The current generational breakdown looks something like this:

This “pulse rate” way of classifying the behavior of people born in these 15 year generational bands assumes that birth date defines behaviors within that cohort. That all people who come of age within those age bands behaves similarly. And that the differences between cohorts are more relevant than the differences among the behaviors of the individuals within them.

A funny thing happened on the way to the digital transformation that throws cold water on this once tried and true way of benchmarking generational behavior.

Age is Just a Number

Over the last twenty-five years, technology has introduced new ways for people and businesses to engage — and routine activities once only done in person became digitally enabled. For everyone.

Take social media.

An 18-year-old Gen Z watches TikTok 58 minutes a day on a mobile phone, a 42-year-old millennial spends 2 hours on Instagram every week on her iPad. A 62-year-old boomer spends 11 hours on Facebook on either a PC or a mobile device each week. All different social media strokes for different generational folks. Yet all generations, except for the very oldest, are using social media apps to some degree to connect to people and brands using their mobile devices and apps.

And let’s not forget that it was the Gen Zers and millennials who taught Grandpa how to text and Grandma to Venmo them money instead of a sending a check or cash tucked inside of a birthday card.

It’s an observation that the PYMNTS Intelligence team made in 2018 when we began to more fully examine the payments, banking and shopping behaviors of a national study of consumers living in the U.S.

We wanted to better understand the degree to which people used digital to connect to one of the many activities that represented a person’s daily or weekly routine that were also often done in person at the time.

Using different birth years instead of the standard generational cohort as a starting point for our analysis helped us understand how similar — and different — the use of technology was across consumers regardless of generational cohort.

We learned that access to technology, the devices consumers owned and how they used them was more statistically relevant to understanding shopping, banking and payments behaviors than assumptions based on the traditional age-defined cohort to which Census said they belonged.

Making broad sweeping generalizations asserting that all members of a particular cohort behaved the same way — inaccurate.

We examined how consumers use connected devices and the things they do with them.

Less connected individuals might use connected technology to conduct their banking transactions, communicate via text and email and stream movies.  More connected consumers also shop for products, buy food and manage their health using connected technologies. And all of this can be accomplished just using a smartphone.

As consumers become more comfortable, they begin to adopt more connected devices like smart TVs, smart watches, gaming consoles, voice connected speakers and even purchase connected home devices like thermostats and smart appliances.  These highly-connected individuals conduct a wide range of household activities digitally, including using them.

Currently 19% of the population falls into the most highly-connected category, and they tend to be younger (46% of Gen Z are in the highly-connected group) and to some extent have higher incomes (only 15% of lower-income individuals fall into this group).

The Bridge Generation

This insight was also key to understanding the differences in consumer behavior within age-defined cohorts, particularly when studying millennials and Gen X.

Also in 2018, the PYMNTS Intelligence team identified important behavioral differences within the millennial and Gen X cohorts. A 29-year-old and 43-year-old millennial turned out to be as different as apples and asparagus, even as both were classified as millennials by Census. So, too, were the behaviors of a 45-year-old and a 59-year-old Gen X.

Using birth year as the starting point, the PYMNTS Intelligence team identified a new age cohort that reframed traditional generational lines; one that “bridged” older millennials with younger Gen Xers.

We found this group to be affluent and well-educated, settling into more stable careers and earning more money, establishing households with partners and children, feathering their nests and consuming many new things as they did it. They relied on connected devices to guide their shopping decisions — from the products they bought to the stores they shopped. Their shopping, banking and payments behaviors were also quite different from their younger and older counterparts in the two cohorts.

We called this new generational cohort “bridge millennials,” and they were consumers born between 1978 and 1988 (who at the time were between the ages of 30 and 40 — today they are 36 to 46 ). They share a more technology-driven lifestyle, a similar set of lifecycle needs and digitally-driven expectations and shopping and payments behaviors unique to this group.

What shaped this behavior was their introduction to digital at important moments in their lives.

