20 April 2016
Paym's success is just a matter of time
I was recently asked if I thought Paym was a success or a failure. I struggled with the question as can we really make such an unambiguous verdict on a service after such a short space of time?
I will argue that we need a bit of perspective. Given the specific and unique commercial environment within which Paym exists, 18 to 24 months is way too early to make any form of overarching judgment. Instead Paym should be viewed in the long-term. Unlike other commercial payment services, it does not require instant success. Of course we can look at factors which could help speed up its adoption and usage, but this should be part of wider evaluation of its early development.
Payments history lesson
While it is fair to say that Paym hasn’t re-written the rule book in terms of the fast adoption of a new payment service, it certainly follows the precedent of other new payments launches. The reality is, despite what advocates of a particular new payment form might predict for a new service - recall Apple CEO’s Tim Cook’s prediction that 2015 would be the year of Apple Pay - history shows that success is typically a much slower process.
Take contactless payments which have had an explosion of growth over the last couple of years. Trials of the technology had begun more than a decade previous, and the first live transaction in the UK was in 2007. I bet back then you would find advocates saying that 2008 would be the year of contactless. However, it was a tough slog getting cards into the hands of consumers and persuading merchants that the benefits of accepting tap and go payments was worth the additional expense. Merchants were incentivised by favourable interchange; while banks gradually replaced their customer’s cards with the new contactless chip. However, getting consumers – who already had pretty efficient payment mechanisms – was tougher.
Targeted use cases for contactless, such as acceptance across Transport for London, helped to encourage consumer adoption. Using a contactless card every time you jump on a bus gave consumers regular experience of its benefits and through this positive learning, made us more confident and willing to tap and go when, for example, visiting a cafe. Eventually, enough momentum was gained that led to a symbiotic explosion in both consumer usage and merchant acceptance which led to a huge upsurge around 2014. Merchant acceptance was also driven by the natural 7-10 year POS replacement cycle; the previous big change happened in 2005 when merchants switched to EMV.
A more fitting comparison for Paym is direct debit. Available since the late 1960s, direct debits only really took off in the 1980s. From a biller’s perspective, the automation of mandates and standardisation of the messaging service requirements made it easier and more attractive for businesses to collect payments this way. To educate consumers of its advantages, a major advertising campaign was launched in the late 1980s to promote the Direct Debit brand, as well as specifically the direct debit guarantee which gave consumers’ confidence to change their payment habits. At the same time, improvements in telecommunications and computer processing enabled automated bank transfers on a mass scale. To illustrate how these collective factors supported growth; in 1984, 16 years after launching and with no real promotion except by individual banks, there were less than 300 million direct debits per year in the UK. Fast forward another 16 years to 2000 and this figure had risen to over 2 billion. Today there are around 3.6 billion direct debits each year.
Changing how we do things is typically a slow and arduous process. As the direct debit example above shows, while a product may be perfectly good in theory, providing incentives and making it easy to use are critical to building a mass market product.
The reason I think the direct debit example is an important comparative is I don’t buy the argument that suggests the apparent slow up-take of Paym is due to it being a technology solution trying to fill a payment problem that does not exist. Prior to direct debits, most consumers did not perceive a problem paying their electricity bills either by post or through visiting their local ‘leccy board’. Direct debits succeeded because once consumer knowledge and confidence of the service was established, it provided consumers with a cheaper, safer and more convenient way to pay bills. A similar thing could happen with Paym (although, arguably it does face more competition than direct debits did, especially from other alternative and social network type payment service). Most people are comfortable putting cash, cheques or prepaid card/vouchers in a birthday card and popping it in the post. We are also capable of divvying up a restaurant or household bill. However, all these scenarios in the real world can be significantly improved by Paym for both sender and recipient. Why should my mum waste time, money and effort to put a cheque in the post for my Birthday when she could Paym the money to me and guarantee I get it in time? If I owe a friend money, I don’t have to pop round to their house with the cash via a trip to the ATM; I can simply send it instantaneously.
There are numerous other scenarios where Paym could improve the day-to-day experience of exchanging money with each other. There are also other use cases which have not been fully explored, which would enable Paym to make a real difference in people’s lives. For example, if you are window cleaner with a regular customer base, wouldn’t it be great if you could accept payment with very little cost via Paym? It is also good for the customer; you don’t need to frantically turn the house upside trying to club £10 together or contact your bank to set up a bank transfer. The other added advantage of Paym over a traditional bank transfer is the look up process means it is very hard to send a misdirected payments as it prompts you with the name on the account before asking you to confirm you wish to send money to this person. A number of banks, including HSBC, have been looking to support small businesses through the use of Paym.
Marketing is key
While it is easy to laud the virtues of Paym over existing P2P payments mechanism, how do we account for the fact that consumer are seemingly not interested? The short answer is patience and a little more marketing effort. The reality is volumes continue to show strong growth, albeit from a low base, and there is no indication that growth is about to dramatically halt. It just hasn’t had the explosion of usage that some may have expected, but that doesn’t mean this will not come later down the line. Paym, like other payment services, is heavily affected by network effects. A limited user base dramatically reduces the value of Paym as a service because if you can’t send money to the person you want to, it is practically redundant.
For users of Paym like myself, I have managed to encourage/coerce a small network of four family members, with whom I regularly exchange money with, to sign up. However, for people outside this small group, it is pot luck, to the point that sometimes I don’t even bother to ask anymore. Sign-ups are key to a service such as Paym, because users can be both payer and payee. If we assume there are both active and passive customers, active users can act as educators to the passive users. For this to happen it will require that active users do not get frustrated when they try to make a payment because the person they wish to send money to has not signed up.
