By Bruce Parker, Modo CEO
Did the word “drive” just now make you think of your favorite new car? Us too. We love cars. And how can you think about the newest new cars and not immediately think Tesla these days? The Model S (so urbane!), Model X (so gullwing-y and spacious!), and Model 3 (so awesomely affordable!) [1] are the epitome of modern automotive design and experience. Plus they’re powered by super clean electricity. Whoa.
Speaking of electricity, have you given much thought to how that electric power gets into said automotive expression of Mr. Musk’s awesomeness? Nope. We hadn’t either. But then we had to come up with an analogy for our payments stuff and now here we are. So, if you happen to have one of those Musk Models within a stone’s throw of Mechanicville, NY, you will up the ante by cranking your Tesla amps with the oldest power plant in the country placed there by none other than Mr. Edison himself in 1897.
What, praytell for the love of valuable reading/procrastination time [2], does this have to do with payments? Lots, actually. The success of the Tesla, or any electric vehicle, still depends on the same alternating-current power grid that our man Nikola pioneered in the early 20th century. And in the same way, we’re about to show you how new digital payments experiences will depend on existing payments infrastructure that we’ve had for decades and will likely have for decades to come. First, let’s look into what we mean by New Digital Payments Experiences. Yes, the caps mean it’s important, so pay attention.
Human brains thrive on novelty, which is why we always want new, exciting experiences. While digital payments may not be jumping out of an airplane or swimming with sharks, they do give us new experiences that help us better engage with the folks involved, get more information, and exchange more value.
Better Checkouts
Remember the first time [3] you got out of an Uber? And how it felt equal parts magical and also like you were getting away with something? So, the first big up from a digital payments experience is just simply a better checkout with less friction, less time, and better engagement with your payee.
More Information about Transactions
Had enough of paper receipts? This little lost-in-time beauty is dripping with noxious chemicals [4] and is written in magic fading ink that disappears after a few weeks. In today’s information-overloaded world we simply expect someone to keep track of things for us and serve it up to us on a delicious digital platter. Chalk a second score for digital versus the “way things have always been”.
More Value in Transactions
Love your loyalty points? #Everybodydoes [5]. Perhaps the single biggest reason that Starbucks mobile payments app has taken off is because they got loyalty together with payments and made a sweet, beautiful . . . buying experience. Digital payments means mo’ dough [6] for you when you are paying with the digits, whether loyalty, offers, or gifts.
Did you notice how few times we referred to the brand spanking [7] new payments infrastructure that makes all this new digital payments stuff work? Zero. That’s because none of these experiences needed a new payments system, instead they use the existing payments infrastructure to do all of their awesome.
You guessed it. Digital payments leverage existing payments infrastructure, so they just go hand in hand. Behind every bright new digital payment system is some old payments plumbing. It’s like when you hire a bathroom remodeler for a fresh baño. It might be instant-er, stronger, prettier, and better in every way, but ultimately even a new bathroom still uses the old drain pipes and sewer system as its method of egress. Still not tracking? Read on.
Apple Pay, Android Pay and Samsung Pay (“The Pays”) Leverage Credit/Debit Cards
Adding a debit or credit card to your “Pay” is a must-do when you start using Apple/Android/Samsung Pay. They allow you to pay your charges by magically swiping your phone over the terminal like a Jedi mind trick, but you can’t do any tricks until you add a credit or debit card that’s already in your wallet, padawan. And behind the scenes whether you checkout, swipe, tap, dip, snap or dangle [8], the same exact set of payments pipes move the same exact set of payments . . . shtuff [9] to the exact same places, in the exact same way. Starting to see our point?
Starbucks Leverages Loyalty, Credit/Debit Cards and Gift Cards
We covered the loyalty angle already, but Starbucks didn’t create a new loyalty program for their mobile app. They already offered Stars [10] via golden plastic cards. Their mobile app uses the same Credit/Debit Cards as you already have to provide funding for the app, but the neat twist here is that Starbucks “recharges” their own Gift Card using the app. Existing infrastructure folks. Eeks-IST-Ing.
