The pandemic is doing to credit cards what iTunes did to CDs
Mastercard's head of digital solutions explains how the pandemic has upended the way we buy.
How many times have you used your credit card since the pandemic started?
In just a few months, the pandemic has upended the way that many people are paying for things. People who rarely bought things online are now ordering all their groceries via Instacart, and the few times they've gone outside they've likely also turned to digital and contactless payment methods. Much of that behavior is likely to stick around once life returns to normal, according to Jorn Lambert, Mastercard's EVP of digital solutions.
The trend away from cash and plastic toward digital payments was well underway before the pandemic. But plastic cards may soon be a relic in much the same way that someone who still collects CDs is seen as anachronistic. Do you still even have a CD player?
And this isn't just a developed-world trend, according to Lambert: Even countries that don't have the digital infrastructure of Square terminals and contactless receivers are going digital, through QR codes, wearables and simple smartphones. "We believe if anything, the unfortunate events of the past months will increase openness for consumers to take things further," Lambert said. "A lot of innovation will come from it over the years to come."
Protocol recently spoke with Lambert about the transformation taking place in the way we buy things, what industries are changing the most, and why the plastic credit card is the new MP3 player.
This interview has been edited for length and clarity.
The pandemic seems to have forced people to change the way they pay for things. Is that what Mastercard is seeing?
It is an amazing time indeed, for unfortunate reasons. We've been on a journey over quite a few years of moving from analog to digital in payments. Over the years we've been building towards a solution suite that enables that, but what we're seeing the last couple of months is a massive acceleration of that. At the beginning of the COVID crisis, people were shying away from "dirty" cash and adopting contactless in a very significant way across the world.
The only way for people to buy their necessary things was in ecommerce, and we saw ecommerce grow dramatically across the world. And as the lockdown eases and people go back to their normal lives, we don't think that they will go back to their old habits, because they've now gotten familiar to a different way of paying. We expect an enormous wave of growth in digital payments as economies return to normalcy. And we're already starting to see that: In April and May as the economy ticks up, digital spending is ticking up with a vengeance.
What I've been very surprised with and actually encouraged by is that despite our partners being in lockdown and having to deal with crises within their own companies, they're really leaning into this. I had expected so many projects to be put on hold or delayed. The opposite is happening, and people are bringing things forward; this week's announcement with Amazon, but also today, we launched Xiaomi wearable payments in Russia for the first time, and did a release in Tanzania about QR payments. Across the world we see that plethora of activity as very encouraging because it helps people, it helps merchants to continue to operate.
Those announcements highlight that there's quite a difference in the maturity of digital payments infrastructure around the world. How do you manage that?
In a way, technology is a leveler. So even in Africa, for example, smartphone adoption is increasing very fast. You're talking about $70 smartphones that can do pretty much the same thing as some high-end phones in developed markets.
The difference between all of those countries like Tanzania and some of the developed markets is the install base on the terminal side. In the U.S., for example, you have the terminals that can dip and swipe, and contactless is embedded so you don't replace the terminal, you just switch it on. In Tanzania, many merchants don't have any terminals and don't want the expense, and therefore a QR solution is more appropriate to get them going. Now, the U.S. is a little behind on contactless, but it's doing a very fast catch-up now. And I think with what's coming down the pipe, and with the impetus of COVID, we'll see vast acceleration as well.
One of the things, which is a common thread across all markets, is this whole notion of tokenization — what we've just announced with Amazon — to replace the traditional 16-digit number that is on the card by a token (or a proxy) stored with the commerce platforms online. If a fraudster steals the proxy, they don't have access to the real card, and they can't do anything with that proxy because it's cryptographically linked to that merchant. So that device is highly secure, but it also vastly increases the convenience for the consumer, because if the consumer needs to replace the card, they do not have to replace the token stored online, that just happens automatically. That is something we're pushing across the world; we're now in 96 markets as of today with about 2,600 issuers.
Why do you think it is that major merchants turn to you over your competitors for things like this?
There's things that we do as an industry, so the token standards, for example, that have been developed as industry standards: Visa has the same structure token as us, and making the ecosystem secure as a whole is important to all of us. But where we then differentiate is in how we implement and how easily we make it available.
