[Dave Birch] One impact of the credit crunch, or whatever you want to call it, is that consumers are shifting their spending from credit cards to debit cards. Or, more accurately, consumers are shifting their spending from credit cards to debit cards even more quickly than they were before. This is hardly news, as it has been recognised for some time that debit volumes are growing substantially faster than debit transactions.
debit purchases are expected to climb 13% in 2008, to $1.2 trillion, according to The Nilson Report, an industry newsletter—compared with a 3% rise, to $1.9 trillion, for credit-card transactions. At Visa (V), the No. 1 card company, debit spending could surpass credit this year.
[From The Steady Ascent of the Debit Card – BusinessWeek]
Debit is clearly a product that consumers like. The debit space is not only attracting issuers and consumers, but others as well, with innovative products extending the reach. An example that caught my eye last year, illustrating an area where there is considerable growth potential for 2009, was the use of the debit infrastructure for welfare payments.
Under the five-year agreement, unemployment insurance benefits will be available on a MasterCard-branded debit card that can be used to access funds at banks and ATMs, and to pay for goods and services. Through a partnership with Bank of Oklahoma, cardholders will receive special opportunities for fee-free ATM and teller withdrawals.
[From Finextra: ACS provides debit cards for unemployment benefits in Oklahoma]
This kind of scheme shows that it is new applications, as well as new merchants and new customers, that will drive debit (and, I am convinced, pre-paid) in the near future.
[Dave Birch] Earlier in the year, Jacqueline Chilton from Glenbrook had a nice write up from CTIA and I remember making a note of it because of one particular point that she made. She reported on a mobile payments panel session, saying that:
In the end, there was general agreement that someone would make a big bet investment and turn the tide.
[From Glenbrook Partners: Report from CTIA – Mobile Payments Eventually]
I’m sure she’s right, because that’s the way of these things. Someone needs to be the American Express, the Apple or the Walmart that animates the new business models made possible by the new technologies. But who? If I actually knew, naturally, I wouldn’t be doing this job, but I think that some of our recent experiences might allow us to do better than random guesses or non-commital management consultancy blandishments. So here’s a bit of informed speculation. If it’s going to be a big bet investment, then it has to be a game changer, not simply the shift of some existing payment instruments over the handset.
Could banks themselves be the game changers? Other people are starting to wonder what the world might look like if banks started breaking off from the international payment scheme networks and becoming their own networks. Banks like HSBC, Citi, Bank of America could simply operate their own payment schemes: they have enough customers. If WalMart took Citi cards, that’s a lot of volume. But it’s also a different basis for competition. As the literature tell us, “two-sided” payment networks have to balance the interests of customers, retailers and banks to work. In practice, this means that the banks (who owned the networks) structure the business. One of the effects of this has been to send a portion of the merchant service charge (MSC) levied on retailers back to the issuers in the form of interchange. Banks then use some of this interchange to incentivise customers (I’m happy to say: my Barclaycard Paypass card is currently giving me 2% cashback on petrol and supermarket transactions). This is the source of a great deal of friction between retailers and issuing banks (not to mention legal action and regulation around the world).
But if a network isn’t competing to sign up issuer banks, perhaps the incentives change. This might lead to the development of real value-added services for merchants (data mining, e.g.) or to more meaningful product differentiation (not just variations in rewards programs) for consumers. In short, shaking up the structure of the payments field might encourage payment companies to do a little more thinking outside the box.
[From Credit Slips: The Visa IPO]
It seems to me, though, that banks have a quite enough on their plates at present and this kind of big strategic decision must be hovering around bottom of the list of strategic decisions that need to be made real soon now. So who else could be the game changer?
[Dave Birch] I was at Ian Harris’ Gresham College lecture
on commercial ethics, and whether teleological approaches can be reconciled with deonological processes in a procurement process, when I saw him use a word that had never occurred to me before in a payments context but I desperately needed. Ian was talking about the scale of decisions and used the simple categorisation of micro, meso
, macro. Aha! Now it all makes sense. A payment of less than $1 is a micropayment, a payment of less than $10 is a mesopayment and a payment of over $10 is a macropayment and a payment of over $10,000 is a megapayment. Does my new classification scheme work?
[Dave Birch] I’ve been looking at some NFC-related business cases for customers in different countries and noticing — without giving away anything confidential — how different they are: some are focussed on retail, some on transit, some on operators etc. Yet they are all founded on what I think is a reasonable consensus on the narrative to date: that is, customers like NFC (a lot), operators aren’t sure how to cash in and banks aren’t sure whether the operators are on their side or not. One thing they all agree on though is that handset availability shapes the critical path. This is because it seems highly unlikely that consumers will hammer down the doors of mobile phone shops to get NFC handsets to use for boring things like payments. Once they have the handsets I’m sure they will use them for payments, but payments isn’t interesting enough to drive them down to the mall. What consumers will want in the first instance is the simple stuff — smart posters, exchanging numbers, that sort of thing — and above all (in certain urban markets) for transit.
