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NEW ORLEANS -- As digitization and mobile devices overtake virtually every corner of business, they are upending the traditional services that consumers take for granted. Think financial transactions.
Digital payments have been disrupting cash and credit cards for several years. Mobile wallets, or digital payments, enable consumers to pay for items with a smartphone or tablet using services such as Apple Pay and Google Wallet. With these mobile payments, consumers may accrue loyalty points for future discounts, or simply circumvent the hassle and insecurity of cash and credit cards. They are also compelling for lower-wage earners who don't have credit, or for Millennials who want more flexible payment options. Despite concerns about data security risks and flimsy ROI, digital payments may be nearing the tipping point for adoption.
Even traditional technology vendors -- Microsoft included -- are getting in on the action. Microsoft has been hard at work on a blockchain as a service offering (BaaS) to be hosted on its Azure cloud. Blockchain technology enlists a distributed digital ledger. It eliminates the single point of failure of traditional credit and doesn't need a central authority, such as a bank. It is transparent, secure, outage-resistant and auditable, making it appealing to industries and consumers in search of greater levels of security.
An executive at a southeastern retail company who requested anonymity said he wants to ramp up his digital payment offerings, and is looking at technologies like blockchain -- once consumers and the market rally around certain options. "We use Apple Pay, but we are waiting to see which other services we want to bring on and if customers really want them," he said. "We don't want to offer everything under the sun."
This week, Microsoft furthered its foray into blockchain as a service. It formed a partnership with the R3 Consortium -- a collection of major banks, including Citigroup, Barclays and Wells Fargo -- to promote and extend BaaS through infrastructure and tools on the Azure platform.
"R3 and member banks will experiment and learn faster, accelerating distributed ledger technology deployment," said Peggy Johnson, executive vice president of global business development at Microsoft, in a statement.
Nearing the digital payment tipping point
Companies such as Microsoft and PayPal are banking on the growth of the digital payments market. Although 85% of transactions enlist cash today, regular use of cash is expected to decrease the most, from 67% to 58% by 2020, according to data by Accenture of more than 4,000 smartphone users. And according to Deloitte Global, the number of people using a service to make a payment on a mobile device is due to increase 150% in 2016 to 50 million regular users.
Daniel SchulmanCEO, PayPal
"Our mission is to democratize financial services," said Daniel Schulman, CEO of PayPal, the digital payment platform based in San Jose, Calif., in a keynote discussion about the disruptive impact of mobility and digitization at the Microsoft Envision conference.
"Managing and moving money should be a right for every citizen, not just a privilege for the affluent." The average underserved consumer spends about 10% of his disposable income on unnecessary fees and interest rates, Schulman said. "That's ridiculous with technology. We should be able to do things with software and mobile that make basic financial transactions faster, simpler, more secure and, most importantly, less expensive."
According to the World Bank, reducing the fees associated with traditional payments could save billions of dollars a year. By eliminating the middlemen that collect fees levied on these transactions, alternative methods could reduce the cost of financial transactions and thus broaden access to them for the "unbanked," or lower-wage earners.
At the same time, consumers and enterprises are still on the fence about the security of mobile payments, among other issues. Consumers, for example, want proof that digital payment is more secure and convenient than traditional methods: According to Accenture, 45% of respondents to a survey were concerned about using digital payment for security reasons, and 60% might increase digital payment usage if they received rewards or other coupons for their usage. Additionally, 56% said they want better financial management tools to increase their usage.
Disrupting the disruptors
Today, new mobile payment options are coming down the pike so fast that they are disrupting the disruptors. PayPal offers its traditional digital, secure payment method, but also a freemium service with use of a debit card, Venmo, which has caught on with Millennials. These younger consumers want flexible payment options, such as bill sharing and social networking.
"The secret to Venmo is taking a monetary transaction and turned it into a social experience," Schulman said. "You and I might think about a transaction as private and between us. But Venmo ties transaction to social feeds. The typical Venmo user opens the app four or five times a week just to see what their friends are doing."
Then, there's Bitcoin , a cryptocurrency that anonymizes transactions and doesn't use individual currencies. Bitcoin has come under criticism for, first, essentially creating currency out of thin air and, thus, being a speculative currency tool. Second, challengers have criticized Bitcoin for being a potential safe haven for illicit activity, such as money laundering and drug trafficking.
But many in the industry are placing their bets on blockchain and its component approach to digital transactions. With more than 40 banks participating in the R3 Consortium and the weight of Azure infrastructure, Microsoft's blockchain as a service technology could open new pathways for digital transactions that are more secure, lower-cost and more participatory.
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