TowerGroup Research Outlines Lessons from Current Consumer Payments Market for Financial Institutions, Mobile Operators

NEEDHAM, MA, March 3, 2003�Electronic payments continue to gain share at the expense of cash and checks in the U.S., a market that has long-lagged other nations in the global shift from paper-based payments. New TowerGroup research finds that as the percentage of electronic transactions continues to increase, so does competition among new technologies to become the dominant electronic payment mechanism for consumers at point of sale, online or through mobile devices.

While credit and debit cards are today�s most common electronic payment options, new devices will become increasingly prevalent � including those that, unlike swiped magnetic strips, require no physical contact to activate a payment.

But according to TowerGroup, whether the future of payments lies in cell phones, �contactless� radio frequency keychain fobs, or chip-based smart cards will largely depend on how effectively these methods can provide clear value to the consumer. Research highlights include:

  • The global retail payments industry continues to shift gradually away from cash and other paper-based payments in favor of electronic payments. In the U.S. (more dependent on paper than any other leading economy), check-based payments have fallen from 86% to 55% of the total volume of retail noncash payments since 1979. Elsewhere in the world, check volumes have already been converted to check guarantee (or debit) cards, while post-paid cards are gaining significant traction.
  • In the next phase of this shift, TowerGroup expects convenient and cost-effective macropayments (payments over the value of US$10) and high-value micropayments (those between US$5 and $10) to expand further into new consumer arenas, like movie theaters and fast-food restaurants. This move is already visible in the introduction of stored value cards by chains like Starbucks, and in the piloting of swipe and contactless cards at fast-food and convenience store chains.
  • Over the longer-term, new products and services will be designed to tap into the convenience of �noncontact� payment technologies, particularly those that leverage the growing array of cell phones, PDAs and other mobile data devices. Ultimately, consumers will be able to pay for a variety of Internet, mobile and physical goods with a single contactless device � such as seen in Korea today, where contactless payments for a range of items are linked into customer-controlled alerts for special offers, loyalty program rewards and mobile couponing.
  • While today�s relationships between credit card issuers and consumers will not go away, the location and ownership of �virtual wallet� accounts will in some cases shift to carriers and other non-standard issuers.
  • But TowerGroup also underscored that consumer value will be a critical factor in adoption of new payment methods. At every point in the payments evolution, success will be measured as much (if not more) on business model and the ability to add tangible value over and above existing consumer payment habits, as it will on an underlying technology infrastructure.

�Financial institutions, mobile network operations and other stakeholders in the payments evolution must carefully consider the past lessons from this market when implementing emerging payments solutions,� said Ed Kountz, a senior analyst in the TowerGroup Emerging Technology Solutions practice and author of the research. �The factors that influenced the growth of swipe-based electronic payments to date will continue to play a role in the push toward �noncontact� convenience payments.�

Kountz noted that over the past two decades the payments market has consistently moved toward convenience, user value and the cost-effective delivery of services. �The primary drivers for emerging payments options are analogous to those we�ve seen in the current payments marketplace. These drivers include the cost of the payment mechanism for both consumers and merchants, the convenience for a consumer versus his or her existing payments habits, and finally, the use of brand affinity or loyalty tools like frequent flier programs that enhance a consumer�s experience, while simultaneously helping retailers better leverage data on consumer buying habits,� he said.

Two reports, titled �The Future of Retail Payments: Today�s Market and the Impact on Emerging Payments Solutions� and �The Future of Payments: Where the Rubber Meets the Road in Noncontract Payments Value� � and graphics � are available.

About TowerGroup: TowerGroup�now celebrating its 10th year�is the leading research and advisory company focused on the global financial services industry. A respected source for trusted information and advice, TowerGroup brings many of the world’s largest financial services, technology and consulting firms a deeper understanding of the business and technology issues impacting their organizations. Headquartered near Boston in Needham, Massachusetts, and with offices in New York, London, and Kuala Lumpur, TowerGroup serves a global client base.