’s a lot of work and education needed to develop the right digital wallet that will include all our cards and the other cards people need.… At this point, is the convenience worth the risk?” —Marketing head, large regional bank

“Right now, there is no value proposition [for mobile pay-ments] from a consumer standpoint and no common standard platform…. It’s a chicken and egg—merchants need to support it and the is-suers need to offer it.” —Executive VP, regional bank

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As one might expect, executives are worried about security with new pay-ment methods in general, and with mobile payments in particular. That’s a strong concern for consumers as well. But looking ahead, executives are actu-ally more optimistic than consumers about the industry’s ability to address security. Many interviewees “recognized a potential for even greater security with smartphone payments through technologies like multifactor authenti-cation and tokenization,” says Bill Wein-gart, chief product officer at Vantiv.

Executives are less confident when it comes to dealing with the widespread implementation of mobile payments. Merchants not only worry about the cost of new infrastructure, they also want to avoid driving customers to new payment types that will increase costs. Financial institutions, seeing lower revenues driven by legislation, want to clearly understand the value of mobile payments before investing.

At the same time, it isn’t clear which technologies companies should invest in. “A primary concern is the lack of a universal standard platform for mobile payments,” says Weingart. The issue is partly behind the formation of the Mer-chant Customer Exchange, a consortium of 14 major retailers that aims to come up with a standard mobile platform for its members. “Efforts like this are a sign of how much desire there is for a clear way forward,” he adds.

Few interviewees felt it was certain that near field communication contact-

less payment technology will emerge as the dominant approach. Rather, ex-ecutives are looking at a growing range of options. These include alternatives to NFC, such as Paydiant and other cloud-based interfaces activated via QR codes or PIN—approaches that do not require much additional infrastruc-ture. With such options getting trac-tion, the future role of NFC is not clear.

The interviews found that executives are seeing a similar level of uncertainty around mobile wallets, which provide a single access point to an individual’s cards and accounts for payments. Industry executives feel that current im-plementations of these wallets do not provide the functionality consumers are looking for—in particular, they don’t in-corporate all the cards customers want to carry, such as merchants’ private-la-bel closed-loop cards. Most merchants said that they were involved in evaluat-ing mobile wallets, but many complained that not enough phones support mobile payments and that current technology is not user-friendly. Three merchants reported that their mobile wallet pilots were unsuccessful; a fourth decided to suspend its program until more phones can accept NFC.

At the same time, executives are con-fronted with a long and changing list of mobile wallets in the marketplace. There are no mobile wallet standards in place, and wallets are available from a wide range of providers. Overall, says Weingart, “executives fear that early implementations may be quickly outdat-ed, and they don’t want to waste limited

WHAT CONSUMERS WANT

Executives tend to think that consumers are looking for convenience, but costs are top of mind for consum-ers when choosing a pay-ment method.

0% 50% 100%

87%No or low cost

Fast at POS

Security

Control spend

Ease of dispute

No minimum purchase

Instant deduction

85%

72%

71%

68%

66%

65%

4

resources on something that won’t serve their purpose for very long.”

Looking at a shorter-term issue, the interviews showed that the impending rollout of EMV technology is a source of anxiety for merchant executives. As one might expect, they are focused on the Visa and MasterCard implementa-tion mandates and the 2015 shift of fraud liability to merchants. But they are also concerned about the challenges of weaving EMV implementation into their point-of-sale technology update cycles—and the fact that EMV does not address card-not-present fraud.

But these executives aren’t alone. Inter-viewers found that financial institution executives are perhaps even more con-cerned than their merchant counter-parts about EMV implementation. Es-sentially, EMV does not address banks’ security concerns; it is effective against card counterfeiting, and it helps bank customers use their U.S.-issued cards in the EMV networks found abroad, but it does not strengthen security against the kind of database breaches and compromises that affect banks.

Nevertheless, implementing EMV will create a significant expense for finan-cial institutions. “It’s primarily a cost issue for them—a big cost issue,” says Ken Paterson, vice president of re-search operations at Mercator. “In some ways they are even more confused than merchants because they’ve been given less of a mandate. So they are just try-

ing to figure out when and how to start actually issuing these cards. And some bank executives are doubtful about the eventual enforcement of the mandates and whether an extensive installed base of EMV terminals will actually emerge.”

