Analyst Back and Forth: On-Demand Payments

At Mercator, our analysts have a lot of very interesting and energetic discussions regarding the payments research that we publish across all of our advisory services. The following is an edited transcript of an email exchange that I recently had with Tim Sloane, Mercator Advisory Group’s Vice President of Payments Innovation, regarding his recent report From Card-on-File to On-Demand Payments: New Payment Model and Strategies for Payment Providers.

Alex: Here’s the thing that struck me when reading your report on the emergence of on-demand payments; apps like Uber are creating new payment volume! This isn’t a case of one payments mechanism stealing volume from a different mechanism (a zero sum proposition).These services are actually expanding the pie. My wife and I recently had a trip to San Francisco that is a perfect illustration. We mapped out a whole walking tour for our four days in the city only to realize when we got there that those hills are a lot steeper than we had thought. In the old days (defined, in this case, as before 2009), we would have gotten to the top of Telegraph Hill and given up. This time? We just summoned an Uber and rode to the next stop on our list (a restaurant solely focused on grilled cheese sandwiches). This obviously generated revenue for Uber, but it also enabled the grilled cheese sandwich restaurant to capture revenue that would have otherwise been lost.

Until I read your report, it hadn’t occurred to me just how significant the evolution from card-on-file to on-demand payments really is.

Tim: As ease of use and ubiquity (both spatial and temporal) increase, the opportunity to derive new transactions also increases. When e-commerce came on the scene, consumers discovered the joy of 24-hour shopping convenience. As the Web moved to mobile, so did e-commerce, and shopping became possible anytime and anyplace. But the Web doesn’t provide much context or engagement. Mobile apps, however, deliver all the benefits associated with the Web but with better context, which enables improved engagement. These benefits provide new opportunities to sell and drive new transactions.

Alex: So the question, for issuers, is how to capture this new volume on their cards. We are obviously still in the early days of contextual mobile commerce, but it seems like most issuers’ strategies are based on becoming the default card in these applications through short-term rewards. For example, Capital One has been offering a 20% discount on Uber rides when consumers use their Quicksilver cards, presumably on the assumption that even when the promotion ends, many consumers will keep their Quicksilver cards as the default payment method in their Uber apps.

It appears we are at the beginning of a “rewards arms race” in the credit card industry as issuers try to establish a dominant position in these new mobile commerce categories. That’s a somewhat depressing analogy. Do you see any other, more sustainable strategies for issuers to pursue in this space? 

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