Bridge millennials were the first to grow up in a largely internet-connected digital world. The oldest bridge millennials were in high school when internet-connected PCs were introduced, the youngest in middle school when the iPhone first launched. The elder bridge millennials rode the PC to mobile wave, were the early champions of digital in the workplace, and early adopters of consumer mobile and digital apps and devices.

The youngest had access to smartphones and apps throughout high school and college. By the time of their college graduation, they were fluent in speaking the language of mobile and apps in business. They became mobile pioneers, raising the bar for what a great mobile experience was in and outside of their work environment. They fed the flames of innovation by giving innovators the incentive to create new and different experiences.

This group was interesting not only because of their introduction and familiarity with connected technologies. They became old enough and far enough along in their career that they were emerging as a significant economic force in the economy.

I published my first piece describing the importance of the bridge millennial to payments and physical retail in May of 2018[1]. The piece referenced a study that tracked 4,000 consumers each quarter over an 18-month period, done with the support of Worldpay.

I wrote then that they would be the bellwether for how connected commerce would evolve over the next five to ten years —at that time, through 2023 and beyond.

It turned out to be more than a well-educated guess.

The PYMNTS Intelligence team continues to track spending patterns and reports on bridge millennials each time we release new data on consumer and merchant trends.

It turns out that over time this group has led to an expansion of digital shopping across retail and non-retail categories. At the same time, we have seen an evolution toward the use of purchasing online and picking up in stores.  In fact, in 2019, a year before the pandemic hit, 35% of bridge millennial consumers preferred to purchase digitally — and that expanded to over 53% during the height of the pandemic (2021).  That rate has declined as we exited the pandemic, but is still at 43% (far greater than it was before).

At the same time, we have seen the overall portion of the population that prefers to order online and pick up at the store increase from 27% before the pandemic to 41% last year.  All of which demonstrates the adoption of connected technology over and above temporary impacts due to the pandemic — and the influence of bridge millennials in shaping that trend.

The Zillennials

We found the same thing when examining the Gen Z cohort in 2022.

Using the same methodology we used for the bridge millennials, the PYMNTS Intelligence team identified a new cohort that straddles the classic GenZ and millennial age-defined cohorts. We call them zillennials, the 39.3 million consumers who were born between 1991 and 1999 (and now between the ages of 25 and 34). The younger members of this group were in the fourth grade when the App store came to the iPhone. The elder zillennials were heading off to college, smartphone in hand.

This is the cohort for whom digital is native to their generation but who are transitioning from school to the workforce. They are deeply dependent on mobile devices and apps to navigate the digital economy. And more than their older peers, they are a generation for whom mobile and apps have changed how they work, bank, pay and shop.

And their expectations of businesses they work for and shop with.

The “Generation Zillennial” report that PYMNTS Intelligence will release tomorrow (May 22, 2024) is the first in a new monthly generational study series that will benchmark zillennial digital behavior, along with that of other generational cohorts across all aspects of the connected economy. The survey design captures a number of social and behavioral trends that offer new insights into the influence of mobile phones on decision making and spending patterns and choices across generations.

With a big focus on zillennials.

One study and set of data points does not make a trend — yet — but we already see the profound impact of mobile apps and phones on this generation.

We find that zillennials are more financially responsible than many may give them credit for: more than three quarters of zillennials can be classified as either budget-minded (45%) or wealth builders (33%). Only a small number are either “givers” (4.8%) or splurge spenders (16%).

We believe that these personas provide a more meaningful way to track and understand zillennial behavior over time — and may even help to explain why so many in this age group move back home after school. Saving money and paying off debt seems to be a high priority, and therefore, a necessary part of their financial plan.

We hypothesize that it was the early access to mobile apps like Greenlight, Step, Copper, goHenry, Robinhood, Venmo and others that made it much easier for this cohort to build good savings and investment habits, with parental guardrails. Setting goals and tracking progress toward those goals could happen in real time and in real life for zillennials, sparking conversations with friends and family members about stocks and markets and the tradeoffs between risk and reward when making investment decisions. If we are correct, access to these apps has helped shaped the personas we observe of this cohort in very different ways.

