Remember the old audio CD? That round piece of plastic holding 15 songs -- two of which you actually wanted to hear? While many of us still use and occasionally buy CDs, I suspect we can agree that with iTunes as the world's-biggest music marketer, the CD's glory days are over. The audio CD represented an unconnected world, in which physical manifestation and distribution were needed to get the music bits and bytes to consumers. As we now know, digital networks disrupt business models by turning atoms into bits, and we also learned that the marginal cost of digital distribution is zero. All this led to massive disintermediation that made the physical CD product -- and the entire distribution system built around it -- completely obsolete.
Now let's think for a moment about the credit card. It's a plastic product (rectangular this time), physically representing data that could not be connected online at the time it was invented, and it's a pretty expensive business to run. Beginning to sound familiar? You bet. And to make matters worse, the credit card, like all kinds of fiat money (without intrinsic value matching its declared value), is already an abstraction, or "virtual," and therefore even more susceptible to disruption.
It is therefore no big surprise that credit card disintermediation is happening all around us; check out Google checkout, Paypal, Obopay, Facebook credits, the dozens of patents Amazon registered in this category, Square, Zong, Boku/Paymo (their tagline is "no plastic required"), Venom, Mopay, and countless other mobile-based transaction solutions. Financial services are shifting to social and giving rise to peer-to-peer lending, buying groups, and virtual currencies such as Blippy, Twitpay, Trialpay, Plastic Jungle and, of course, Farm Cash. To further complicate things, all banks today offer direct digital access to your accounts. Currently, a credit card deal costs a merchant more than five times more than a cash one. No wonder then that when you shop with retailers such as freshdirect.com, the first message you'll get is a handsome incentive should you opt to use direct debit from your bank account and save FreshDirect nicely.
All this is happening because one of the only things the internet did not change is the fact that we all prefer to pay less rather than more -- and that's the factor that will further push the credit card disintermediation. The average cost of a credit card transaction is around 1-3%, representing the fee and cost structure associated with this plastic-generation technology, while the overhead of pure digital direct transaction platforms on the internet is significantly lower. Unlike the late B2C music industry, credit cards are mostly a B2B model, which is the reason it is not yet as disrupted as the music industry is. This will change as more merchants and businesses find cheaper ways to enable transactions with their customers, and as more consumers will understand that a part of the cost comes out of their pocket. The consumers will also discover that using pure digital payment systems is indeed cheaper, and also faster and easier.
In a world where the internet democratizes financial services and shifts the control to consumers, and where mobile/contextual payments are expected to reach more than $600 billion in 2014, it's surprising to see that Visa, MasterCard or Amex did not rush to buy or develop their own technologies. Well, perhaps they didn't buy mint.com after Aaron Patzer called the credit card model "a tax on the economy" (it was bought by Intuit). But there are plenty other opportunities to buy or develop smart and friendly solutions, or even license existing solutions such as Amazon's "pay phrase" or paying with your phone # + a 4-digit code.
I believe that the future of the credit card companies lies with brave new interpretations of the words making their category name: "credit" and "card." "Credit"? Yes, but personalized and transaction-based, and with far greater transparency. Let's begin by renaming the credit card act "the fair transaction act." "Card"? Not for long -- the plastic must be augmented and eventually replaced by modern, consumer-centric experiences. Visa, MasterCard and Amex must realize that they're in the smooth, personalized transactions service business. If and when they implement this into their culture, they will be able to develop the services and products that will leverage their brands and footprint to effectively compete in this new reality.
|ABOUT THE AUTHOR|
Oren Frank is global chief creative officer at MRM Worldwide. During his career, Frank has worked with such brands as Honda, Volvo, Microsoft, Yoplait, Heineken, Axe and McDonald's.