Finally, executives expressed concern about the emergence of nontraditional players in payments. Financial institu-tion executives are worried about new mobile payment providers. “Many fear that the new non-card-based entrants may quickly make significant inroads and cut out their card network-based interchange revenues,” says Royal Cole, president, FI Services, at Vantiv.

Merchant executives also worry about new players—such as Google and perhaps Amazon, Apple, and even social media networks—becoming interme-diaries that gather a wealth of informa-tion about their customers. This could not only result in merchants having less control over customer relationships, it could also enable those intermediaries to use that data to offer marketing and advertising services to a merchant’s competitors, targeting the merchant’s customers. However, the executives do see an upside to the arrival of new play-ers which, they hope, can help reduce their costs around mobile payments.

Executives and Consumers: Differing Opinions

With all of these concerns in mind, the merchant and financial institution

The Challenge of Change

“The most challenging is to figure out which payment types a bank with limited resources should offer…. We can’t offer ev-ery type of solution that comes along.” —Senior VP, large regional bank

“A major pain point is having a list of 25 things to do.… How should we allocate our resources in the payment world that is changing so fast? We need to move more quickly in some areas, but how?” —EVP, community bank

“Some of the new companies developing mobile wallets are not in the payment industry—we see right through them. They’re trying to make the marketing compo-nent more valuable, but their busi-ness is run by advertising.” —Supermarket retailer

“Our biggest pain point is un-derstanding which payments customers really want to use, even if they don’t know yet. It’s too expensive to invest in all the technologies that come out. We have limited resources and want to focus only on the most impor-tant ones to our customers.” —Drugstore retailer

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executives told interviewers that they were moving forward very cautiously with new payment methods. But in a rapidly evolving environment, a wait-and-see strategy may be ill-advised because it is out of sync with what customers want and expect. Waiting too long could mean missed opportu-nities and even lost customers.

The research identified several key differences between executive and consumer attitudes—and a number of these “disconnects” underscore the risks involved with a wait-and-see strategy. For example, consumer inter-est in mobile payments is quite high: Vantiv research found that 62% of con-sumers expect mobile payments to be widely used within five years—and 31% think that will be the case in just two years. Consumers see challenges, such as security and reliability issues, but ex-pect the industry to work through them and deliver mobile payments capabili-ties sooner rather than later.

But executives see a slower transi-tion and believe that the widespread use of mobile payments is farther off. Financial institution executives foresee a somewhat shorter timeline than do merchants. That presumably stems from the fact that banks consider mobile payments a natural extension of mobile banking and card operations. Many merchants, on the other hand, cited their disappointing pilot pro-grams and frustration with the mobile payment tools being offered. Some

also felt that current mobile payment strategies are not in their best interest and benefit only the issuer. “There is a consensus that these are coming, but there is a lack of clarity and agreement about how fast they’re coming and how they’re going to work,” says Peter Kulik, vice president, Product Manage-ment, at Vantiv.

The research also uncovered some differences of opinion around the role mobile payment platforms will play in consumers’ lives. Executives tend to see mobile payments as a vehicle for using traditional card accounts—an electronic form of plastic—and little more. Consumers, however, expect mobile payment platforms to bring more information and convenience to their entire purchasing experience. They want mobile platforms that not only handle payment transactions but also help them manage receipts and coupons, track spending, and so forth.

Indeed, the Vantiv research found that for consumers a key barrier to the greater use of mobile payments was that mobile payments, by themselves, are no more convenient than a credit card. At the current state of evolution, many consumers see no compelling reason to change. They want more than just the ability to pay with their phones. Without additional tools and more information on the mobile plat-form, they may stay away from mobile payments—or find providers that have those broader offerings.

WHO’S INTERESTED IN MOBILE?

Executives are cautious about mobile payments, but younger consumers are es-pecially interested in them, suggesting future growth. Desirable customers—high-er-income consumers—are also interested.

57%18-34

35-64

65+

33%

14%

41%

33%

34%

43%

42%

33%

0% 20% 40% 60%

AGE

Men

Women

Less than $50K

$50K-$75K

$75K-$100K

More than $100K

GENDER

INCOME

6

Consumers are also looking for more when it comes to prepaid cards, and they like the inherent spending discipline of having a set amount of funds loaded on a card. The research also found that consumers see prepaid cards as the most secure form of in-store payment. And nearly half considered prepaid cards useful for online purchases—a “surpris-ing finding, since open- and closed-loop cards have not generally been marketed for this use,” says Ed Paciolla, product management director at Vantiv. Looking at consumer interest and awareness, the research concluded that prepaid card usage is likely to keep growing.