Of course, we will examine this more fully in future releases.

Why Zillennials Matter

Like with bridge millennials, we believe that the zillennial cohort will be instructive in understanding the substantial impact of digital on the lives of these consumers. By the end of this decade, zillennials will represent 13.6% of the population and 14.5% of consumer spending. They, along with their older millennial peers, will represent a majority of the workforce. Economically, together, they will be a force.

We believe that tracking zillennial behavior will give us a window into understanding how they use digital tools to navigate the connected economy and the influence of apps on kids and teens in shaping payments, credit, banking and investment preferences and behaviors. As important, we believe also it will give us a lens into the impact of their digital behaviors on others across generations with whom they interact.

The premise of the connected economy that I first began writing about in March of 2020 was mostly about the ability of mobile devices and apps to connect activities across once-discrete industry verticals. What we have discovered since is their demonstrable impact on people, no matter their age.

Technology, mobile and apps have become the bridge that connects people across traditional generational definitions, making age little more than a biological mile-marker on life’s journey. A way to share new experiences, drive adoption of new technology and establish new preferences.

And, as we’ve discovered, an entirely new way to define population cohorts.

[1] Bridge Millennials and the Threat to Physical Retail, Karen Webster, May 14, 2018.  https://www.pymnts.com/consumer-insights/2018/bridge-millennials-physical-retail-future-online-clothes-shopping/

The post Why Zillennials Will Rule the Digital Economy appeared first on PYMNTS.com.

“Stretch” reduced the processing time of complex data sets from six months to a single day.

Three years later, in 1964, IBM introduced its System 360 Mainframe, marking a significant milestone in business efficiency. The System 360 bundled IBM hardware with software and services, making them easy to buy, use and upgrade. Businesses could also, for the first time, run multiple applications simultaneously using a single computer.

Mainframes, and the sale of them, propelled IBM into becoming one of the most valuable companies in the world.

By 1990, IBM was the 4^th largest company on the Fortune 500 list; at the turn of the millennium, it was number six measured by revenue.

Companies and governments in need of massive, reliable, fast and redundant computing power bought them as fast as IBM could make them.

Down and to the Left  

Ten years later, IBM’s fortunes began to shift — as did its place on the Fortune 500 list.

IBM lost $5 billion in 1992, the most ever for a company at that time, after losing billions in each of the years before that. Between 2012 and 2020, IBM reportedly lost $95 billion in market cap.

Many case studies written about IBM’s downward spiral cite a series of strategic management, pricing and partnership blunders, and a costly shift from its B2B core to personal computing in the 1990s. Those costly mistakes sapped time, dollars and focus from what was necessary to innovate for the future.

But in the early 2000s it would be its failure to recognize cloud computing as the cornerstone for computing in the digital age that would become IBM’s corporate cross to bear. This blind spot came from believing, early on, that IBM mainframes were so central to the core of the business that customers would always upgrade and buy high-margin services, but never leave.

That’s what Lou Gerstner observed when he was brought in to turn IBM around in 1993. At the time, he cited “corporate arrogance” as a contributor to the company’s lack of urgency to shift focus, blaming a leadership team who believed too much in its own PR. The “no one ever got fired by buying IBM” mantra fanned those flames.

Until, of course, it didn’t.

By the end of 2010, IBM had slipped to 65^th place on the Fortune 500 list and has remained solidly stuck there for the last 14 years.

Milking the Cash Cow

It is estimated that 10,000 mainframes exist today, mostly IBM vintage, and mostly owned by the largest companies in the world. It’s reported that two-thirds of the Fortune 500 companies use them, as do 45 of the top 50 banks and 70% of the world’s largest retailers. Big Iron, as these mainframes are collectively called, processes about 90% of credit card transactions today. There’s a great story about the history of IBM and mainframes here.

