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Small change, big effects: An overview of payment systems

The payment industry is undergoing a huge transformation, with several new technologies promising better efficiency: blockchain, mobile wallets, contactless chip credit cards, and electronic payment platforms. But even as they pay out, not all of fintech is paying off.

The overarching goal in business today is twofold: act in real time and increase efficiencies to a point of zero cost to execute. This effort applies to every process, from the basic to the most esoteric. Payment processing is an important example—especially wherever payment processing fees are high and margins are slim.

“High-volume retail and grocery have very thin margins. For example, a large grocer may have 1.5 percent margins and also pay 1.5 percent interchange fees,” says John Pistone, executive director of strategy and business development at Toshiba Global Commerce Solutions. “If they can convert 10 percent of their credit card users to a wallet, they can save millions of dollars per year and double their margins for those customers.”

But not all newer financial technologies, also known as fintech, are paying off, even as they pay out as expected.

“Services like Stripe, PayPal, and Square have worked very well for us. They are all easy to integrate and to use to receive payments,” says Sean Pour, co-founder of SellMax, a cash for cars service.

However, the drawbacks are reminiscent of those from older financial services, beginning with high fees. “[The services] do charge transaction fees that can add up,” Pour explains. “Typically, it’s 2.9 percent plus 30 cents per transaction. The other drawback is that they typically hold your money for two days, and with Stripe, it can take up to a week to receive payment. However, these services allow you to accept payments very quickly and hit the ground running.”

Financial services transformations

The vast array of current and emerging fintech is transforming the payment industry and making room for disruptors.

“Fintech enables smaller players to compete against the large banks and financial institutions. This means the focus of financial technology services has shifted from being the biggest to being the fastest and most effective,” says Jared Weitz, CEO of United Capital Source, an online lender for small and medium businesses.

This shift is spurring changes in even the largest financial institutions.

“At a minimum, [fintech] will prompt financial institutions to re-engineer their systems and value propositions,” says Vikram Gollakota, vice president of strategic partnerships at HighRadius, a cloud-based fintech provider. Those traditional financial service organizations could stand some updating, he says, because payment transactions often take several days to process, clear, and settle. “New payment technologies strive for real-time transactions,” adds Gollakota. “Real-time payments are very real, with 39 countries already having implemented immediate payments.”

Financial service companies are also changing their menu of services and the types of clientele they serve. “Fintechs such as Revolut, Monzo, Monese, Atom bank, and others board literally millions of people without a credit history and with that level of risk for which banks are not ready,” explains Akim Arhipov, CEO of BASIS ID, a provider of authentication and verification of end-user services and data privacy compliance services.

Because fintech services are changing, it’s an opportunity for brand differentiation. In particular, payment services are a vital part of the burgeoning customer experience movement.

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Starbucks is a prime example of payment services as product features. The coffee shop chain weaves payments into its famous customer service protocols. According to Pistone, “Starbucks has more mobile payment users than Apple (23.4 million), and 39 percent of U.S. sales are from the loyalty program.”

Starbucks mobile app features permit users to order ahead, earn loyalty points, apply points, and pay for the order. “Starbucks mixes the mobile and in-store experience into what it calls the digital flywheel, which encompasses taking insights from purchase data to provide personalized offers and communications to shoppers,” Pistone explains. “When offers resonate, they turn into sales. Consumers pay with the least amount of friction, purchases are fed into loyalty reward programs that keep the customer interested and coming back, and the cycle continues.”

The fintech lineup

A lot of technologies are involved in payment systems. Different types of fintech are used for different purposes, and therefore, the top technology for one purpose may rank poorly for another. Nevertheless, and generally speaking, here are how common fintech options size up.

Mobile wallets are all about convenience on the customer side of transactions. Mobile wallets are frictionless and often contain extra features, such as budget tools.

But it isn’t only the consumer who benefits. Businesses are finding mobile wallets to be relatively cheap to implement and easy to deploy.

“Businesses profit from mobile payments as well,” says Anastasia Yaskevich, an enterprise mobility researcher at ScienceSoft, a professional software development company. Because the mobile payments are fast and simple, “they reduce queues and create a shorter customer journey from the purchasing intent to approving a transaction." 

Yaskevich adds, “Bigger brands develop their own apps that bring together payments and loyalty programs, while other companies welcome the use of existing mobile wallets, such as Apple Pay or Google Pay. All a retailer needs is a point-of-sale terminal with an NFC or QR scanner. Small businesses can even go for portable NFC readers that sales assistants can easily attach to a smartphone.” 

Peer-to-peer (P2P) wallets are swiftly gaining in popularity. “Zelle, a P2P wallet that is rivaling PayPal-owned mobile payment service Venmo, is actually a network of 229 banks led by Wells Fargo and Bank of America. They had 433 million transactions totaling $119 billion in payments in 2018,” says Pistone. “The pros for P2P? It cuts out the middleman regarding fees, eliminates the need for cash or credit cards, and from Zelle and Venmo’s perspective, it is a significant data collection tool for consumer insights.”

