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The Digital Payment War

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In the late 90’s Google won the war of search engines allowing it to cement itself as the technology giant that it is today. In the following decade a new technology war broke out: the war of smartphones, which knocked out veterans like Blackberry and Nokia and forged the path for iOS and Android to be the Operating systems of the future. Now ten years later a new war is brewing, The Digital Payment War. Now unlike its predecessors this war is different. The biggest difference is entry to market. Search engines needed specialized skills as the Internet was still emerging and sophisticated algorithms were not very common as it is today. Smartphones became successful only when paired with an army of third party developers, which meant companies needed to provide a development environment for them, a task that needed giants like Apple or Google to make it a reality. In the case of Digital Payment, the companies that position themselves the best for customers and merchants would end up winning, as the needed technology pretty much exists already. On one hand you have Smartphone providers like Apple and Google. Apple iPhones come standard with Apple Pay and its counterpart AndroidPay, preinstalled on most Android devices. Korean smartphone manufacturer Samsung sells Samsung smartphones that come loaded with its proprietary Samsung Pay. Now all of these services use NFC technology with fingerprint/facial recognition for authorization. Social media giant Facebook, has started to implement payment services on its popular Messenger and Whatsapp platforms.

Apple has introduced this on its own iMessage service and these primarily focus on P2P transactions. On the other hand you have the startups led by Paypal. Paypal has made a name for itself in the digital payment space and with its Braintree product has integrated a One Touch digital wallet into the apps of several merchants. Paypal subsidiary Venmo is extremely popular among millenials with almost 68% of millenials (20-30 year olds) using it, according to a poll funded by student loans marketplace LendEDU. Jack Dorsey founded company, Square, has Venmo competitor Square Cash. Square also provides financial solutions to merchants and vendors. And then you have the financial institutions. Most banks as well as credit card duopolies, Mastercard and Visa, have partnered with Apple and Google to make their credit and debit cards easy to accept on the Apple Pay and Android Pay services. JP Morgan Chase has Chase Pay that competes directly with the other digital payment services. Now each of these companies and group of companies have their own advantages and many of them cater to different aspects of the payment system. But before we select a winner let us first understand what does it take to actually win this war. What do companies need to do to win?The first thing companies need to do is identify its customer value proposition. This is a marketing term that tells why a customer would use a particular service. According to a study by Mckinsey, convenience is the top priority among customers. In the world of online payments services like Apple Pay, Android Pay and Paypal are definitely more convenient than typing in your credit card information. Apple and Android have almost an equal market share in the United States, which cuts their respective service usage in half. Paypal is in a unique situation as it is already a trusted online payment platform and has cross-platform adaptability. If Paypal can find a way to use Venmo as a payment method at online stores then Paypal can tap into Venmo’s large consumer base. However mobile sales contribute to less than 50% of all online sales with most sales still happening from desktops. This reduces digital payment’s current advantage though this may change, as the trend is slowly moving in favor of mobile. E-commerce giants like Amazon and Walmart store credit card information on their platforms making one-touch payments more convenient than using third party digital payment solutions (Apple Pay or Paypal).

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Amazon makes up for 49% of all online retail in the US. Online retail is growing at 15% as opposed to 4% for onsite sales. However as of 2017 online stores only make up 10% of all retail purchases. If online sales were to overtake onsite purchases it would be in a distant future. Digital payment methods do not provide a distinct convenience in onsite stores, especially in countries like the US where card usage is very high. It’s an uphill battle for digital payment methods to replace fundamental consumer behavior. One strategy to circumvent this is what Venmo has done by introducing a Venmo card, a debit card that deducts money from your Venmo balance, essentially a compromise solution between digital payment and card usage and ultimately converting a Venmo account into a checking account. Companies also have to identify merchant value proposition. Digital payment providers also have to convince merchants to switch to accepting digital payments. This is a tough task as evidenced by the MCX consortium of the 39 largest US retailers (led by Walmart) who pledged to each start their own digital payment system believing that Apple and Google would increase costs for retailers to pay banks for credit card service by taking a percentage as a middleman. Companies would have to offer services such as data analysis, rewards programs and higher conversion rates in order to convince merchants to switch to digital payment methods. Payment methods also rely heavily on network effect and since most retail happens in stores and with credit cards it would be difficult to provide a strong argument in favor of digital payment methods.