Companies still buy mainframes because they are reliable and efficient data processing workhorses, despite the dearth of COBOL programmers and the cost to keep them running. They upgrade them because there’s no other option — at least, not right now.

Analysts project that the mainframe market will grow a modest 6.4% a year over the next seven years – from $2.5B in 2023 to $4.5B in 2032. IBM’s revenues from mainframe sales are expected to get a 3% to 5% lift in 2024 as new models are introduced and existing users upgrade their software and service agreements.

But experts, investors and analysts agree that IBM’s future can’t be about squeezing every last drop of milk from its flagship product, even though it will help keep the lights on in the near term.

Today, IBM is playing a costly game of catch-up — the cloud computing market was valued at roughly $588 billion in 2023 and is expected to reach $2.2 trillion in 2032 with a growth rate that is two and half times the mainframe sector. The shift from mainframes to the cloud may be a many-years, even decades-long, journey for its current users. But it is so important for achieving key strategic objectives that any IT department worth its salt is planning for it, has probably even started, and is likely working with the big cloud providers and their partners to guide the process.

Then, there’s AI.

IBM was an early innovator with Watson in 2004, yet they are rarely mentioned as a key contender when AI or GenAI discussions are had today. IBM made a big bet on healthcare, investing billions to build Watson Health and another $5 billion to acquire companies for their data. The focus was oncology; diagnosing and prescribing personalized cancer treatments was the use case. All signs seemed to point to a slam-dunk winner.

Soon after Watson Health’s 2016 launch, doctors found its patient diagnoses to be inaccurate and irrelevant, citing representative data limitations. They stopped using it. Watson Health was sold to a private equity firm six years later, in 2022, for $1 billion.

When the Apple Does Not Fall Far from The Tree

In 2000, Apple was 285^th on the Fortune 500 list, having fallen 162 places (from 123) in 1995. A series of costly product, pricing and competitive blunders led to big losses each year between 1994 and 1997. In 1997, Apple reported a Q1 loss of $708 million, destroying 85% of the company’s value, and nearly tipping the company into bankruptcy.

That was also the year that Steve Jobs returned to Apple. 

He persuaded the board to give him some time to reposition the company and create better and more accessible personal computer products. He brought with him his dream team, including Jony Ive and Tony Faddell. That team — and the launch of colorful iMacs — brought Apple back to life.

So did the repositioning of the firm as a software company powered by cool consumer hardware — and the opening of 500 retail stores to give consumers a way to touch and experience Apple products before buying them.

The launch of the iPhone in 2007 and the App Store in 2008 would cement Apple’s place in history as having created the one of the most transformative consumer products of all time.

By 2010, Apple had jumped 229 spots to 56^th place on the Fortune 500 list.

By 2020 it had moved fifty more to sixth place.

In 2023, Apple occupied spot number four. And its market cap reached $3 trillion.

The Big Apple Earnings Circus

Apple’s success over the last 24 years represents one of the, if not the, most successful turnaround stories of all time. Since the iPhone launched in 2007, it has grown its annual revenue 16X — from $24 billion in 2007 to $383 billion in 2023. The iPhone user base counts 18% of the world’s population or 1.46 billion users. In the U.S., 55% of the adult U.S. population owns an iPhone, with many of them representing the most affluent consumer spending demographic.

On Apple’s Q2 FY 2024 pep rally earnings call,  CEO Tim Cook described Apple’s “amazing” quarter, using the word “all-time” 14 times to describe Apple’s performance to investors, along with other superlatives such as “groundbreaking.”

This as iPhone revenue was reported down by 10%, iPad revenue down by 17% and Wearable device sales down by 10%. Apple also guided single digit growth in iPhone sales for the rest of the year.

Cook described Apple’s latest hardware innovation, Vision Pro, as “exciting” and a big hit, citing nearly half of all Fortune 500 companies as buyers exploring “innovative” use cases. He failed to say how many units were purchased by individuals and which use cases companies are exploring, even though he was asked.

