I'll admit to having been over-focused, even somewhat obsessed, on what I've considered to be the high cost difference between card present and card not present transaction rates. After all, the difference on some interchange tables is over 100 basis points, a full percentage and more of cost. Even Square employs an up-charge when card data is entered via the keyboard, 3.50% instead of its 2.75%, a 75 basis point delta.
Ouch. That has to hurt, right? It has to inhibit e-commerce and mobile transactions? Based on e-commerce sales this year, not so much. And there are far bigger accelerants in play. The CNP problem may not be as big as I'd thought.
To put it into Maslovian terms, the hierarchy of merchant needs does not begin or end with payment cost. The nearly entire pyramid of need is about increasing sales. While transaction costs impact cost of goods sold and the price to the customer (bow to Walmart), a method of increasing sales volume comes out ahead of a 30, 40 or even 75 basis point cost, the typical range for many merchant categories. It's just a few cents on a $100 sale.
When you're a top e-commerce retailer, those few pennies can add up quickly. But even those costs are lost in the noise when compared to merchandise fraud losses. Unlike their brick-and-mortar card present competitors, e-tailers are not covered for fraud losses simply because the card is not present, a presentation that has long been equivalent to card holder presence. And while it's rumored that the top dog, Amazon, has managed its fraud down to card present levels, managing those fraud levels matters a whole lot more than the CP v CNP cost delta.
A lot of innovation and hard work is happening in fraud reduction. More on that later.
Assuming for the time being that fraud loss management is strong, let's look at the accelerants to increased sales. A major accelerant is the rise of mobile apps and their use of card-on-file payments. Despite the fact that these are charged at card-not-present rates, increasing numbers of merchants are more than willing to take on the risks because these apps improve sales.
Starbucks is, of course, the poster child of that success. While 25% of its sales are now on its prepaid cards, Starbucks announced at its December 5th investor conference that its mobile channel is now seeing 2.1 million transactions per week from 7 million active mobile users. Its app not only manages transactions, it supports what Starbucks calls "direct emotional engagement." Every merchant wants that kind of love. Mobile apps, when they work well, engender warm feelings if not Starbucks-level passion. Its integrated Square's mobile payment app, Square Wallet, as yet another mobile payment method to expand that love.
from Starbucks Dec 5 2012 Investor Conference presentation
The convenience of that card-on-file payment, and reload for many, contributes to the appeal. That's why Dunkin Brands has its own app now for its eponymous Donut shops. Why Amazon's mobile app is well loved (I'm the only person you'll ever read of who bought a chainsaw at 11 pm from his bed). And why more brick-and-mortar retailers are looking to apps to drive in-store performance through a either a directly managed card-on-file approach or via a cloud wallet from the likes of PayPal, Google, or Paydiant.
"Direct emotional engagement" trumps a simple piece of plastic.
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