If it is true that transaction fees for payments are going to continue to fall, then what transaction fees will merchants pay instead?
My old friend Peter Vander Auwera posed a good question on Twitter recently. He asked:
In 20 years, will merchants be willing to pay twice: once for the payment transaction and once for the relationship?
— Peter Vander Auwera (@petervan) June 24, 2014
Well I think I know the answer to this one. Not because I have any sort of crystal ball but because I can see the same trends that everyone else can see. The transaction revenue from payments (at least in the mass-market retail space) is asymptotic to zero. Payments are becoming a commodity and they’ll soon be vanishing inside the transaction itself. At every conference I go to nowadays, people point towards the retailer apps as the transaction wrapper and I am sure they are right to be looking in this direction, although there will of course be others.
(As an aside, this has rather an interesting set of implications for incumbent players since I cannot even remember whether I’ve loaded a Visa card or MasterCard into my apps let alone which issuer the cards came from. I just don’t care, and I’m pretty sure a great many other consumers won’t care either, especially when the app provider offers them double loyalty points to go straight to the bank account.)
The incisive point in Peter’s comment is that it will be the relationship that is the source of the value around the transaction and that will be what the stakeholders will pay for. Obviously, in order to have a relationship the counterparties have to know (let’s set aside what that means for a moment) who each other is. They have to be able to recognise each other. And over time the relationship, and the history of the transactions associated with that relationship, become a most valuable asset indeed: a reputation. This is what we have taken to calling the “3Rs” strategy for businesses who want to exploit the triple-A technology play of authentication, apps and APIs that we have been advising them on for a couple of years.
That means that the future value – literally and figuratively – will accrue to the platform and the apps and the third parties that operate, power and enable the layers around payment that get consumers to buy more things.
Well, not more things, necessarily, because the retailer’s goal might be to get you to buy more expensive things instead, but Karen was certainly correct, provided that the payments layer can be made to work properly. And that means a payments layer that is less vertically integrated, because it cannot predict or constrain the apps that will use it, and it should consume standard services from below (authentication being a good example).
One answer to Peter’s question, then, is that the merchants won’t pay twice, because the payment will be free. A potential commercial structure is that the merchant will pay for the recognition, they will manage the relationship themselves and they will sell the reputation on. Sounds plausible.