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Expert opinion

Payment optimisation – cash, cards, or digital wallets

Friday 21 December 2018 | 09:51 AM CET

Mark Beresford, from Edgar, Dunn & Company: “Digital wallets have not replaced cards and are unlikely to do so in the foreseeable future”

It’s not surprising that in the 1930s, when radio was rapidly being adopted, it was predicted that it would kill off the newspaper completely. Go back further to 1913 and you will find Wolfgang Riepl, the chief editor of Nuremberg’s biggest newspaper at the time, stating that newer modes of communications media would never replace the existing modes of media. Known as Riepl’s law, it reappeared in 2006, when the CEO of the leading German newspaper Die Welt stated “I believe in Riepl’s law... Books have not replaced storytelling. Newspapers have not replaced books; radio has not replaced newspapers; and television has not replaced radio. It follows that the Internet will not replace television or newspapers”. This hypothesis is still considered to be relevant, explaining the fact that new media never makes “old” media disappear.

Radio has adapted for the podcast age and on-demand-services via the internet has meant radio is finding new audiences. Similarly, television is changing with the continued rise of YouTube, Amazon Prime, Netflix, and other on-demand services. TV broadcast programming is expected to drastically change during the next decade.

What does this mean for payments?

In many ways, what we have seen with print media, radio, TV, and digital media is equally reflected in how different payment methods are not replacing older methods of payment. They are adding to the payment mix. The number of alternative methods of payments that consumers can use to make a payment continues to grow.

Plastic payment cards never replaced cash. Digital wallets have not replaced cards and are unlikely to do so in the foreseeable future. Comparably, social media will not be the death of real-world interaction. Cash will be around for a long time and so will cards. The digitalisation of payments is not expected to be the end of cash. Real-time instant payments (faster or immediate payments) are not expected to replace the card networks. We have some considerable time before cryptocurrencies become the commonly accepted form of currency, however, virtual credit cards, payment apps, and e-wallets are making it easier for consumers to transact in a more instantaneous and streamlined manner. Today, there are more ways to pay than ever before.

As a result of consumers being faced with more choice in the way they pay, merchants must be able to respond to changing consumer payment preferences. Research has shown that as the size of choice grows, consumers can become overwhelmed and often opt not to choose. This is sometimes known as the “paradox of choice”. Consumers will want the choice that provides the best results with the minimal disruption, what payment geeks like to refer to as “frictionless payment”. For an online retailer, any payment friction can lead to abandonment of shopping carts. An optimised conversion rate is a key performance indicator and a source of competitive advantage for many online retailers. I suspect that more than once you didn’t complete an online checkout because your physical wallet or purse, with your credit card in it, was beyond your arm’s reach. A payment that is easy and fast is always the preferred customer choice.

Appropriate, not alternative methods of payment

In store, consumers will want to pay with cash as much as they want to use their credit or debit card. However, in Sweden for example, the consumer’s preference would not be cash. A shop does not want to turn someone away just because they don’t accept a particular method of payment, online or offline. You can still pay with cash in a Swedish shop, but they are highly unlikely to have the right change. I have seen disgruntled consumers in checkout queues because the card reader wasn’t working, or it didn’t accept contactless payments. Similarly, online consumers will abandon the checkout because they don’t accept a particular e-wallet, such as PayPal, or it does not support Amazon Pay.

For a new European business, it is easier than ever before to receive your own sort code/account number and IBAN, so customers can pay you from across Europe via a Payment Initiation Service Provider (PISP). Under the second Payment Services Directive (PSD2), consumer payments are expected to adopt real-time bank transfers across multiple sales channels and shopping platforms. Will this be the start of the end of payment cards? Again, I doubt it. It is just another method of payment, alternative to the previous incumbent payment method.

As we have seen with print media and digital media, the two will survive side by side in harmony. Similarly, different payment categories can live side by side in harmony. Certain payment brands may fail to survive and die out; however, the different categories will co-exist and “alternative method of payment” becomes the “appropriate method of payment”: appropriate for the consumer, for the payment scenario, for the specific use case, and for the particular shopping circumstance. The consumer will want the choice.

Hard work, not complex work

Optimising payment acceptance for omnichannel retailers is a huge strategic challenge. Payments are not complex, but the choice of payment methods is growing and the ability to integrate and accept them is becoming hard work. Hard work is not the same as payment complexity, but many retailers are finding complexity in optimising payment acceptance. Edgar, Dunn & Company (EDC) has many years of experience on establishing a payments strategy, evaluating and selecting the right payment partners to achieve payment optimisation for leading businesses around the world.

This editorial was first published in our Payments and Commerce Market Guide 2018-2019. The Guide presents the key trends and developments in global and regional payment methods by highlighting the innovation, challenges, and developments in the use of the most important payment methods across geographies and verticals.

About Mark Beresford

Mark Beresford is a Director at Edgar, Dunn & Company (EDC) and has over 20 years of experience in the payments sector. He is responsible for the company’s practice working with omnichannel merchants and payment service providers across the globe.

 

 

About Edgar, Dunn & Company

Edgar, Dunn & Company (EDC) is an independent global payments consultancy, founded in 1978. The company is widely regarded as a trusted adviser, providing a full range of strategy consulting services, expertise, and market insight. EDC clients include the payment brands, issuers and acquirers, processors, and the merchants.

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