Beyond Minimizing Friction: Digital Payments as Platform for New Value

Yes, with motion comes friction, but payments should be about much more than only removing friction.  They should be about adding new value.  This blog describes the opportunity for innovators to help banks add significant value around digital payments for both consumers and merchants.

Old view:  Payments as utility products

Payments have been historically viewed as utility products—fundamentally transactional and tactical in nature, undifferentiated and volume-driven.  BNY Mellon, in conjunction with Moorgate and Opus Advisory Services, describes this phenomenon in their recent report, entitled:  “Global Payments 2020:  Transformation and Convergence.”

In their report, one bank describes the payments space—and opportunity and threat brought about by digital technology—as follows:

“The payments space today involves significant cost and a degree of transactional ‘friction,’ both being unattractive to end-clients, and both presenting opportunities for truly disruptive and creative solutions to supplant the banks as providers of payment solutions.”

Payment innovations used to be primarily about minimizing friction.  Another industry player acknowledges this old view of payments… as well as the importance for providers to think beyond the payment to add value and improve the customer experience as follows:

“Payments will inevitably be commoditized.  It is more about helping the end-customer with their experience of a transaction and not with the payment itself.  We go into a shop to buy something, not to make a payment.”

New view:  Digital payments as platforms for value transfer

Today and into the future, digital payments need to be recognized as more than just the settlement of a transaction or the mere movement of funds.  Digital payments can become platforms to create new value.  Boston Consulting Group (BCG) espouses this view in their 2014 Payments Report, entitled “Capturing the Next Level of Value.”

To net out their key thesis, BCG states:  “Incumbent players must figure out how to integrate their own payments services into platforms that contain additional benefits.”

Digital payments platforms can provide new value for both merchants and consumers.  In order to maximize this value creation, these platforms must be technology-agnostic to enable maximum reach, access and usage.  They should be architected for: 

• Multiple issuing banks, multiple acquirers and multiple Mobile Network Operators
• Multiple interface technologies (e.g., NFC, QR codes, feature phones or smart phones, POS, ATMs, etc.)
• Multiple analytics capabilities (e.g., for financial institutions, merchants and consumers)

Digital payments platforms can offer merchants new value through:

• Improved customer (in-store or online) experiences from integrated payment and loyalty programs
• Higher revenues and traffic through effective opt-in mobile marketing campaigns
• Smarter store operations through web-based analytical tools

Digital payments platforms can offer consumers new value through:

• Greater time and money savings from payments integrated with trusted merchant loyalty and marketing programs
• More flexibility and convenience from a wide variety of potential new digital payment transaction types
• Easier money management and greater knowledge of spending habits (from digital receipts, usage dashboards, etc.)

In summary, BNY Mellon summarized well how banks need to view digital payments as a platform for added value in their report:

“Banks will need to be smart:  they need to create solutions around the ‘utility’ payment transaction, realizing that their main competitors are evolving and will evolve from other industries, and that these competitors understand a core requirement of end-clients—to get money from ‘A’ to ‘B’ quickly and securely, adding value along the way.”

Removing friction is the baseline for entry into the new digital payments game; the winners will be those that use payments as a platform to add the most value.  Let us know what you think.