GenAI plans were also vague, but described as a very key opportunity for Apple. Everyone expects details at Apple’s annual World Wide Developers Conference about a month from now (June 10). Already, the hype machine is spinning at warp speed.

Apple’s earnings bright spot was the increase of 14% in Services revenue with double-digit increases guided for the balance of the year. It’s not transparent about what accounts for that growth, although Apple did report a total of one billion subscribers to Apple One. That’s roughly two-thirds of its user base.

Analysts and investors remain bullish on Apple’s future. Its stock price is up 8% since reporting its quarterly results. Many say that’s just because the results weren’t as bad as they expected. Warren Buffet, whose Apple stakes once comprised 50% of Berkshire Hathaway’s portfolio, just sold 13% of his shares. Nothing bad, he said — it was just time to cash in and move on.

Everyone seems optimistic (hopeful?) that GenAI will juice future iPhone sales and stem defections to the Android handsets that already include GenAI powered software.

And why not? The iPhone and its business model created the smartphone category, the device that connects the physical and digital worlds for its users.

The indispensable consumer product that anchors the digital transformation and has become the centerpiece of life inside the Apple ecosystem.

And it’s Apple.

The Wagons That Are Circling Apple’s Basket

Despite all its stunning achievements, by any objective measure Apple faces multiple serious and strategic issues. Issues so fundamental that everyone should be asking questions about the many assertions supporting its future as a leading mobile technology ecosystem — and its stratospheric market cap.

The iPhone and the iMac were big hits. But that is where the big hit parade seems to slow down.

Wearables were a hit for a time, but now not so much. The HomePod was an outright flop. Like most AR/VR headsets, the Vision Pro seems a niche product that got a PR and fanboy pop but seems to struggle to gain adoption. The Connected Car, billed as Apple’s biggest flagship product since the iPhone, was shuttered after a decade-long attempt to make it road-and consumer-ready. And don’t even try to ask Siri where Apple was when AI took off in late 2022.

Unless Apple has another transformative product innovation hiding up its sleeves, Apple’s growth is entirely dependent upon people buying the next generation of iPhone, upgrading them and using them. The same form factor, more or less, that they have been buying for the last 17 years.

And as goes the iPhone, so goes Services.

Without the iPhone, there is no Services revenue or double digit increase that comes from using Services — the part of Apple’s business that is high-margin and touted as its growth engine.

More Markets, More Problems

That may be harder to assume than it was a year or so ago.

At the end of the first three months of 2024, Apple ceded its global handset leadership to Samsung. Apple’s iOS users are a third of Android’s with 3.3 billion users and a 41% global share.

There’s China, which, along with AI, could mark the biggest headwinds Apple has seen since the bad old days of 1994. China is Apple’s third largest market accounting for roughly 17% of its sales. For the first three months of 2024, iPhone revenue there fell 19%, as Huawei sales jumped.

Of course, it doesn’t help that the Chinese government forbids government officials from using iPhones and arranged key photo ops of all of them clutching their Huawei handsets. But don’t blame the Xi regime. Chinese consumers, who are now feeling the spending pinch, can get better, cheaper phones and don’t need to rely on Apple’s app ecosystem given the widespread use of WeChat.

In a double hit to both Tesla and Apple, handset maker Xiaomi announced the debut of a low-priced electric vehicle that is also totally integrated with the phone. Now the Chinese consumer can get a two-fer — a good-looking and inexpensive EV, totally integrated with a digital ecosystem powered by Xiaomi.

Although it will take time to see the impact of the loss of the China iPhone sales to its corresponding Services revenue, it seems inevitable.

There’s Apple’s business model, a foundational pillar of its innovation and competitive advantage. It is also one under attack in nearly every jurisdiction worldwide, forcing Apple to open its App Store to competing payments processing systems and dinging its Services revenue further.

There’s high-margin search revenue. Safari’s search was so bad, it needed Google to step in. And it did — for a fee that became a win-win for them both. But depending upon how the Google antitrust case works out, Apple may be out the high-margin $18 or so billion a year they get from Google to power search on the iPhone.  That reportedly accounts for 36% of Safari’s annual ad revenue.

