Business of Payments
Don’t tokenise the transaction, tokenise the experience
Here’s my round-up from last week’s Merchant Payment Ecosystem conference in Berlin - the premier European event for merchant acquirers, their customers and suppliers. This is an expanded version of an earlier LinkedIn post.
The payment industry is often accused of moving too slowly but it’s certainly covered a lot of ground in the last 12 months. Not long ago, keynote presentations at MPE featured long digressions on strong customer authentication (SCA) and cryptocurrencies. I assume that SCA is a problem largely solved because hardly anyone mentioned it. Asked about why crypto had vanished from the agenda, one Mastercard exec paused and said, “Life has changed significantly.”
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Customer experience remains king. But with use cases demanding “invisible” payments, the technical infrastructure grows ever more complicated. Yet it’s vital to focus on the customer not the technology. Michel Rudolf von Roher from Nexi put it rather nicely: “Don’t tokenise the card. Tokenise the customer experience.” He was referring to Telepass, a service which originally paid tolls on Italian motorways but it’s just as relevant for any embedded payment application including the hot topic of virtual worlds.
The metaverse is still too nebulous a concept for the practical folk at MPE. Worldine was closest to showing a solution but is clearly still some distance away. What happens when you put a headset on and want to make a payment? Only a tokenised card can currently allow people to make a purchase without removing the headset, but Worldline is working on authenticating individuals based on their game play. It says it can establish a unique pattern of activity in just 20-30 seconds.
More concretely, Worldine showcased a series of Live Shopping Events it had powered on behalf of a number of blue chip brands such as H&M and L’Oreal on the Livescale platform. Live Shopping improved conversion rates by 30% and has been particularly popular in the Far East. Again, tokenised cards are behind the scenes. Ralf Gladis from Computop explained that most “alternative payments” are not fit for embedded applications. “They are not invisible,” he said.
Tokenised cards are at the heart of the relaunched Mercedes Benz Pay. This service allows car owners to pay for upgrades – such as rear axle steering - with a fingerprint touch on their dashboard. Mercedes Pay will be opened to 3rd parties such as parking operators and gas stations soon. Starfish – a German specialist payment infrastructure developer – built the service. Adyen is the acquirer/processor.
Mercedes Pay is one of the first applications of delegated authentication – the car is recognised as a smart device and its biometric checks accepted by the card schemes – and it's easy to see how the proposition makes sense to Mercedes. Automotive brands are desperate to cut out dealers and aftermarket partners to sell direct to consumers.
But wouldn’t Mercedes owners prefer to control their vehicle from their own iPhones? VW certainly seems to be taking a different approach from its German rival. VW is not proposing the car as a payment device. Instead, it has invested in the Elli app which can be used at 400K EV charging points.
The end of cards?
From a product perspective, all eyes are on artificial intelligence (AI), softpos, the metaverse and payment orchestration. But one topic that recurs every year is whether we can yet see the end of cards on the horizon. Cards may be expensive for merchants but Visa and Mastercard have proved remarkably durable. Tokenisation is the latest reason why this is so.
Dennis McNulty, from GetYourGuide, a marketplace, was clear that he wanted to steer customers to cheap payment instruments that don’t have chargeback guarantees. It’s possible that his customers may have other ideas. Surely, the customer is always right and should be able to choose to pay how he wants to? Not according to Dave Birch, chairing the conference. He pointed out that customers shouldn’t have the choice to pay with cheques. At least not unless they’re prepared to pay extra.
Open banking has been set to destroy cards for a while now and it does seem finally to be gaining a little traction in the UK. Elsewhere in Europe, there is much less excitement. Industry experts told me of poor-quality APIs, disengaged banks and consumers preferring more longstanding A2A payment types such as PBL’s in Poland or Sofort in Germany. Merchants are hostage to each bank’s user experience and some banks still have very clunky mobile apps. There are some niche use cases. If you want to buy a Mercedes Benz in the UK, it’s a Trust.ly open banking transaction behind the scenes.
Advocates are still promoting open banking as a cheap alternative to cards. However, asking informal questions of exhibitors, nothing changes my view that open banking will land on pricing close to debit in most market. Vendors should be selling this new payment type on enhanced customer experience not cheaper merchant fees.
The main stage speakers were animated about AI in general and ChatGPT in particular. It’s clear that AI has the potential to solve many problems for merchants. For example, ChatGPT could dynamically devise and apply anti-fraud rules. And it could propose payment types that have the highest chance of success or lowest cost of processing.
But within enterprises, people are finding it hard to make the switch from relying on humans to implementing processes designed by our robot overlords. Although it’s a black box, Dennis McNulty said “now it’s time to trust the AI.”
Dave Birch suggested that the consumer’s AI and the merchant’s AI might negotiate common ground before agreeing whether a transaction would be high-cost Platinum Amex or low-cost direct debit. This sounds overengineered for a simple transaction and under engineered for an important one like buying a car. And what could possibly go wrong?
We all need to be careful about making payments invisible. My view is that most transactions need a large “CONFIRM” button before money changes hands. Most shoppers don’t have the luxury of a large bank balance to cushion mistakes.