One potential solution would be to automatically register the consumers’ mobile phone to the Paym database on sign-up to a banking app. However, this would require some form of consumer consent. This would also not cover the tens of millions that already have mobile banking but have not signed up to the service. Another solution would be to offer incentives for consumers. For example, what if banks were to send a text message to their customers promising to give them £5 if they signed up to Paym. While it is not my job to spend the banks’ marketing budget, this could be a comparatively cheap mechanism to get sign ups and would no doubt act as a very positive customer engagement exercise. Some banks, such as Santander, initially offered incentives (£1 on sign up, £1 on first payment, £1 on receiving first payment) when Paym launched, but this has since ceased. A potential renewal of these types of activities may act as great recruiters for the service.
While increasing overall registrations will be important to turn Paym into a mass market product, creating small user networks like the family one I describe above could be key in creating active users of the service who will lead others into adoption. For example, a targeted communication campaign by the banks of Students – a self-enclosed network of potential users who transfer lots of cash between each other – as part of their overall student banking proposition could represent an ideal market segment to grow Paym. Not only do they regularly transact among themselves (sharing household bills, restaurant bills and lending each other money etc.), they also have a big incentive to encourage their parents or other sources of emergency funds to adopt Paym.
A crucial problem for the service is that consumers are simply not aware of Paym. Recent research by Mintel shows that just 8 percent of respondents were aware of Paym compared to 18 percent for Apple Pay, 24 percent for Ping-it and 92 percent for PayPal.
Source: Mintel, Consumer Payment Preferences October 2015
Making consumers aware of Paym is something that needs to be addressed and is arguably a priority task. Whether this is through a systematic, albeit potentially expensive, media advertisement campaign, existing banking interactions with customers, or through some other means - I’ll leave that to the experts. This has arguably been hindered by some confusion around brand, with many banks choosing to label the service under their own mobile banking and payments brand. This becomes problematic when consumer try a transaction with each other but belong to different banks. Lack of consumer awareness and confusion over the service is a clear and significant hindrance to the growth of Paym.
Unfortunately, banks are under enormous pressure at the moment to meet regulatory requirement, improve IT infrastructures and respond to increasing external competition. As a result, they face many competing priorities for their time and resource. Fortunately, the big advantage a service such as Paym has over other new payment launches is it has time on its hand. There are no significant commercial pressures for it to be an overnight success. However, this can be a double edged sword.
The commercial challenge
Banks do not make money out of the Paym service, rather it is extension of their overall mobile banking offering. The big commercial challenge that Paym faces, which distinguishes it from direct debits, is there are few incentives for the parties involved. Direct debits worked because DD was commercially beneficial to corporates (who could reduce costs), to banks (who could charge corporates) and to users (who could save time, effort and money off their bills). With Paym there is a benefit to consumers and potentially small businesses, but for the banks it is mostly a cost.
In the long term it could save banks money if it further reduces cash and cheque usage, but I doubt this is a significant factor for banks. Nevertheless, while there is not a direct commercial incentive, services such as Paym enrich their customer experience which can support customer recruitment, engagement and retention. Arguably, this in itself represents a significant incentive for banks.
User experience is also cited as a potential issue for Paym. At present, a typical Paym user looking to access the service will need to log on to their banking app and then search through the various features to find it. Inconsistency of branding/labelling doesn’t help here and depending on who you bank with, the quality and experience will vary. However, over time we expect this to improve. Innovation and competition to retain customers will likely lead to advances in how we log onto our banking apps and the user interface, which in turn will make it easier for customer to access and use Paym.
Alternatively, banks could decide to unbundle Paym and other payments functionality into a dedicated payments app. This could help raise the profile of Paym as a dedicated brand among consumers and ensure a more streamlined payments process. Looking around the world, the runaway success of the Swish P2P service in Sweden shows how a simple, dedicated, and externally branded payments service can quickly capture consumer loyalty. Personally, I expect that Paym will for the most part remain a service offered as part of the banks’ own-branded mobile banking app.
According to a 2015 survey by Forrester, just 16 percent of mobile phone users have used a mobile finance/banking app in the last month, and over half were between the ages of 18 to 34. This is equivalent to roughly 8.3 million adults using mobile banking apps in the last month. What’s more, as the chart below shows, based on mobile banking app usage in the previous three month period, apart from checking balance and transaction history, more advanced functions, such as payments are still relatively uncommon.
Sample Size: 2820; Base: UK Online Adults 16+ (Online Weekly or More) who are banking customers with a mortgage, personal loan, credit card, current account, or savings account and who use a mobile phone.
Source: Forrester, European Consumer Technographic Financial Services Survey, 2015
This is not to dismiss the impact of mobile banking, it is just to give a little perspective. Mobile banking is a well-documented success in recent years and correctly cited as a major factor in the changing face of consumer banking. However, it is still a relatively niche product, highly concentrated among specific demographics and mainly used for very basic tasks. We expect this to change over coming years with payments becoming an increasingly important component of this.
As Paym is a product that is affected by network effects, while mobile banking per se is not, the success of Paym will largely be dependent within this future evolution of mobile banking. Paym effectively needs mobile banking to be a mass market product. How quick this evolution will be is anyone’s guess, but for Paym to become mainstream might take a while. While the window of opportunity is not indefinite, especially with rival P2P services available using alternative proxies, time is not necessarily a factor that defines its success.