One good example of that is last week we implemented, with Citibank, a token connect feature: A consumer, when they're on the Citibank app, can choose to link their cards to a certain merchant. What happens when the consumer does that, from the Citibank environment, they push a token, without the consumer having to fill out forms. These types of things make the friction for the consumer very low. Nobody wants to fill out forms on the internet. That's just how we differentiate, making sure that beyond the security, we provide the smoothest experiences, the easiest ways for our partners to scale.
How does that compare to your recent tie-up with Samsung and the Apple Card?
That's in the same vein, but there's a nuance to that. We've grown up as a plastic company, and for the last couple of years, we've introduced digital versions of plastic, but the digital version is a companion of the physical. The world is becoming digital-first — the notion that you need plastic first and to digitize is no longer necessary.
I kind of compare it to the transition of music. You used to have CDs, and then those CDs we used to load up into an MP3 player, but, the physical was still always there. It's only later that we said, "Who needs the CD? Let's just have the MP3 player."
In payments, it's the same. The physical is optional — and it's still quite useful because there's too many places that need the physical card. So with the Apple Card, and now with Samsung Money, we've decided to go digital-first. And that means the consumer can apply for the cards on the app, they can be approved instantly, and instantly provisioned with the credential. They don't have to wait three weeks for this to come in the mail — they can pay three seconds after they've finished their application with a digital credential. And if they opted into a physical card, it will come in the mail. In addition, all of the information can be found in the app, so you don't need the number, the expiry date or security codes on the card anymore.
It's very quickly becoming a standard way of operating, and it's indicative of how the world is changing, and how we are leaning in, rather than hobbling behind a trend. It's serving us well because it's what consumers want, and certainly with COVID now, we'll see much more of that than before.
The MP3 player is pretty much a relic at this point. How long do you think it'll be before the same is true of physical cards? Has your thinking changed at all because of the pandemic?
We don't dislike the physical card. The card is not necessarily a bad thing — it's not an objective for us to make it disappear. Our objective is to enable consumer choice and make things easy for them. And the world is a big place. There are 40 [million] to 50 million merchants with physical terminals where you need some form factor for your credential. So I think it'll be a long time — I might have a long white beard, and I've shaven this morning. But I think we'll see it faster in certain categories than others. I think in transit, for example, it'll go really fast, in quick-service restaurants, you'll see moving to contactless and digital very fast. But before you can pay with digital for your trip to Botswana or to the Argentine Pampa, it could take a while. And that's OK: Everything we do is always backward-compatible, and we want to make sure that consumers are not stranded somewhere.
Are there any areas where physical cards or cash is still going to be a necessity for a long time yet?
There are definitely countries and segments where cash is very prevalent and where without access to cash, you'd be in a tough place. Even in the U.S., in farmers markets — although things like Square dongles are now quite common — you can find sometimes that cash is useful. If you go to developing economies, cash is still very much present. There's other countries on the other extreme like Iceland or the Nordics, where electronic forms of payments are very ubiquitous, and cash is a small minority.
One of the big objectives for us is to make sure that consumer choice exists. If a consumer wants to move into electronic payments, we help them with digital and financial inclusion. People who are stuck in the cash economy can never build up credit history or creditworthiness, can never get access to lending, so they couldn't set up a business. That's why a big initiative for us is financial inclusion and making sure that electronic records are being created for them to move up the social ladder.
I've got to believe it must be tough to set up businesses during the pandemic, but those digital solutions would make it easier than if this had happened 10 years ago?
True. For us, the pandemic has not created, but has accelerated, a more secular trend towards digital. It's something that we luckily were well-prepared for because we've been working on it for years. We already moved to a digital-first mentality, but now seeing our partners really leaning in and, and deploying solutions for consumers is great to see.
With consumers being much more comfortable now with digital solutions, I think they'll be more open to things like machine-to-machine payments, like your car independently paying for the parking or for the toll, and 5G applications coming down the line. We believe if anything, the unfortunate events of the past months will increase openness and preparedness for consumers to take things further, and a lot of innovation will come from it over the years to come.