The consensus from the main stage was that cash will be eliminated within five years. “Payments follows commerce and commerce is going digital,” said Maria Parpou from Mastercard. This is a bold projection and fraught with political risk. One mitigation is Central Bank Digital Currencies (CBDCs) which could be explained to the public as digital cash. They could equally be presented as a surveillance operation in which the Government tracks our every move. It would be a bold finance minister that would have that argument.
Yet the Bank of England is consulting on Britcoin and the ECB has also shown strong indications of being serious about issuing digital money. Nobody knows what this means (although Dave Birch’s Substack gives it a good go) or even whether, in the words of Olof Wierfelt from Trustly, this is “a politically driven solution to a problem that does not exist.”
One problem solved by CBDCs might be to “cut out the parasitic middlemen” of banks, acquirers, issuers and card schemes. That would not be a solution to excite the audience at MPE. Of course, digital currencies will still need gateways, anti-fraud vendors and foreign exchange converters. All would not be lost.
Future of acquiring
With CBDCs long in the future, there was good discussion on the prospects for merchant acquiring. Francesco Burelli of Arkwright Consulting pointed out that the market is becoming increasingly consolidated. The top ten global acquirers process more than the next 140 combined according to his new report. But there is still room for regional and local players so long as national market buying behaviour and ecosystems continue to diverge from each other.
Some good news for the minnows is that the smaller acquirers are growing faster. Burelli suggested this is because they are quicker to adapt to new merchant needs than the giants encumbered with legacy platforms. We’d need more data to substantiate this. I’ve met plenty of small acquirers running on antiquated technology.
Burelli thinks that large merchants will increasingly negotiate directly with schemes and issuers, leaving acquirers firmly in the background. Even when maintaining direct acquiring relationships, many retailers will be using payment orchestration to save money or increase conversion rates by routing transactions to multiple acquirers.
In response, Diana Carrasco, from Lloyds talked plausibly about evolving from merchant acquirer to merchant service provider. Some of these services will be payments and some of the payments will be cards. But many will be payment-related financial services such as cash management, foreign exchange and lending.
Turning to merchant commerce, as channels converge, softpos looks like the technical bridge between the physical world (where more than 75% of transactions take place) and eCommerce. Ingenico, back in public after a troubled few years, announced the acquisition of Phos. This follows Worldine’s purchase of the well-regarded Softpos.eu and Marketpay buying Dejamobile. It’s not clear that softpos is a sufficiently well-defined product category for vendors to survive as independent businesses, at least not in today’s funding climate.
Ingenico have chosen wisely. Phos is one of the leading softpos vendors and its product will form part of Ingenico’s new “Payment Platform as a Service” proposition. PPAS is a vendor agnostic management layer that includes a terminal management system, software provisioning and reporting covering both traditional Linux and new Android terminals – including Axion, Tetra, PAX and Verifone.
PPAS could be very attractive to bank/acquirers managing large estates sourced from multiple hardware vendors. But Ingenico is not alone. I met the team from SHC Consulting, a German software company, whose VAS Cloud provides a similar platform.
Referring to POS-based acquirers, the advice from Giulio Montemagno from Ingenico, which counts 1200 bank/acquirers as customers, is that continuing to offer just a terminal that takes money on cards and/or local debit schemes is asking for trouble. Merchant churn is reaching 25% at some legacy acquirers, he said, often because they are maintaining terminals from multiple vendors. This makes it hard to introduce new features and services that merchants would value.
Although there are hundreds of possible value-added services acquirers could add to terminals, the number two profit source is still dynamic currency conversion (DCC). This is not normally a thing to shout about so it was good to see Fexco on stage. The Irish currency specialist showed a slide asserting that merchants and shoppers love dynamic currency conversion (DCC). I sense a campaign brewing in advance of the EU’s review of its cross-border payment regulations.
In other terminal news, Newland has started supplying Nexi with Android terminals for the Italian market. Software is from Poynt. Ingenico has made little progress yet with Android but Newland may finally be giving PAX some competition in Europe.
Two of the three finalists in MPE’s start-up competition were from the Far East. Allink, from Korea, pitched an NFC-based tap-to-pay solution that bypasses Apple and Google Pay. It has already signed 7-11. Pi-xcels (pronounced pixels) demonstrated digital receipts via NFC. A single tap of the phone on a terminal provides the payment and returns a digital receipt to the handset at the same time. No app or email address required. This solution attracted a great deal of interest from delegates and a partnership there is talk of a partnership with Ingenico.
Both Allink and Pi-xcels have patentable intellectual property. But the winner of the innovation award was Hands In, a UK start-up making it easy for groups of people to buy holidays or other high value products. The service certainly meets a strong market need but is easily replicable.
Crypto was less evident than in recent years but a couple of vendors caught my eye. Go Crypto from Slovenia offers a range of crypto acceptance at POS but has widened its portfolio to include cards (via Finaro). Tus, a local supermarket chain, is a customer. But despite Ljubljana’s reputation as crypto-central, less than 3% of Go Crypto’s transactions are actually crypto.
Triple A, from Singapore, look like a viable alternative to Bitpay if you need a crypt/fiat gateway. It is regulated, charges per transaction and doesn’t take a spread.
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