Moving Money: The Future of Consumer Payments

2 Payments in Flux: Megatrends Reshape the Industry

Payments is a complex industry in which change often occurs without warning. Today, three major technology trends could profoundly shift the pace and direction of evolution across the payments landscape. Industry incumbents and entrants should heed these trends to ensure their own future success. U.S. payments evolved gradually over the last two centuries to become an industry in its own right; it is now one of the nation’s largest. At approximately $280 billion in revenue, the industry now surpasses many that are better known, including airlines, hotels, television, films, and music. Competition and regulation have been important drivers of its evolution, but technology has been an especially capricious player. Frequently it changed the rules of the game in unforeseen ways, subsequently reshaping both the industry and consumer behavior. Today it again stands at the industry’s gates, ready to impose significant change in diverse ways. How can institutions cope with the myriad changes that seem to arise at every turn? How do they determine which of the many strategic options are most likely to create competitive advantages? To 2 Payments in Flux: Megatrends Reshape the Industry vijay d’silva 19 The author thanks Eliza Hammel, Glen Sarvady, and Tariq Shaukat of McKinsey and Company for their invaluable contributions to the development of this article. 02-0277-1 CH 02:02-0277-1 CH 02 5/23/12 5:05 PM Page 19 help address such questions, I focus in this chapter on how technology is shaping the near-term evolution of the payments industry. Surviving Landscape Upheavals History reveals that the U.S. payments industry has seldom been quick to adopt innovation. In 1690, for example, the Massachusetts Bay Colony issued the colonies’ first paper currency. Not until 1792, however , did Congress create the U.S. Mint, which produced the nation’s first one-dollar coins. Throughout the first half of the nineteenth century many state-chartered banks nonetheless continued to issue their own notes. In 1862 the U.S. Treasury finally introduced America’s first national paper currency, which eventually removed banks from the currency production and control processes. Checks followed a similar pattern. Businesses and wealthy individuals used them during America’s early days, but clearing was often difficult until 1914, when the Federal Reserve—created by Congress the preceding year—developed its centralized clearing system. Gradual improvements followed until the 1950s, when magnetic ink character recognition for checks was introduced, dramatically improving checkprocessing efficiency. Credit cards also appeared early in the twentieth century. The concept —described as early as 1887 in Edward Bellamy’s utopian novel Looking Backward—took root in the early 1900s when several oil companies and department stores issued credit cards to drive loyalty and improve customer service. Initially made of paper, early cards were merchant-specific and easy to replicate. It was not until 1950 that Diners Club introduced the nation’s first general purpose credit card. The American Express card followed in 1958. BankAmericard, the forerunner of Visa, followed soon after. Today, 77 percent of American households use credit cards, making them one of the industry’s most widespread payment instruments. The pace of technological change quickened in the second half of the twentieth century, with adoption rates of new instruments like debit 20 Vijay D’Silva 02-0277-1 CH 02:02-0277-1 CH 02 5/23/12 5:05 PM Page 20 cards and electronic transactions growing faster than innovations of earlier decades. The late 1960s gave birth to ATMs; the 1970s brought automated clearinghouses that enabled banks to exchange funds electronically ; the 1980s gave us data mining and advanced direct marketing approaches that enabled more aggressive card growth; and the 1990s brought these tools online with the birth of PayPal and other online payment mechanisms. In some ways, the payments industry has become one of the most stable industries in the United States. It comprises large networks and wellestablished players with secure processes that enjoy significant structural and scale advantages. Still, though this industry may be slower than some to accept technological change, its pace of innovation is clearly quickening, and compelling participants to keep up. Comprehending a Complex Industry Payments is one of the most visible components of the financial services landscape today. Yet few people realize that it also accounts for over one-third of U.S. banking revenues, and that about three-quarters of those revenues come from consumer credit cards...