Apple has done a decently well job in trying to woo merchants by creating a buzz around Apple Pay. This has helped Apple put together a sizeable list of merchant partners. However without providing a long term value add it has to be seen if Apple can hold on to its merchant list. Google, Samsung and Chase fair far behind Apple in merchant partnerships. Paypal has already established partnerships with companies in online markets, but needs to find a way to use that advantage in onsite stores. Looking EastAmerica and its western counterparts have to catch-up with companies in China when it comes to digital payment. In China two companies dominate, Alibaba and Tencent, Alibaba with its Alipay and Tencent with its WeChat Pay. Alipay was initially created as a payment solution for its B2C system called Taobao. Taobao was to act as an intermediary between consumers and merchants in order to improve trust. Taobao held the money paid by customers during a transaction and if the customer were satisfied then Taobao would release the funds to the merchant. This improved trust for the consumers and increased business for the merchants. Taobao soon realized that it had a lot of capital in its deposit pool and in order to improve on its product offered to pay interest on the deposits in users’ Alipay accounts. This money market account gave users a higher interest rate than traditional banks and more customers put money into their Alipay account and started using it like they would a traditional bank account. Alibaba created a subsidiary, Ant Financial, in order to manage this new financial service company. Ant Financial today offers a money market account along with other financial services such as insurance, loans, credit rating as well as small-to-medium business banking. WeChat started as a messaging platform similar to Whatsapp. This later grew to include social media, as well, with the failure of China’s Facebook equivalent, Renren. In 2013 with success of its social media, WeChat launched WeChat Pay for P2P transactions and purchasing from online vendors. Wechat Pay later introduced a money market account just like Alipay and created it’s own virtual bank account. Today Wechat Pay and Alipay are the most popular payment methods in China, with 92% of Chinese in major cities claiming to use either Wechat Pay or Alipay, according to a Penguin Intelligence study in 2017. They are used to buy everything from e-commerce to ride sharing and even government transactions such as fines and license fees. Can the US emulate China? Major digital payment players like Apple, Google and Paypal hope the answer is yes.

However it is much harder to do this in the US or Europe as it is in China, India or the other Southeast Asian countries where digital payments are gaining traction. There are two reasons for this. First, China and the countries in Southeast Asia have a significantly larger young population compared to Europe or the US. This allows these emerging market countries to be more open to adapting to new technology. Secondly China, India and the other Southeast Asian countries did not have a history of credit cards. They jumped from a cash based society into a digital payment society. Since the digital payment service is vastly more convenient to the erstwhile cash-only market making that transition was much easier. The US and Europe have long culture of using credit cards with institutions and infrastructure built around it making it harder for consumers to shift from credit cards to digital payments. Are Banks doomed with the expansion of Fintech Companies?In the short run, the answer would be no. Credit cards are still the most popular mode of payment in the country and it would take a few years to change the culture around credit cards. Since most credit cards are linked to banks, they would be safe for the time being.

In the long term however it is very possible that banks would be completely replaced by Fintech Companies. Venmo currently helped people exchange $18 billion, which shows that people, especially millenials, trust non-traditional financial institutions to handle their money. With the introduction of the Venmo card, the Venmo account essentially becomes a checking account. With the interest rates given to depositors in US banks being next to nothing, there is very little incentive for people to put their money in banks. With new technology, such as blockchain, entering the scene it is very possible for non-traditional financial institutions to provide the same functions of banks with more security. If the digital payment system becomes more prevalent the need for banks would disappear like its happening in China. This definitely spells doom for traditional financial institutions. Who is the real winner in the Payment War? The short answer is no one. Banks and card institutions like Visa and Mastercard can not lose as all payment methods including digital ones like Apple Pay and Paypal still need bank accounts and credit cards to operate, at least for the near future. However they don’t seem to have made a significant impact in digital payment methods on their own. Mobile phone companies such as Apple, Google and Samsung have to prove an additional value add to both consumers and merchants if they want to win. Messaging and Social media platforms such as Facebook and WhatsApp are yet to be a dominant player in this space. Startups such as Paypal and Square are the best situated in this war.

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