The Payment Industry’s Virtuous Cycle Of Innovation: How New Tech Impacts Business Opportunities

By: Danny Shader , founder and CEO of?PayNearMe

We live in a culture that is rarely satisfied for long. Innovation triggers customer expectations, which fuels development, which creates new industries and moves society forward. New innovative technologies have contributed to some of life’s biggest improvements during the past 50 years and, as a result, consumers have developed an insatiable appetite for more.

Consumer expectations will inevitably continue to grow and change, trigger new cycles of innovation and drive markets forward—a pattern known as the “virtuous cycle of innovation.” The role of technology innovation is to enable businesses to meet consumer expectations. When they don’t, they die. Remember Blockbuster?

This article looks at the virtuous cycle of innovation as it relates to the payments industry and how new technologies have raised consumer expectations and ushered in new eras of payments technology.

Payments 1.0 Era

When Amazon and eBay launched in 1995, consumer expectations changed. Online shopping was convenient, and we demanded more of it.

The problem was that merchants were required to do all the heavy lifting to make card-not-present payments successful, ensure payment security and compliance, and create the front-end customer flows that enabled consumers to view their shopping carts and complete payment.

Amazon could pull it off because it’s a technology company with an army of developers. EBay acquired PayPal to maintain its solid footing. But, what about all the other businesses trying to go online? Only the most sophisticated merchants had the technical know-how and resources to enter the online fray.

With the era of Payments 1.0, new payment technologies emerged to enable merchants to process online, card-not-present payments securely and economically. While successful at enabling thousands of retailers to participate in the e-commerce revolution, the companies behind these emerging technologies were so focused on making it possible to process online payments they often overlooked the payment experience. As a result, that experience was awkwardly separated from the online shopping experience, and consumers soon demanded better.

Payments 2.0 Era

Merchants’ desire for a one-stop shop for all the technologies required to go online gave birth to the era of Payments 2.0, where payments technology companies acquired the various products required to bring more businesses online across an array of industries.

The problem was that millions of companies entered the online fray, from retailers, lenders and utilities to iGaming operators and media companies—all with different requirements for how consumers transact online, and the disjointed product suites offered by the Payments 2.0 roll-ups were inherently incapable of optimizing payment experiences across vertical markets.

A point-in-time commerce purchase, for example, is very different from a recurring bill payment. Retrofitting e-commerce technology to accommodate recurring, scheduled payments resulted in systems that lacked the industry-specific functionality required to best serve those customers.

Designing a seamless, personalized payment experience also posed challenges because customer and payment data sat in various legacy systems that were often cobbled together. Then, as customers demanded emerging payment types and modern notifications through text, email and chat, the problem got even worse, resulting in Frankenstein-like payment systems that were a monster to secure and maintain—a dynamic that persists today.

Payments 3.0 Era

We’re now pushing the payment experience envelope. Customers expect payments to be as convenient and frictionless as making an Amazon purchase or paying a friend with Venmo, and they want businesses to know their habits and preferences. Many want them to bridge the gap between physical and digital experiences and expect them to anticipate consumer needs and deliver a personalized experience around every payment.

These changing expectations have spurred a new era: Payments 3.0, where fintech companies create hyper-personalized payment experiences that deliver value and eliminate friction, while simplifying and speeding up every transaction.

This endeavor requires purpose-built payment platforms that seamlessly wrap payments into the overall experience. Configurable technology must flex and adapt to support unique customer needs in specific industries. These platforms must also manage massive volumes of accurate, real-time data quickly and securely, all with minimal merchant effort.

Fintech companies and their clients are deriving specific customer behavior patterns from the transactional data they collect. This data helps predict customer needs to deliver more personalized payment experiences.

The ubiquity of mobile data plans with their increased capacity and improved reliability has resulted in the availability of real-time data that businesses can use to create hyper-personalized, contextually relevant customer experiences before and after each payment.

The Payments 3.0 era is still young, but there are many opportunities for businesses. Here are three ways that Payments 3.0 experiences can be created:

1. Embed payments in the overall customer experience.

To create amazing experiences, companies must first change the way they think about payments. Payments can no longer be viewed as a cost center where a lousy or frustrating experience doesn’t matter, but rather as a critical component of the overall customer journey that must be optimized to increase customer satisfaction, transaction completion and revenue.

2. Identify and eliminate the friction points.

Businesses must conduct an audit to identify and eliminate every place customers fall out of the transaction process or fail to complete a payment. Determining those drop-off points is like finding gold: Eliminating them reduces customer service costs and increases revenue, immediately impacting the income statement.

According to McKinsey & Company, effectively organizing and managing the customer experience can yield a 20% improvement in customer satisfaction, a 15% increase in sales conversion and a 30% lower cost-to-serve.

3. Make payments data accessible to the customer experience team.

To create hyper-personalized, contextually relevant customer experiences, businesses must harness all of the data at their disposal. For instance, they can analyze payment completion rates by payment method, time of day, week or year. This, coupled with demographic data they already possess, can be used to present customers with the best method of payment at the optimal time to increase the likelihood of getting paid.

The virtuous cycle of innovation won’t stop with Payments 3.0, but focusing now on a more seamless customer experience will position a business well for whatever might come next.

This article was originally published on Forbes for the Forbes Technology Council on January 9, 2023.