In a previous blog-entry I identified security and dispute management as the two most potent assets that traditional issuer/acquirers have to prevent disintermediation by online/mobile payment providers for offline purchases. Today I want to look at these in some more detail; particularly how likely online providers are to develop capabilities in these areas.
Among all factors that determine a consumer’s payment choices, security is the most important. Today’s online payment solutions offer a simple one-factor model that simply requires a static password or PIN to complete a purchase, whereas the card-based model offers two-factor security; physical possession of the card and a PIN-code or signature.
The payments industry has been unable to roll out a two-factor model for online payments despite a number of attempts. Therefore security is considerably greater for cards-based payments than online payments and is likely to prevent many from adopting the online/mobile model for offline payments. However, as smartphones become more advanced and widespread, secure technologies for online/mobile payments is likely just around the corner.
Another factor that is important to customers when choosing a payment option is their position in case they need to dispute the transaction. The card industry, and particularly the closed-loop networks, have traditionally supported cardholders in resolving disputes. Online/mobile payment providers on the other hand do not have sufficient organisational scale to support individual customers with dispute resolution.
However, they are likely to become major players in the ‘reputation economy’, which is likely to put new pressures on merchants to quickly resolve disputes. One could also imagine that new players, such as shopping or marketing platforms (e.g. eBay or Foursquare), will play an increasingly important role I dispute resolution.
Having reviewed security and dispute resolution in more detail, it is clear that the card-based industry has important advantages in these areas. For this reasons, consumers are unlikely to switch to online/mobile solutions for offline transactions in the immediate future. However, this is only a question of time, so the card industry must quickly understand what the value chain of the future will look like and position themselves to benefit from the changes that are sure to come.
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