PayPal Leverages ACH and Credit/Debit Cards
Using PayPal may have revolutionized the way you send and receive money, but you know that digital cash has to start somewhere. And guess what? It starts in the bank just like your old school checks. You also have to register your credit/debit card information to verify to cover any negative balances that occur when you drunk shop on eBay. Oh, and PayPal’s Venmo recently boasted more than $1 billion in payments processed in just one month (January 2016). Where did all of those bar tab splits come from? You guessed it! ACH payments from the folks’ bank accounts.
From PayPal to Starbucks to Target RedCard to the ubiquitous mobile “Pays” from Apple, Google & Samsung, new digital payments experiences are now showing up often and, in the aggregate, are growing fast. According to eMarketer, the use of proximity payment services like Apple Pay, Android Pay and Samsung Pay will more than triple by the end of 2016. In another three years, it’s estimated the average consumer will spend more than $3,000 per year solely using mobile payments.
According to our good friends at Boston-based Aite Group LLC, digital payments accounted for $162 billion in purchases in 2014, growing to $214 billion in 2015 and over $1 TRILLION dollars by 2020 (Thad is the MAN!). Customers have paid $82 billion in bills and $54 billion in bank card acceptance alone with digital payments. They estimate that the trend will only keep growing at up to 68% CAGR in the United States alone.
The thing is, existing payment systems are not going the way of the dinosaur, either. From ACH to credit and debit cards, a 2013 Federal Reserve Payments Study found that 2012 saw 22.1 billion ACH payments, 26.2 billion credit card payments, and 47 billion debit card payments made.
Our friends at NACHA crowed that ACH growth hit 5.6% in 2015, and now encompasses 24 billion transactions. While VISA saw 11% growth in payments volume in 2015 and MasterCard saw 12% growth in 2016 payments volume. Not to be outdone, gift cards grew at 6% in 2015, and loyalty value grew at some crazy awesome rate too.
Net net, all the needles are in the red, and every trend is up and to the right. So what gives? Where is this disruption that everybody keeps talking about?
Digital payments experiences won’t replace existing payments. They will only increase the reliance on existing systems, albeit in a more sleek, svelte and awesome way [11]. They are less risky to lose, they give you points for freebies, and they help expand brand names to make customers feel more connected in an exclusive club. Everyone wants the VIP treatment.
So just like enjoying the the Tesla-ness of the latest Tesla doesn’t require that Mr. Musk has to change how the country generates electrical power [12], creating and enjoying new digital payments experiences doesn’t depend on re-plumbing anything that VISA/Mastercard/Amex/Discover or ACH or Gift Cards or Loyalty or Store Cards or . . . ok, really any payments system already does. The only thing that really might come in handy is a way to connect those existing payments systems to the new digital payments experiences. Let us know if you can think of one [13].
[1] Has anyone else noticed how the combination of the letters of the current Tesla models spells something naughty in leetspeak? Just us? Ok. We’ll go back to keeping it uber geeky here at Modo.
[2] We highly recommend reading our whitepapers while otherwise <ahem> indisposed. BTW, that’s also where/when we write them.
[3] Every digital payments whitepaper has to reference Uber. It’s in the rules.
[4] We’re totally serious. You have to keep up with this stuff, it’s BPA people. B-freaking P A. Bad news. http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0110509
[5] A 2015 survey from Bond Brand Loyalty found consumers still love offers from retailers that reward repeat purchases, with 70 percent of respondents saying they plan their spending around these programs. http://www.retailcustomerexperience.com/news/survey-says-consumers-more-motivated-by-loyalty-programs-than-ever/
[6] The thoughtful (and brand aware) reader may notice the homophonetical similarity to our company name.
[7] Pro tip, don’t spank payments systems. It just makes them angry. And you won’t like them when they are angry.
[8] This is NOT an acceptable method of presenting payment anywhere respectable. Just don’t.
[9] Money, people. Just money. Please stay focused.
[10] Witty that. On second thought the last five letters of their name might have been another choice.
[11] Your debit or credit card is your friend, but digital payments are your friends with benefits. Please practice safe payments.
[12] Mr. Musk IS trying to change how the country generates electrical power: http://www.solarcity.com/team. But this teensy little fact got in the way of our narrative. So we hid it down here.
[13] Our head of sales required us to point out that Modo actually does this. So really we already thought of the answer, and that question was a weensy bit disingenuous. https://www.newmodo.wpengine.com/contact/