The research suggested that mer-chants and financial institutions may be missing the significance of the growing consumer interest in prepaid cards. The interviews found that in many cases, banks are only in the planning stages with general-purpose reloadable card programs, and many are just beginning to think about issues such as reloading capabilities and online usage. Few are including prepaid cards in their rewards programs or actively marketing them to their customers. “At some larger banks, executives think that prepaid cards will only pull customers away from core

accounts, so they are kind of lukewarm toward prepaid,” says Paciolla.

Merchants, too, are paying relatively little attention to the potential of pre-paid cards. Although they are familiar with closed-loop cards and are aware of the recent growth in the sales of such cards, they generally do not view them as a critical form of payment. “Mer-chants usually do not link their loyalty or rewards programs with their closed-loop cards,” Paciolla says. “And general-purpose prepaid cards are essentially off their radar.” Merchants may also be missing an opportunity to use closed-loop prepaid cards to reduce the overall cost of payments.

Meanwhile it seems that consumers and executives have different views on what drives consumer payment choice. Vantiv’s consumer research has shown that consumer payment preferences are determined, in order of importance, by low fees and low costs, speed and convenience, security, and spending control. Consumers are clearly fee-sensitive, with nearly 90% saying that cost is a critical factor. Eighty percent consider their worst payment experi-ences to be unauthorized, unexpected, or added fees based on payment type.

In contrast, executives tend to believe that consumer payment preferences are driven primarily by convenience and/or rewards, rather than costs. Incidentally, financial insitutions think of convenience in terms of offering an

MOBILE AND PREPAID: HITTING THEIR STRIDE

The use of both prepaid cards and mobile financial

tools are following adoption curves that indicate contin-

ued growth, with prepaid cards being further along

the curve.

YEARS IN U.S. MARKET

5 years0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

10 years 15 years 20 years0 years

JAN

UA

RY 2

012

CO

NS

UM

ER U

SAG

E LE

VEL

✦ Smartphones (iPhone intro)

✦ Tablets (iPad intro)

✦ Mobile P2P services✦ Open and single-merchant e-wallets,

✦ Mobile banking* (initially SMS-based)

✦ General-purpose open gi� cards

✦ Retailer closed-loop gi� cards

✦ Downloaded prepaid mobile app like Starbucks

✦ Prepaid cards online✦ General-purpose reloadable cards

Source: Vantiv/Mercator Insight Series Research, February 2012. * Data from Mercator Advisory Group Survey, October 2011.

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organized, easy way to manage spend-ing, payments, and receipts, while mer-chants think of it as speed at checkout and being easy to carry.

Finally, in considering these various disconnects, it’s worthwhile to con-sider some demographic realities. The research found that young adults are more interested in mobile payments and prepaid cards than older consum-ers are, and they are more likely to see themselves using mobile payments. Thus, consumer interest in these areas is not a short-term event. As these types of tech-savvy consumers come to make up more of the consumer pop-ulation, the marketplace’s expectations around these payment methods is only going to increase. These consumers are not likely to reward those providers who took a wait-and-see attitude.

Taking Action— and Finding What Works

In this environment, merchants and financial institutions need to move ahead—and they can do so in incremen-tal steps. They can get beyond wait-and-see strategies to gradually build the capabilities needed in an evolving payments environment—without having to commit solely to one approach.

Financial institutions, for example, can leverage their existing mobile banking platforms by adding functions and fea-tures, even if they not ready to include payments. “Getting various mobile

offerings out there, getting to know which customers use them and how they use them, understanding the use cases that their customers are most in-terested in—those types of things are very important,” says Kulik. “Whether it’s a mobile banking application that’s accessed through the phone browser or a single-use case like mobile check deposit, banks can provide some value to customers while learning how to make the best use of the platform.”

