Current Payment Climate: What the Future Holds

Jared Mintzlaff

Payment methods have come a long way from the days of bartering goods for goods. Back then, the issue with bartering was that there was no common standard of value. For example, one person's horse might be worth a lot to them, but less valuable to the person they were transacting with. This led to inefficiencies in the exchange process, as one had to physically carry goods around to make a trade. In order to overcome these inefficiencies, humans innovated and began using rare metals or coins as a store of value for exchanging and transacting. However, even this method had its own set of issues, such as fluctuations in the value of the metals being used, and the burden of having to weigh and carry around large amounts of metal.

As a solution to these issues, paper money was introduced as a means of exchange. This came to us from China where merchants invented the first paper money and by the 19th century, it had become a common method of exchange in Europe. While paper money was a significant advancement, it still had its own set of issues such as concerns about theft and forgery. But as technology has advanced, and so have payment methods.

The most recent innovation in payment methods is the introduction of credit cards in the early 1950s. Credit cards offer a lot of advantages for consumers, such as the ability to transact with a single payment instrument, rather than a host of paper bills or coins. However, there are also problems associated with credit cards, such as credit card fraud and the large fees merchants must pay for processing transactions. This has led to a few large card networks having significant control over the market, which creates problems that regulation is trying to address.

In the US, over 90% of credit card volume is controlled by Visa, MasterCard, and American Express. These card networks offer rewards to customers in the form of loyalty and rewards programs, however, the cost of these transactions is primarily borne by merchants who pay high processing fees. This creates a two-sided market where the consumer has a negative cost and the merchant bears a higher cost than what would be expected in a traditional one-sided market.

From a consumer protection perspective, this presents some complexity as simply seeing an elevated cost on one side of the market isn't necessarily indicative of market failure. Setting up a two-sided market, such as a card network, is also complicated because the platform is essentially valueless until there is substantial participation on both sides of the market. For example, a credit card network will have little value to consumers if there are no merchants accepting the card, and similarly, merchants will not find value in accepting a card network if there are no consumers using it.

Current networks have value and cost to both sides of the market, both in the merchant acceptance relationship and in the cardholder usage relationship. On the merchant side, cards are immensely valuable because they allow customers who don't carry cash to still buy products and services, but the costs of processing fees can be significant. On the cardholder side, credit cards are attractive because they come with rewards and loyalty programs, but it's important to note that the costs of these transactions are primarily borne by the merchants. Each of the three major card networks, Visa, American Express, and Mastercard have their own rewards program for their customers. The main difference in rewards between these three credit card networks is the type and variety of rewards offered. American Express is known for its strong rewards program, with a variety of options for earning points or cash back on purchases. Visa also offers rewards, but the options may be more limited compared to American Express. Mastercard offers a wide range of rewards, but the specific rewards offered can vary depending on the issuer and the card. Additionally, American Express and Visa may have more exclusive partnerships and offers compared to Mastercard.

In the future, blockchain technologies such as eWallets and P2P payments will become more popular due to their lower transaction fees and faster transaction times. This could potentially change the way we view and use credit and debit card payment networks.

Today, cash is still the most common means of purchase in the US, however, its share is declining quickly. Debit and credit card usage has really exploded in the past few decades. Debit cards are most commonly used by low and middle-income consumers who have access to a debit card because they have a bank account. But don't transact with credit either because they don't feel comfortable transacting with means of payment that couples borrowing from a bank or a financial institution with transacting. Credit cards are predominantly used by higher-income consumers who have access to really attractive rewards cards and use them as a means of purchase.

Since the financial crisis, debit usage has actually dominated credit usage. One reason that people think this may be is because especially millennial consumers are still operating in the shadow of the crisis and worry about taking on too much credit card debt. However, in the future, going forward, the belief is that credit will dominate debit.

Rewards programs have become a staple in the world of consumerism. From credit card points to loyalty programs at your favorite store, companies use rewards to entice consumers to make purchases and stay loyal to their brand. But why are these rewards so effective in drawing us in?

Research shows that rewards tap into our innate desires for instant gratification and social comparison. When we receive a reward, it triggers the release of dopamine, a chemical in our brain associated with pleasure and motivation. This creates a positive association with the brand and the act of shopping, making us more likely to repeat the behavior in the future.

Additionally, rewards programs often include a sense of exclusivity or VIP status, which plays into our desire to feel special and valued. The allure of unlocking special perks or earning exclusive discounts can make us feel like part of a select group, leading to a greater sense of loyalty towards the brand.

Furthermore, rewards programs often have a sense of progress and achievement, which appeals to our need for accomplishment. Earning points or reaching new tiers in a loyalty program can give us a sense of achievement, making us more likely to continue using the program. Some may offer more tangible or valuable rewards, while others may be more difficult to redeem or come with stricter requirements.

Rewards programs are effective in drawing consumers in due to their ability to tap into our desires for instant gratification, social comparison, exclusivity, and achievement.

Blockchain technology has the potential to revolutionize the way businesses operate by automating processes while maintaining high levels of security and transparency. FinTech technologies, such as eWallets and Peer-to-Peer (P2P) are developing continuously. PayPal. AliPay. ApplePay. Oppo. Paytm. These are some of the key players in the e-wallets segment. E-wallets have clearly become a global phenomenon — and they keep getting bigger and more relevant, with 80% of millennials shopping and paying bills online with a mobile device. As the world moves towards a more digital economy, the payments industry will see a significant transformation, easier and more efficient, through blockchain payments and loyalty systems.

Additionally, many eWallets offer loyalty and rewards programs, which incentivize customers to use their platform.

Peer-to-peer payments also offer the same benefits of lower transaction fees and faster transaction times, but with the added benefit of cutting out the middleman. This allows for more direct transactions . As the global economy continues to evolve, so too will the way we pay for goods and services.

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