This post is part of a series. This is part 2.
In part 1 – The Coming Ecosystem War Over Your Wallet and Payments – I argue that tech is entering payments because in a world of walled gardens, it is now the last channel that allows one ecosystem to collect data from another ecosystem. The point of payments is no longer money but data.
In part 2 – Payments and Loyalty – I argue that tech is entering payments because with (mostly) everyone online now, the game is shifting to user retention and user loyalty. Payments is a natural conduit for loyalty programs because many people already engage with credit card loyalty programs from traditional financial services providers.
In Part 3 – Payments and Identity – I argue that tech is going to win payments because the changing structure of the payments value chain means tech is best positioned where it matters most – Identity management.
In my recent post, “The Coming Ecosystem War Over Your Wallet and Payments“, I argued that payments is increasingly becoming central to tech ecosystem strategies because of data:
The desire for proprietary data (and the desire to keep proprietary data, proprietary) is driving further cracks into the open internet. Today, we live in multiple internet ecosystems, but they are hardly interoperable. Your Facebook data is trapped in Facebook. Your Google data is trapped in Google. Your Amazon data is trapped in Amazon. There are no roads between these gardens.
And because there are no roads between these gardens, payments is evolving to become the key battleground between them all.
Payments is essentially becoming the last road connecting all of these walled gardens and the desire for data on the other side of the wall(s) has never been greater.
All leading tech ecosystems today largely seek to aggregate users, commoditize suppliers, and keep everyone captive through data moats.
Although suppliers are largely commoditized (e.g. apparel, home basics, etc)…and users can technically join any new / competing ecosystem with a few clicks, the users currently do not own their own data. The ecosystem does.
The suppliers are mostly commoditized, but the users are not. From the incumbent ecosystem’s perspective, each user can be distinguished as a unique individual because of the rich data gathered over many years. This means users are not commoditized from the incumbent’s perspective. This is not true for a new challenger ecosystem. New users to new ecosystems are always a commodity because all new users look the same to the platform and are, therefore, treated the same until the new ecosystem can gather enough data to provide tailored experiences.
Payments is becoming the last somewhat neutral tool to help ecosystems gather data on existing and potentially new users in terms of interests and commercial intent. In a way, digital payments is becoming “permissionless data”. Users are increasingly aware of aggressive data gathering techniques by internet platforms. Users are trying to fight back.
But the great thing about payments is that it is inherently a frictionless method of data gathering where the users implicitly agree to have data gathered. After all, whenever anyone uses a credit card, no one is surprised that the credit card company knows what they bought, where they bought it from, and how much they paid for it. Except now the credit cards and payments are being offered by tech ecosystems.
The point of this post isn’t to rehash the points I tried to make in the last post, but to take it further: On top of the inherent data advantages of integrated digital payments, tech ecosystems are likely to increasingly push into payments because of how valuable payments can be from a loyalty perspective.
The leading tech ecosystems (Facebook, Google, Amazon, Apple, Alibaba, Tencent, Bytedance, etc) all already have billion(s) of users on their platform. Gathering data continues to be an important exercise, but increasingly the game is also shifting towards retaining users.
This means an increasing focus on loyalty.
Amazon has been pretty early to this game via Amazon Prime. Amazon Prime is an interesting loyalty program because it is not tied directly to payments, but rather to delivery convenience / benefits and ancillary benefits like Prime Video and music. However, a content and logistics driven loyalty program is a very expensive program to offer.
Most tech ecosystems increasingly realize that they don’t have to reinvent the wheel: Credit cards have been offering attractive loyalty programs for decades already. And all it costs is just a few % of transaction value that often can be recaptured in other ways (e.g. credit card revolving interest).
Doing loyalty through payments also has additional advantages in terms of avoiding difficult decisions around anti-competitive cross-selling. Amazon Prime is a valuable service, but increasingly it seems to sit on sand because it is a (presumably) loss-leading program that gives the e-commerce business a potentially unfair advantage that other retailers do not have.
Loyalty through payments, on the other hand, appears less problematic. After all, no one has ever complained that credit card loyalty points is anti-competitive even though it does offer an advantage to the existing service / product provider.
More importantly, if data gathering is a primary or secondary goal, payments is also much more suited because it can be offered in an open way. Apple can give you 2% cash back when you use Apple Pay at non-Apple merchants. Apple gets data (although Apple promises not to use it for other purposes…this may not be the case for other tech payment providers) and loyalty at the same time. Amazon Prime, however, does not have this benefit because Amazon Prime does not touch non-platform merchants or their data.
The loyalty benefits are not only for existing businesses. That is very different from the game for traditional loyalty programs where loyalty benefits remain in the same product (e.g. United giving you points when you fly that can be redeemed for future flights). The new innovation that many tech companies are likely to explore are comprehensive, ecosystem-wide loyalty programs that help drive adoption of new businesses. A critical eye would view this as anti-competitive bundling, but when you put a payments wrapper around it, it suddenly seems less objectionable…
What does this look like?
This might look like Mercadolibre’s efforts to create a platform-wide loyalty program covering both their payments / e-wallet effort and e-commerce:
We’ve also made meaningful inroads on the customer retention and loyalty front during the quarter. More specifically, we’ve started integrating Mercado Pago wallet uses and products into our loyalty program, Mercado Puntos.
We’ve expanded loyalty rewards to QR payments and other usage cases with Mercado Pago, where historically discounts and points were exclusively geared towards free shipping and other benefits only for marketplaces. This should help increase our engagement and retention within our ecosystem, as well as enhance our couponing and cross-selling capabilities. Still on the engagement and retention front, we’ve also launched our discounts on items on our marketplaces as well as discounts for our buyers, purchased through our mobile wallet both online and offline, differentiated by loyalty level.Source: Mercadolibre 2019 4th Quarter Earnings Call
Not only is the e-commerce platform being utilized to drive adoption of payment features, loyalty points are now fungible across the two platforms. This means users that accrue points by using Mercado Pago QR codes offline can redeem those points / gain benefits on Mercadolibre’s e-commerce platform as well.
There are many, many examples that are starting to shape up in a similar manner across the world.
If you think tech ecosystems are dominant now, wait a few years and you may be surprised.
Tech ecosystems own our data right now, but they still don’t command our loyalty. With deeper push into payments, this may change.
Data and loyalty…
Both of those elements continue to suggest owning the highest quality and dominant tech ecosystems as well as digital payments providers that are well aligned with tech ecosystem interests.
Tech ecosystems already have above-average ability to drive adoption of new services, payments-driven loyalty further reinforces that ability and will likely allow tech ecosystems to continue to push new services beyond their current cores.
Disclosures: I own shares in FB and BABA. I have no intention to trade any shares mentioned in the next 48 hours.