The Disruptive Shift to Pay-As-You-Go Payments And Lifestyles

10 Tipping Points for the Payments Industry
Part 4
Although the payments business has historically evolved at a glacial pace, the massive shift in consumer payments from physical to electronic forms is moving at light speed by comparison, making debit accounts the preferred means of funding transactions in every conceivable channel and venue. Electronic debit-account use is soaring among younger consumers. Recent research data from Bank of America Corp. show that Gen Xers prefer the use of debit cards over checkbooks by 2.5 to 1, and Gen Ys prefer them by 8 to 1?versus 1.5 to 1 for Baby Boomers and all BofA consumers. Many youngsters opening up their first demand deposit account don't get checks, and don't know how to write them. And both younger customer groups are ready adopters of online banking and bill payment. Debit is establishing itself for spontaneous Internet transactions, as well. Visa reported a year ago that more than 50% of its online card purchases were now being done with signature-debit cards?eclipsing credit card usage. Part of the motivation for younger consumers to prefer pay-as-you-go financial management and control?instead of their parents' credit-oriented model– is to avoid the nasty “gotchas” banks are serving up. These include escalating non-sufficient funds and overdraft fees and a host of penalties and charges from succumbing to the temptations of too-easy-to-get credit. Contrary to the ministrations (and ambitions) of the bank card associations for decades, consumers don't really want a single card that does everything they want to do while transacting electronically; rather, they are willing to access many means of transacting, including multiple bank cards, multiple DDAs, PayPal accounts (more than 125 million registered), multiple types of stored value cards, and so on. Wallet share is being diffused, and try as they might, loyalty programs based on single cards or accounts do relatively little in terms of differentiating brands or driving loyalty preferences. So financial institutions?and their processing partners and technology providers?would appear to be better served by holistically managing the proliferation of ways and means by which younger consumers access their primary transactional accounts?the DDAs. And they must act decisively to eliminate the historical obstacles to moving funds in and out of the DDA to appeal to the younger customers who will increasingly constitute their future business. For example, today's consumers can't understand why banks for the most part can't pay each other electronically?even between their own accounts! They also can't figure out why it's so hard to fund transactions electronically to external parties, such as billers. Though some banks and most billing-service providers have been working on these problems for years, nearly all intrabank transfers move within two to three days via the automated clearing house, and one out of four online bill payments still winds up as a paper check from banking websites to the billers.

Such operational limitations, coupled with rising concerns over security and privacy, confound user expectations in a digital era, and have driven adoption of online banking and bill payment from bank websites onto a flat spot recently.

These new consumers want to access their debit accounts from any place they feel like transacting, any time they feel like it?with safety and convenience. Naturally, merchants are equally eager to support the various forms of remote access (online, mobile, contactless, etc.) that are required.

With these kinds of shifts in payment form factors and access points, the payments industry can ill afford to continue hiding in the closet with its unrealistically guarded (paranoid?) focus on traditional means of accessing all-important debit accounts. Instead, it must retool to manage the DDA as a portfolio in order to capture ALL of its transactional volume potential, or risk becoming irrelevant to these users.

Prognosis: This huge and widening demographic shift to electronic debit account usage means evolving the payments infrastructure rapidly to accommodate new requirements for network and device integration, as well as providing stronger levels of security and risk management suited to remote-access venues over open networks. For merchant and banking players alike, the costs of participation in electronic payments will be rising quickly?along with the stakes. Wildcard: PayPal offers a virtual debit card and other payment options with effective real-time access (and even instant credit) via your DDA account; on top of that, this non-bank provider pays 5% interest on even a $1 balance in their own accounts. Extend these services to the point of sale, bill payments, and funds transfers, and maybe the problem is already solved…
—Steve Mott, Better Buy Design