The idea is to strengthen relationships with consumers and hold on to them as the mobile payments space evolves. The Vantiv research found that some banks are adopting this kind of defen-sive strategy with mobile wallets, intro-ducing their own wallets using their own bank cards or branding “white label” wallets from partners. “Even if they do not expect their digital wallets to be a leading payment type in the near future, they want to introduce their customers to the experience early to gain loyalty and seed their market,” says Paterson. “These financial institutions will be bet-ter positioned to combat nontraditional mobile competitors.” That’s important, he adds, because “the window of op-portunity for financial institutions is closing as non-traditional vendors step up the pace of their mobile network development.”

Merchants can take similar action and explore the use of mobile platforms without including payments, allowing them to make progress while they wait

PREPAID PURCHASES PLANNED

Executives may be luke-warm about prepaid cards, but more than a quarter of surveyed consumers expect to purchase more of them in the next 12 months. Young-er consumers, women, more affluent consumers, and smartphone/tablet owners are more likely than average to plan such purchases.

0% 10% 20% 30%

26%Either

general-purpose or retailer cards

Retailer-specific prepaid cards

General-purpose cards

20%

18%

8

Vantiv Corporate Headquarters

8500 Governors Hill Drive, Cincinnati, OH 45249866-622-2880 | www.vantiv.com

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for terminal standards to emerge and infrastructure decisions to be resolved. That can mean focusing on smartphone applications that enhance the in-store experience—providing features such as coupons, e-receipts, and product search capabilities to customers, who can then make payments with their tra-ditional credit card. Case in point: the recently released Apple Passbook ap-plication lets consumers organize and manage their virtual cards and coupons for use with mobile payment systems. “By integrating mobile into the shop-ping experience and the overall process for consumers,” says Kulik, “customers can then be transitioned to mobile pay-ments when the merchant is ready.”

On the prepaid card front, merchants and financial institutions can look for opportunities to strengthen their programs to take advantage of that growing market. Improvements could include providing better access to balance information, simpler redemp-tion and reloading, the ability to split transactions across prepaid and credit cards, and so forth. Companies can also integrate open- and closed-loop prepaid cards into their mobile wallets and their rewards and loyalty programs.

Altogether, such initiatives, combined with ongoing loyalty, security, compli-ance, and cost-management efforts, require a wide range of technologies

and skills. That can be a lot for individ-ual merchants and financial institutions to cover, making it difficult to tackle these initiatives alone. Like other indus-tries, merchants and financial institu-tions are likely to benefit from working with partners that can bring mobile, processing, and other payment-related expertise to the table. “Forging part-nerships that are focused on strength-ening payment initiatives is becoming more critical to the success of financial institutions and merchants, because it can help them navigate through the development and deployment of new technologies to more adeptly address market needs,” says Paterson.

At the same time, executives can ques-tion assumptions—always critical in a changing environment. The research identified several areas where consumer attitudes appear to be out in front of merchants and financial institutions. But those disconnects are not insurmount-able, and by understanding them, execu-tives can take action to shape strategies around consumer wants and needs. “Fi-nancial institutions and merchants have an opportunity to take a leadership role in the evolution of payments and shape standards, technologies, and offerings that keep them in step with changing demand,” says Weingart “Those that take early steps to engage their cus-tomers will be better positioned to keep those customers tomorrow.”

About Vantiv

Vantiv LLC is one of the leading integrated payment processors in the United States. Known as Fifth Third Processing Solutions since 1971, the company, headquartered in Cincinnati, Ohio, changed its name to Vantiv in 2011, and became a public company in 2012. Vantiv’s credit, debit, prepaid, and data security solutions help businesses and financial institutions of all sizes get the most out of payment activities.

Growing Opportunity

“Prepaid cards are very impor-tant.... I think there’s an op-portunity for someone to come up with a mobile gift card mall where it is easier to redeem points and convert to gift cards and access your prepaid ac-count using mobile phones.” —Home improvement retailer

“The technology is moving so fast, there’s a lot of opportu-nity to move to new payment types…. We don’t want to lose membership to another finan-cial institution, and we want to attract the younger gen-erations. Are we on top of the market? Are we identifying the best alternatives and partner-ing with the right vendors?” —SVP, credit union

“Mobile technology will help us better engage our custom-ers and guide them through our stores.… They can set up a profile within our rewards appli-cations to include preferences, shopping lists, and preferred payment method. It will recog-nize through geo-fencing when they will be in or near our stores and know what they want to buy and direct them to the best product in that category.” —Drugstore retailer

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