Looking to the past to build a better future for today’s payments landscape

By Bethan Cowper | 30 July 2014

Predicting the future is no mean feat. To get a true handle on the patterns and trends occurring now and potentially in the future, the logical step is to start by analysing the past. For over 10,000 years, money has been a physical form, from bartering with goods and services, to the Greeks stamping their own coins in around 600 BC, to the introduction of paper money in China around 790 AD, a trend that didn’t reach Europe until 1661.

The first lessons we can take from these simple facts are a) trends spread and are adopted globally and b) it can take rather a long time.  Let’s not be hasty in our predictions then, it seems we have plenty of time and the evolution of money and the payment still have a lot to teach us. To fully understand a trend you need to get to grips with the reasoning behind it.

So, why did we need money anyway? This is the pivotal question. We needed a universal ‘money’ so that we didn’t have to pay for everything in goods and services. A physical form that was essentially a representation of the worth of the goods we were trading and therefore usually made from a metal of value. Something that clearly showed that one cow is worth two goats, one goat is worth four chickens, etc. Perhaps, more importantly, money was much easier to both exchange (what happens if your baker doesn’t need fish?) and transport, substantially widening the catchment area for ‘business deals’ and for the growth of the economy as market reach expanded. The main motivation behind the adoption and growth of cash thousands of years ago is exactly the same as the key driving factor of today: convenience.

The next question is then, why the move to paper money? Well, when trading with precious metals such as gold, the goldsmith was often required to provide a receipt. These receipts were used to make payments, circulating from hand to hand and creating the first paper money. This development brings in the conjoined idea of convenience and security. The fact that paper money evolved to the extent it no longer represented precious metals and instead became what it was designed to imitate, shows the irrefutable success of this payment type.

Stepping forward a few years, money chugged along happily until 1946 when, according to MasterCard, the first bankcard, ‘Charg-it’ was introduced by John Biggins, a banker in Brooklyn, USA. The first credit card was introduced shortly afterwards, when the Diners Club Card was created by businessman, Frank McNamara, in 1950, when he found himself without enough cash to pay for dinner. Now that a need was identified, cards slowly grew in popularity as a number of charge cards and credit cards came on the market and the debit card was soon to follow, in 1966. Cards offered both convenience to the consumer and new revenue for the banks, a recipe destined for success. Today, according to Cards International, cards account for 56% of all non-cash payments.

The plastic card phenomenon led to the introduction of the ATM in 1967 by Barclays Bank in the UK and eventually the POS terminal entered the mainstream in the early 1990s. Both developments again fuelled by convenience and potential new revenue streams.

The move towards electronic payments and e-money didn’t take place until the early 80s with the introduction of ‘home online banking services’ referring to the use of a terminal, keyboard and TV (or monitor) to access the banking system using a phone line. Stanford Federal Credit Union in the USA was the first financial institution to offer online internet banking services to all of its members in October 1994, and banks worldwide were quick to follow suit. As the mobile phone grew in popularity, banks began to take note, introducing SMS banking in 1999 and adapting their banking services with the rise in the uptake of smartphones in the 2000s. The lesson here is to use new and popular emerging technologies as new channels to engage the customer, grow the customer base and again, make more money.

As a general overview, we are skipping a lot of important stuff, so it is crucial to mention a few things such as; telephone banking, loyalty programs designed to entice the customer and give financial institutions and retailers tangible data to map consumer habits and offer tailor made programs, the introduction of security measures such as EMV and standards to protect data (PCI DSS), the rise and growth of the International Payment System giants, the move from bank-centric to customer-centric products and the introduction of terminology such as multi-channel and omni-channel. The entrants on this list all have their place in shaping the payments landscape into what it is today.

Currently, industry news and predictions for the future are generally heralded by contactless functionality and NFC, whether it is using a card, a mobile phone or wearable technologies from glasses and watches, to actual clothing. Mobile apps for making payments such as Pingit, Paym amongst others are also revolutionising our payment behaviours. The convenience of banking has changed from offering consumers the option of not having to pay with cash in a restaurant to shaving a mere 3 seconds off making a payment. How popular these methods will become remains to be seen, as financial institutions struggle with consumer adoption due to a lack of education often around use, need and security.

So what can we learn from our brief dip into the history of payments? Well, the past tells us that no one payment method is going to die. Let’s face facts, people still exchange goods, pay with coins and have cheque books and these choices are based not just on individual preference, but on culture as well. Things are moving and changing, but never as quickly as predicted, as change takes time; trust needs to be built and new habits and behaviours need to be formed.

The future looks to offer consumers a multi-channel and omni-channel payment experience full of choice and more convenient ways to pay. So how can financial institutions differentiate? Well, with all these new, easier and quicker channels, money is more accessible and it is easier for people to become more relaxed about managing their finances.  This has, in turn, led to more people discovering different avenues with which to find themselves in financial difficulty. Payment services providers need to act responsibly and offer their customers education and transparency around their payment products whilst actively encouraging them to manage their money more effectively. With all of the technological advances in payments in recent years, perhaps the most undervalued is the functionality to enable this clarity around consumer spending. These tools are readily available, from SMS alerts on spending and available balance to internet banking applications that offer budgeting tools and graphical representations of spend. It is time to put them to good use; offering services such as these, isn’t enough, customers must be encouraged to use them.

In a nutshell:

  • The future is multi-channel (and cash isn’t dead), so cover all of your bases
     
  • If you want to innovate, first find a need for your new products to guarantee success
     
  • Encourage responsible spending: this approach will ultimately increase your customer loyalty.

 

By Bethan Cowper, Head of International Marketing, Compass Plus

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