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Payments Alone May Not Pay the Bills

I came across an enterprising man who worked as a driver and doubled up as the neighborhood milkman. In the initial months, he found himself collecting and carrying large amounts of money on a daily basis, which became quite unwieldy with his day job. To make matters worse, with outstanding dues, leakages in collections and a host of challenges posed with managing currency, he often wondered if in fact he was making any profits in this enterprise.

A benevolent aunt stepped in and helped him open a bank account in a new age bank. Now armed with a debit cum ATM card, he ventured into this mysterious world of electronic banking and soon adopted a device called the ‘ATM’. Though 24 hour access was the dominant benefit, the ATM allowed him to experiment and learn with his banking relationship without the risk of ‘social embarrassment’ in a branch.

The ATM was soon his new business ally, allowing him to make currency deposits, print mini statements, place requests for cheque books and a host of other essential features that helped run his business. It was his business ledger and he would brave it into the branch once a month to take a detailed printout for the month, tallying the deposits and withdrawals!

I’m not particularly sure if the founders and generations of bankers thereafter had conceived of such benefits, but this enterprising entrepreneur did indeed create some for his use. In an interesting twist however, in this journey, he still hasn’t ventured out to use his debit cum ATM card for making over the counter purchases at retail stores! He just doesn’t get it!

“Why should I use a card, when I have cash in my wallet?”

“Why should I use a card, when I know I may spend more than I should?”

His bank, in the meanwhile, has been pounding him with offers of reward points for using his debit card for POS purchases!

With a debit card population crossing the 200 million mark in India, the industry continues to be challenged with low levels of usage at POS. Furthermore, with a host of new age mobile based banking, payments & transfers services available & being introduced by leading players, it makes one think!

1.       Should more be done to increase the adoption of these new age payment systems?

2.       What is the role of banks & Financial Institutions in the payments space in driving adoption of electronic payments?

This appears to be a challenge spanning socio-economic segments. PhD yielding professors and rickshaw pullers seem to resonate similar questions!

Hence, though the challenge is universal, is the solution necessarily singular?

The conventional methods of driving adoption of electronic payments, may be broadly classified into the following three categories :

1.       Legislation  & Financial Incentive :  The South Korean model wherein card based payments are mandatory for tax breaks

2.       Convenience & Safety : The classical advantage of using plastic. No need to carry cash (and spend money you don’t’ have!)

3.       Scarcity : MPesa, launched in a financial environment that didn’t offer a semblance of a reliable transfers network.

When one operates in an environment of ‘Scarcity’, then the need for safety and trust are sufficient!

But how would it work when alternatives are available? Here…cash is good! It’s worked for centuries, and no reason that it won’t for the ones coming up as well.

As a significant proportion of future growth would emerge from populations that lie below the affluent & mass affluent segments, there is a need to understand and define solutions that address their need states and socio economic environment. Furthermore, one needs to bring in a wave of fresh thought even for those customer segments that we have been addressing in the past.

The challenge that lies ahead for those in the payments industry is to think beyond transaction processing and move towards designing solutions in a segmented manner. Why should financial institutions even consider this approach in a more aggressive manner. Well, let’s do a reality check!

1.       Margins are dropping : We’ve all seen what’s going on with Interchange in North America. The wave should sweep the globe in mature markets soon

2.       Who’s grabbing the value in the value chain? : Non Banking institutions appear to be raking in the revenues in what was conventionally deemed to be the domain of banks & FIs, as in the case of MPesa

3.       Dropping ticket sizes : It makes immense sense to make 1.1 % on a USD 50 transaction, but not as much on a 50 cents transaction.

4.       Brands v/s commodities : We all know that brands command a greater premium vis a vis commodities. Would intermediate value added service providers come in and rule the roost?

5.       We don’t need Reward Points! : The new consumer lying near the bottom of the pyramid may not find the tried and tested approaches of reward points sufficient enough to switch behavior.

There appears to be a tenable economic argument or justification for banks to consider going down the path of value creation.

What next? Well, banks & FIs may do well in investing greater resources in enhancing both the experience and value generated in the payment process, often the last leg in the buying process. Some brands have however made some interesting forays that should inspire others.

Visa had launched ‘Rightcliq’ in 2010, allowing consumers to shortlist products online and seek feedback from their social networks. This, as a service was made available for non-customers of Visa products as well. Subscribers could also use non – Visa cards to make purchases!

American Express labs had set out on that journey, potentially reaching out to customers and going further back in the purchasing and selection behavior prior to the end payment state.

The fundamental shift lies in the fact that both these brands and a few others have realized the need to develop segmented solutions that address aspects in the buying process, that venture further up the value chain, much beyond the actual act of making payments.

Now, let’s head back to the milkman. What would be a sufficient stimulus or trigger point for him to use debit cards for over the counter purchases. Reward Points? May be..or perhaps:

i.                     A discount coupon sent via an SMS with every swipe? Hence demonstrating the economic impact of using a debit card vis a vis cash?

ii.                    An alert informing him how much he could have earned on bank interest if only he had not withdrawn a large amount of funds at the beginning of the month and used his debit card prudently for purchases through the month. Also, how much he could have saved by availing discounts from bank issued offers.

iii.                  Offer him additional airtime if he were to purchase talk-time with his debit card

iv.                  Escrow systems & Micro-credit: Establish a promise to pay between a trader and a buyer via the mobile for a pre-defined period. On maturity, the seller receives the due amount. The buyer however continues earning interest on the balance till the date of debit! This could also be an interesting take on EMI payments

v.                   Group Buying & Pooling : Groups often purchase items in a collective format to avail discounts, or even pool in together for gifting purposes. Could a pooling system be enabled, allowing each of the group members to make payments to the local retailer, allowing the retailer to track the payments received and the customers in availing the benefits.

Though there is clearly no scarcity in creativity, a significant nudge is required in the fundamental shift required for payment service providers.

Could these be services that could be charged? Why not? If the bank can establish a comprehendible and coherent value proposition, why not?

The migration to electronic payments would surely need to offer solutions to daily problems and needs of the larger populace. We really need to move past reward points!




Comments: (1)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 22 May, 2011, 14:08Be the first to give this comment the thumbs up 0 likes

My car driver closely fits the profile of the driver-cum-milkman described in this post. As soon as he opened his bank account and received his ATM/Debit card, he asked me whether he could use the card for shopping. I told him yes, sure. A month later, he told me he couldn't use his card for shopping anywhere. Reason? A majority of the mom-and-pop stores that he'd shopped in didn't accept card payments. The few that did demanded a 2% surcharge for card payments.

While almost all supermarkets and department stores accept card payments, they only constitute 10% of the retail market in India, with those at the bottom-of-the-pyramid patronizing mom-and-pop-stores that make up the remaining 90%.

Changing consumer payment behavior is important. But, banks might also need to promote greater acceptance of debit card payments by merchants and enforce the no-surcharge rule that already forms a part of the merchant's agreement with card networks. 

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This post is from a series of posts in the group:

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

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