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This is a personal blog. Although the authors are affiliated with Coda Payments, the views expressed here are their own.

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Tuesday
Apr162013

Is the future of payments not having to think about them?

In the developed world the emergence and growing penetration of smartphones augers a major change in the way people make payments at retail. I think one very likely shift is from a world in which payments require the active initiation by and authorization of customers to one in which customers' role is more often passive, with explicit review of payments occurring asynchronously (either in advance or retrospectively). Such genuinely frictionless payments promise greater convenience for customers and more revenues for merchants; they also open up new opportunities in the value chain for firms willing to assume the risks that such payments entail.

To understand what I mean, it is helpful first to think about what is happening with online services and the way people pay for them. Subscription-based cloud services have become the darling of venture capitalists in part because customers are far more likely to continue paying for so-called opt-out services to ones that require periodic opt-in. I pay for services this way personally (Spotify, Dropbox), and we use many more in our company (Google Apps, Amazon Web Services, Xero, Jira). I appreciate the convenience—in the most general sense, subscription billing reduces the number of conscious decisions that I have to make, which frees up brain bandwidth for more important things—and these providers and their investors like the recurring revenues. Research presented in a recent TechCrunch article suggests that, at least among a certain user segment, there is still lots of headroom in customers' willingness to pay for services that are billed on a subscription basis.

Something similar is afoot in bill payments. In the old days, paying bills meant reviewing (paper) bills and deliberately initiating payments (by check). Today, however, customers are increasingly likely to issue instructions, either to their bank or their biller, to automatically debit their bank account on a recurring basis. Sometimes these payments are for the same amount every month, as with, for example, student loans or gym memberships, and sometimes the amount varies, as with utility or credit card bills.

This move from active to passive payments online appears to be  a boon for both sellers and consumers. What does this suggest about payments in the real world? Consider the following examples as intimations of where we may be headed. Today, Square Wallet customers can walk into a Square merchant's shop, order and collect a coffee, identify themselves by name, and walk out—no card, cash, or recordable authorization of the purchase required. Cover extends this concept to dining and will allow customers who make a reservation using their app (presumably offering up their payment credentials in the process) to simply get up and leave the restaurant when they are finished with their meals. And it is easy to think of other possibilities. Today, checking out of a hotel is a time-consuming and largely pointless exercise. Why not e-mail guests an itemized list of charges after they have left, which they can review at their convenience (or, if they are especially harried and trust the hotel, not at all)? This would save time for both the guest and the hotel's staff.

Now for customers to accept these arrangements, they must feel that they have the ability either to preview payments or (more commonly) to retroactively adjust those that have already been made. The simplicity of passive payments will have to be accompanied by mechanisms that give customers control of them for them to be truly attractive. If Cover automatically adds a 15% tip to restaurant bills, users will want the ability to increase or decrease that default depending on the quality of service. Similarly, if a hotel guest finds a minibar or telephone charge that they did not make on their statement, they will need a way of challenging those charges. And so on. This means there is a risk that there will be a discrepancy between what the customer thinks (or fraudulently claims) that he owes and what the merchant thinks (or fraudulently claims) it is owed.

No player in today's four- or three-party model is very well positioned to assess and therefore to assume such risk: the final word in any dispute with a credit card company about a charge is evidence (in the form of a signature or PIN entry) by the customer, which is a hallmark of an active payment. In some cases, merchants themselves will be willing to assume this risk: after dozens of stays in their properties around the world, Starwood can be reasonably certain that I'm not going to pull a fast one on them by disputing a room-service charge that I did in fact incur. In cases when a single player acts as both acquirer and issuer (Square), that entity will be situated nicely to bear and manage such risk. And in still other instances, firms like Affirm or Klarna, currently focused on m-commerce, that can assess creditworthiness and extend credit in realtime will underwrite it. But regardless of who assumes this risk, I suspect the business case for doing so will exist for the simple reason that customers tend to spend more when they don't have to think about paying—and merchants will pay for that.

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