[Dave Birch] I gave a talk on cashlessness to the London Futures Symposium a couple of weeks ago so I thought I’d do an experiment and put the presentation on to to Slideshare
to see if anyone is even vaguely interested in looking at it. Let me stress — once again — that these are my personal opinions so I have taken the Consult Hyperion background out and put another one in! Anyway, if you like to take a look, I’d love to have your feeback…
[Dave Birch] It seems that the prepaid cards market may be smaller than we have been led to believe. According to the Federal Reserve, the U.S. open- and closed-loop prepaid card markets reached $50 billion in total transaction value in 2006 with roughly 3.4 billion transactions — much lower than industry estimates, but still a far-sized market. The potential for growth is vast, seeing that prepaid transaction value is one percent of debit transaction value and that only 10% of prepaid transactions are on open-loop (eg, Visa/MC) cards despite the volume of open-loop cards being proportionately much higher. This suggests to me that the consumers see far greater utility — still — in closed-loop cards, presumably becuase may of them are retailer-issued and offer loyalty schemes etc. Anyway,
The Federal Reserve’s prepaid numbers are lower than many industry estimates, which vary greatly. The discrepancy resulted because the Fed’s study focuses on purchase transactions with prepaid cards and not on fund-load amounts, as some industry studies have done, according to the Federal Reserve. The size of the prepaid market “is dramatically lower than anybody expected,” says Tony Hayes, a partner in the Retail Banking practice of Oliver Wyman, a New York-based management consulting firm.
[From CardForum | PREPAID MARKET NOT AS LARGE AS INDUSTRY BELIEVES, FED SAYS]
There doesn’t seem to be any shortage of new prepaid products coming into the market though. Payments News picked up another one only last week: a colour-coded pre-paid card in the U.K., aiming to solve the problem of age verification and convenience together:
The UreLife card is available at launch for five age groups; 12-15 years, 16-17 years, 18-20 years, 21+ years and 60+ years. Cards are colour-coded according to the age category of the cardholder and a colour photograph, PASS hologram and printed date of birth makes the card unique.
[From Payments News: UK’s First Prepaid Debit Card With Built-In Proof-of-Age – April 16, 2008]
This is one of those odd cases whether the users (ie, teenagers) are not the target market: it’s the parents (and, to some extent, retailers) who will create the demand. Let’s hope it’s more cost-effective than the raft of other prepaid cards in the U.K. market at the moment.
[Dave Birch] I’ve been looking at some NFC-related business cases for customers in different countries and noticing — without giving away anything confidential — how different they are: some are focussed on retail, some on transit, some on operators etc. Yet they are all founded on what I think is a reasonable consensus on the narrative to date: that is, customers like NFC (a lot), operators aren’t sure how to cash in and banks aren’t sure whether the operators are on their side or not. One thing they all agree on though is that handset availability shapes the critical path. This is because it seems highly unlikely that consumers will hammer down the doors of mobile phone shops to get NFC handsets to use for boring things like payments. Once they have the handsets I’m sure they will use them for payments, but payments isn’t interesting enough to drive them down to the mall. What consumers will want NFC for is the simple stuff — smart posters, exchanging numbers, that sort of thing — and (in certain urban markets) for transit.
Yet while some commentators (eg, me) bemoan the lack of handsets — largely a reflection of the convoluted standardisation process around the location of the "secure element" in the mobile handset (ie, on the SIM or not) — there are big banks out there who are making big bets…
Citigroup Inc. has an NFC mobile phone under development that it plans to brand with the Citi logo according to a lab report filed with the U.S. Federal Communications Commission. The report clearly shows the Citi logo on the front of the tiny handset. Citi has been rumored to be considering issuing or distributing a branded phone to customers.
[From CardForum | CITIGROUP DEVELOPING A CITI-BRANDED NFC MOBILE PHONE]
Frankly, I’m not sure if I believe this to be the winning strategy, but I’m not an expert on Citi’s markets and I’m sure they are. Personally, I don’t want a Barclays phone: I want my Barclaycard OnePulse to be loaded to whichever phone takes my fancy (I’m currently very happy with my N82, thanks). It seems to me further confirmation that the move to NFC is gathering momentum despite the natural reaction to early hype. Yes, there won’t be as many handsets out there as quickly as people hoped, but still as James van Dyke of Javelin Strategy put it
[I] find myself wondering how long it will be before we all start to turn in our personal carrion-enclosed container o’ credit, debit and identification cards for a chip-enabled mobile payment device.
[From Javelin Strategy and Research » When too tired to be coherent, use props]