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June 28, 2016

The Pair-A-Dig-Em Shift Is Coming To Digital Payments

One of my favorite resources is The Gobbledygook Manifesto by David Meerman Scott. Anyone who is tasked with telling the story of a product or service falls into the trap of using “gobbledygook” sooner or later. Some, however, fall harder than others.

This was the case anyway with one gentleman I met at a conference. He had a particular affinity for the word paradigm. The problem was that his rural southern upbringing left him with an accent so thick that the word was impossible for him to pronounce correctly. Instead of “paradigm,” for him the word was “pair-a-dig-em.”

Paradigm entered the ranks of “gobbledygook” many years ago thanks to overuse by business consultants and self-help gurus who want to be business consultants. That is too bad since it is a solid word with a very important pedigree. Fifty-five years ago, Thomas Kuhn made the word famous. He was writing about how scientific knowledge advances and described the catalyst for that process as being a “paradigm shift.”

Before Kuhn, the view was that science evolved thanks to long slogs by past researchers, theorists and experimenters, if not towards "truth," then at least towards greater and greater understanding of the natural world. Kuhn's version of how science develops differed dramatically.

Where the standard account saw steady, cumulative "progress," he saw discontinuities – a set of alternating "normal" and "revolutionary" phases in which communities of specialists in particular fields are plunged into periods of turmoil, uncertainty and angst. The revolutionary phase of the Kuhn Cycleoften occurs when existing information is interpreted differently than it was in the past.

Turns out that technology is subject to the Kuhn Cycle as well, even in the somewhat staid world of FinTech. Let’s look at payments as an example. The need to trade has existed for much of human history. At first we bartered and that worked great in localized situations. But as trade routes opened up across regional areas, there was a need for something more portable to represent value exchanged for goods and services.

Boom! The birth of money, specifically coinage, solved the problem until the things being purchased – say between governments – held so much value that carrying around the money to pay for them was impractical. Enter letters of credit and, by extension, checks. Then some seventy years ago now the idea of facilitating the desire and need to trade more conveniently gave birth to the plastic card. To use a term from the Kuhn Cycle, this is, more or less, plastic cards are the “normal science” for payments today.

For the last several years, a lot of people have been using a lot of other people’s money to try and convince consumers, retailers and financial institutions to replace this existing plastic card “para-dig-em” with one built on digital devices and mobile wallets. There are very well reasoned – if perhaps somewhat self-serving – articles and blogs published every day on why this is a good idea. You may find an example or two here in The Long View and elsewhere in popular industry publications.

For example, in “There's a Clear Path to Consumer Mobile Pay Adoption,” the author claims that one reason mobile payments represent a paradigm shift in the industry is that they offer security that is superior to that delivered by plastic cards. That statement is true but the supposition that this fact is fuel enough to ignite a Kuhn Cycle is false.

While the amount of payments fraud last year sounds (and is) impressive at over $14 billion, it is a fraction of the amount issuers earn when consumers shop with their cards. As long as that math prevails, there will be little incentive for the organizations that provide plastic cards to consumers to shift their paradigm.

Consumers are not likely to be much help in igniting the Kuhn Cycle around the issue of security. Consumers have demonstrated again and again that though they claim security is important, they continually – and repeatedly – choose convenience over practicing safe card use. It is a simple fact known by all of us in the payments industry that security requires friction, and friction is, by its nature, something that slows down the process of making a payment. Slowing down the payment process slows down the exchange of value that powers the world's economy.

Evan Schuman articulates this point clearly in his article entitled “Apple Pay’s Security Can’t Trump Convenience. At Least For Now.” In fact, Evan asserts that the lack of security in Apple Pay was intentional. Apple knew that mobile payments adoption would be an uphill battle and, therefore, opted for a low friction UX over security knowing that their partner banks and credit unions would take the hit for any security issues that arose. Those Apple folk are way smart since, as it turns out, that is what happens.

Yet, as smart as they are, even elegant Apple Pay has not been able to gen the kind of adoption that represents a true paradigm shift in how we pay for goods and services. The fact is that adoption of digital payments using shopping applications (e.g., a mobile wallet) remains low while card use – with all its inherent issues involving susceptibility to fraud – continues to grow. Where’s the paradigm shift if it cannot be created with bank-grade security and Apple-grade convenience?

Could it be that we need to look at the situation around what will drive the adoption of digital payments differently? What if security and convenience are just table stakes and not the catalysts for change? Then what would the catalyst be? The answer is: financial institutions. That’s right, banks and credit unions. Do they know they could be the catalyst? Some do (large players such as Wells, Chase, Capital One) and most don't (pick almost any regional or midsized institutions).

When will the ones that don't get on board and start igniting a Kuhn cycle in digital payments? That is the multi-billion dollar question.

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