The payments space has never been a static environment, and recently it has evolved even more rapidly with a hotbed of activity. Whether it is cryptocurrency, Buy Now Pay Later (BNPL) or faster payments, there are many new choices coming to market which merchants need to consider for their checkout experience. In this article, I will approach the subject on two fronts: first, what should a merchant consider when evaluating alternative payments, and second, how do I see the landscape regarding the most talked about initiatives?
When adding a new payment type, my first consideration is always centered on how it makes the customer’s experience better. If it doesn’t enhance the experience in some way, it is adding complexity to an already crowded checkout experience. Merchants understand that the more decisions customers are forced to make in the checkout process, the greater the opportunity the transaction will not be completed.
Once I have determined there is value to the customer, my next screening process is to determine the return on investment for implementing alternative payments. This can become a complex measurement, as it is not as simple as asking does it lower my cost of payments? One must consider additional elements like:
- is it shifting consumers to a higher cost tender on products they would have purchased regardless
- does it increase the customers access to funds
- does it remove labor by speeding up or eliminating the checkout process
- do I see incremental sales through the implementation of the new payment type
- does it open a new market segment
- can it provide differentiation from my competitors
- and does it add or remove post purchase liability.
Once you create the ROI model and plug in the projections, your consideration should turn to a couple of other more strategic plans, such as will the implementation help in creating a competitive and transparent payments ecosystem or what will happen if the new payment type controls a large share of my sales. I advise any merchant to avoid exclusivities and volume requirements on any new payment type.
Another consideration may be: am I leveraging my company’s position in helping to launch this new payment type to create additional value for my company? Co-brand credit card products have long provided merchants with incremental revenue stream due to the merchant’s ability to attract new customers to the issuers. As a merchant, you should recognize that enabling new payment types may enhance the value of the payment type, and therefore this should be considered in any agreement. Whether it allows for long term pricing protection or input into the future development of the product, it is important to make sure you have a long-term perspective on the development of the product.
After you have done your work and feel good the product will add value overall, I encourage you to think about how your consumer will be treated by the new provider and does it align with how your organization expects your customers to be treated. Whether it is your intention or not, by accepting a payment instrument your customers attach your brand to the product. How the customer is treated by a payment type that you introduced to them will reflect on how that customer views you. Make sure your philosophies align in the treatment of your common customer.
Now that you have an outline on how to evaluate a new payment alternative, let’s cover some of the hottest categories under discussion in today’s environment. We have seen the most activity around BNPL products from an implementation standpoint. There are several new FinTechs launching these products, including Sezzle and Opy who are current sponsors of the MAG. These providers differentiate themselves in a couple of different ways, such as time to pay back the loan and the amount of the payments.
The most common products in the market are the four pay models. In this scenario the cost is split into four payments which are paid off in a relatively short time frame. This product may suit lower purchase points with a target of smoothing out the customers money flow. One consideration for merchants in this type of product is whether it is causing tender shift from lower cost debit to a higher cost product. Also, while consumers would always prefer to pay less upfront, does the current price point prohibit them from making the purchase or are they just taking advantage of better terms?
Other models spread out the payments over a longer term and usually are associated with higher price points. In this case, credit seems to be the product most likely to be replaced. In these cases, you may have instances in which the consumer’s thin credit file or desire not to have an open line of credit may prohibit the customer from making the purchase. In these cases, the ROI may be more apparent, but the additional cost should be considered.
The MAG currently has a BNPL Community of Practice (COP) creating a document to outline the different products in the market. The goal of the paper is to help our members understand the landscape and engage the parties which can best suit their needs. One thing a merchant should always be cautious of is any offer of exclusivity. In many cases, you may want to implement several products to fit different purchasing patterns. Locking yourself into one provider may prevent such an approach.
The second hot topic that has recently skyrocketed in value is cryptocurrency . Recent news articles have shared that PayPal, Square, Visa and Mastercard are all allowing cryptocurrency to be used as the basis of the purchase. For the merchant, this transaction looks like any other transaction which takes place as it is converted to fiat currency. The merchant has no requirements or risk other than those currently taken with the products issued by the above-mentioned providers.
In order for a merchant to take cryptocurrency in its original form there is a lot to consider. First, how do you make sure the consumer understands the amount of the currency needed to complete the transaction. Second, once accepted, what happens if the currency fluctuated before being converted in fiat currency? How does the tax liability get recognized, because currently cryptocurrency is thought of as an asset? Additional considerations are the requirements of validating the consumer and complying with know your customer and anti-money laundering regulations.
While cryptocurrency seems to continue to gain momentum, it will be a while before merchants accept it directly from a consumer wallet. We are also seeing a rise in stable coin products, which may solve some of the hurdles listed above. Another possibility is the issuance of Central Bank Digital Currency may be the future of crypto acceptance among merchants. If this topic is of interest to you, please join the MAG’s Innovation Committee. This group regularly meets with the different innovators in the industry to find out how products are progressing.
The last payment type we are seeing a lot of discussion about is faster payments. This is a payment is which the money moves with the transaction versus settling at a later date. Currently the main use cases that have been deployed are P2P, bill payments and gig workers payments. The Federal Reserve is currently building a new payment rail called FedNow. When it becomes available in 2023, we may see greater innovation in the use cases. Merchants should watch for this new entry. It may be similar to the ACH cost structure, as it will be a very efficient and secure payment methodology.
There are a lot of options for a merchant to consider around the future of payments acceptance. Remember payments considerations are long-term decisions. Once something enters your infrastructure, it is highly unlikely it will ever be discontinued, and I encourage you to think long-term when making these decisions. Finally, never lock yourself out of future innovation by agreeing to limitations in your ability to control your payment experience. Please reach out to me if have any questions.