10427 The Retailer Autumn 2018_Final Draft Pages

How can merchants navigate the future of payments?

Ali Combes Director of Technical Consultancy CMSPI

Challenges: why do merchants need to be careful? New payment methods will be unregulated and may actually have higher costs associated with them than Visa or Mastercard. Amex, PayPal, WeChat and Alipay all tend to have very high fees for European merchants, mainly due to price elasticity of these payment methods. They deliver incremental sales by introducing merchants to a subset of niche consumers. As a result of this specialisation, these payment methods only really create mini-monopolies for these subsets of consumers. As merchants have found to their detriment with Amex, once critical mass is reached, there is no turning back and they are forced to pay high fees for that payment method indefinitely. I. Barriers to entry mean the industry may naturally tend towards monopoly anyway. Is it really better to shift dominance to the big tech companies? II. Point of Sale (POS) experience – There are thousands of alternative payment methods (APMs) out there and it is not feasible for merchants to accept all of them. There is also dilution – the more payment methods available means low volumes per system, lowering the bargaining power of each system and benefits from economies of scale. Finally, there is the issue of multiple transaction costs with managing a number of contracts. III. There could be increased data risk. OPEN BANKING... WHO WILL BE THE PISPs? Open Banking provides the opportunity for Payment Initiation Service Providers (PISPs) to initiate payments instead of the traditional card acquirer/Payment Service Provider (PSP) model. We have identified the following potential PISPs: I. Large Merchants on their own. Realistically, only very large merchants can do this, such as the major supermarket chains. II. Merchants joining together. Merchant Customer Exchange (MCX) is an example of this type of union in the U.S. MCX sought to create a QR code-authenticated, merchant-owned mobile payment system although it was ultimately unsuccessful. These groups can be difficult to manage as there are various issues to consider when competitors join together. III. Big tech firms entering the payment space. We have already seen this to an extent with Apple Pay, although it ultimately aligned with Visa and Mastercard. CASHLESS SOCIETY One aspect of the future payments space that is often mentioned is the fabled “cashless society”. Dwindling cash volumes and numerous catalysts identified in this article may accelerate this

WILL OPEN BANKING PROVIDE THE COMPETITIVE CATALYST MERCHANTS ARE HOPING FOR? A visit to any payments conference, a read through industry publications, or even a quick Google, will show the payments market as being a hotbed of exciting innovation. Despite this, the majority of consumer payments are still conducted via either cash or card systems developed 40 years ago. PSD2’s Open Banking provisions may change this, but will it succeed? The Second Payment Services Directive (PSD2) entered into force in January 2018 and promised to have a fundamental impact on the European payments industry. It affected merchants in three main ways - through a ban on surcharging of regulated card transactions, a mandate covering strong customer authentication* and, arguably most importantly, through its Open Banking mandate. This Open Banking initiative will open up access to bank accounts to non-financial institutions, and will likely result in an unprecedented surge in innovation, but will it have a material effect on retail payments? *The SCA mandate will only emerge after the Regulatory Technical Standards are published in September 2019. HISTORY - THE PAYMENTS GRAVEYARD In recent years, countless payment methods have tried – and failed – to seriously penetrate the retail payments space. Indeed, it seems that every year is touted as “the year of mobile”. Ultimately, however, these payment methods are often absorbed by the major card brands, if they don’t fail altogether. The fundamental conclusion to draw from this is that it’s hard to break the dominance of the card schemes. However, a major catalyst has emerged in the form of PSD2’s Open Banking provisions, which give third parties access to consumer bank accounts. WHAT DOES OPEN BANKING MEAN FOR MERCHANTS Benefits: why might Open Banking be positive? I. New payment methods provide much needed competition to Visa and Mastercard. Any movement away from expensive card payments reduces interchange and scheme fees for merchants. II . Merchants may be able to gain more customer insights from new payment methods, including marketing and loyalty benefits. This could ultimately deliver new customers. III. The innovation encouraged by PSD2 can improve security, speed and efficiency within the industry, to the mutual benefit of all supply chain stakeholders.

16 | autumn 2018 | the retailer