Cryptocurrency offers a lot of promise, but few consumers and businesses are ready to pay or accept payment in bitcoin or other cryptocurrencies. Further complicating the scenario is that there isn’t one blockchain flavor. Of the choices, some are more useful than others.

At some point, there will be a blockchain shakeout, leaving the best standing. Even so, there are other important points to consider.

“The main benefit we see with blockchain is instant payments for individuals. Typically, most payment processors will hold your money for a few days, but if you use bitcoin, you’ll get the money instantly, which can help with cash flow. In addition, with cryptocurrency, you forego a lot of the unnecessary bank fees, but you do lose the security of a federally backed currency,” says Pour.

But financial institutions see the potential benefits. “JPMorgan Chase is using blockchain to improve payment at point of settlement. They created a network of 75 banks, called Interbank Information Network,” says Pistone. He says it seeks to create an ecosystem that would allow fintech start-ups to develop products for their ecosystem—allowing JPMorgan Chase to partner and leverage relationships with startups rather than compete with them as disruptors.

Mobile and blockchain combinations are cropping up everywhere, most notably on social media networks and messaging apps. For example, Alipay and WeChat Pay use messaging apps to move money.

“Facebook is now looking to enter this space,” says Pistone, using the WhatsApp messaging app. Facebook sees an advantage in India in particular, where WhatsApp has 300 million users.

“Facebook is combining its messaging capability with a ‘stable coin,’ a cryptocurrency that is tethered to a fiat currency like the U.S. dollar. They see this as a way to make retail payments, but it also can be used for remittance. According to a Barclays analyst, combining this payment system with the new Instagram ‘shoppable tags’ means Facebook has an additional $19 billion revenue stream,” Pistone adds.

Pay-at-the-table fintech is currently favored by restaurants. The technology uses tabletop tablets so customers can pay for their order without a waiter wandering off with their credit cards. Think of it as self-service paying.

“Many restaurants around the U.S. have recently adopted pay-at-the-table technology in an attempt to bring greater operational efficiency, enhanced security, and faster table turns,” explains Erik Ploof, vice president of business development for TableSafe, a pay-at-the-table solutions provider for the hospitality industry. “Some restaurant operators have bundled the concept of table-side ordering and payments in a single solution that resides at the table or through the use of a tablet that the server manages.”

However, many other operators—particularly the full-service operators that are focused on superior service—see value in separating the payment process from the ordering, Ploof adds.

Such fintech is also under consideration by other businesses, such as bowling allies, exercise gyms, and hair salons. It benefits industries looking to do away with centralized payment queues and provider station bottlenecks—for example, hairdressers processing payments with Square on their phones.

Accounts payable automation covers the gamut from paying gig workers to vendors in the supply chain. “The added efficiencies that come with enterprise payment tools like accounts payable automation are required to meet today’s growing ‘instant gratification’ demand, especially for manufacturers and distributors,” says Tom Kieley, CEO of SourceDay, a procure-to-pay and supply chain collaboration software-as-a-service provider.

“Amazon, Walmart, and now Target are pushing one-day and same-day shipping, all but ensuring this will become the new norm. The only way merchants are going to be able to keep up and compete is if they find ways to make every link in their supply chain faster—and automating and digitizing payment is a big piece of the puzzle,” Kieley adds.

Personalized fintech is designed to resolve specific payment issues and meet personal needs. “What makes a person choose a metal prepaid card to take and put their money there? By issuing these cards, fintechs give a sense of importance, success, revolutionism to their customers,” explains Arhipov. “Or another example is Zestful, a debit card for your employees. They get a budget for an employee perk program with the opportunity to spend on training or fitness. No more reimbursement process for accountants. Warms the soul, right?”

Point-of-sale (POS) loans are the new layaway plans. They are most popular among millennials, who spurn debt and tend to avoid credit card use.

The consumer advantages for POS loans start with being interest free. “Lending companies charge a fee to the retailer on the transaction, similar to a credit card company,” explains Pistone. “POS loans are usually broken up into chunk payments, such as four monthly payments of X dollars. But you can take the purchased item home with you today. In years past, you would buy a refrigerator [on layaway] and only after making the final payment could you take it home with you. Approvals are done instantly.”

Total value is the bottom line in successful fintech. “It's not really about technologies; it's about personalization of experience, people behavior, and brand,” says Arhipov. “Fintechs have to establish a strong brand, whether personal or corporate, and it is all about value rather than volume.”

Payment systems: Lessons for leaders

  • Offer customers many payment options. Making it easier for customers to pay adds to the customer experience and encourages repeat sales. 
  • Consider offering additional rewards and discounts to lower financial service fees. Offer customers a discount or additional rewards for using those payment options.
  • Use new fintech to negotiate better terms with traditional banks. Consider renegotiating bank fees, terms, and services—such as real-time deposit and payment crediting—with your traditional banks to lower costs and improve cash flow. 
  • Customize brand payment options and tie to loyalty programs. Consider developing your own apps to combine payment options and loyalty programs, as Starbucks does. 

Related links:

5 steps to securing global payment data

This article/content was written by the individual writer identified and does not necessarily reflect the view of Hewlett Packard Enterprise Company.