Apple’s closed ecosystem also means that Apple apps are not interoperable or portable unless used with another Apple product — which are fairly limited now. Without interoperability and portability, iPhone users are forced to live their life in that ecosystem. Innovators are forced to prioritize and pick sides. And Apple shuts itself out of the 3.36 billion consumers who use Android phones.

Apple’s closed ecosystem has worked well in a world where the iPhone is the front door that opens all other apps in an ecosystem that its high-spending users like living in. But in a world of distributed commerce and voice-activated transactions and commands, it will be increasingly limiting, and potentially frustrating. Try to use Apple Pay on any device other than an Apple device. Or your Apple Wallet on your PC.

Then try to use Chrome on your iPhone — you can — and Alexa on your iPhone or Android device — you can do that, too.

Or Chat GPT.

Perhaps Apple’s biggest threat is AI, where, like IBM, it squandered its early lead.

Enter the Dream Nightmare Team

Apple was among the first to innovate voice with Siri — back in 2010 as an app, and a year later as an integration into the phone itself. Siri has improved over time but seems incapable of responding to complex tasks. Apple claims to have invested $100 billion in AI over the last five years, yet it isn’t part of the conversation when it comes to the innovators who are now driving the AI revolution.

And just a week ago, Apple made the surprising announcement that it was teaming with OpenAI for GenAI on the iPhone.

Plan A? Or a sudden shift to Plan B (or C) from feeling the pressure of being late to the GenAI party?

As PYMNTS has written, there is a new dream team reimagining the future of the smartphone with GenAI — and it’s not at Apple. OpenAI’s Sam Altman and original Apple dream team member Jony Ive are passing the hat to raise $1 billion to create an AI-powered smartphone. In an interesting twist, one of the funds rumored to have an interest in participating is Laurene Jobs, Steve Jobs’ widow.

Could this device become as transformative to the smartphone world as the iPhone was in 2007? Hard to know right now. But if the past is prologue and the dream team delivers, the odds seem high. And if isn’t them, it might well be another team we haven’t yet heard of.

Like the iPhone, a GenAI phone has the potential to change the user experience, the way business and consumers engage, and the business model that powers the economics of that experience for users, developers and third parties.

Like IBM and the Mainframe, users won’t bail right away. A lot will depend on what “it” is, how much the device costs, and how compelling the user experience and use cases it powers.

And how much work it takes to make a transition. The work to move from Android to iPhone and vice versa isn’t fast or easy, and the differences not significant enough to put in the work. The data shows that not many people have.

Cutting to the Apple Core

Like Blackberry and the iPhone that displaced it, and the IBM mainframe and cloud computing, market share shifts take time. But history tells us that once users see a different and better way, those shifts gain momentum, hit a tipping point and become irreversible.

Blackberry and IBM were ill-equipped to pivot in time, mostly because they believed that their products were indispensable. That there might be something better, but users wouldn’t invest the time and the money to make the switch. They didn’t see a different future, only one where incremental improvements to the products would be good enough to keep customers from fleeing.

They also failed to recognize the frictions that users would face if they didn’t make the switch, the opportunities they would forgo but didn’t want to, and the innovations that would make the experience new, different and truly transformational. Blackberry users didn’t buy an iPhone to make calls or type emails, they bought it to connect to the digital world in a way that was impossible to do before. Enterprise companies aren’t moving to the cloud because they’re sick of mainframes, but because they want the speed and agility necessary to deliver real time, data-driven solutions to their customers.

Apple is one of the most beloved brands in the world, and once again flirting with a $3 trillion market cap. It has $56 billion in the bank and a talented team accustomed to delivering — and having people buy — Apple’s next big thing.

But like IBM, its flagship product has changed little over the last 17 years. The form factor looks better, is faster, takes better pictures and doesn’t have to be charged as often. Software upgrades add new features. But nothing else has really changed.

IBM, at number 65 on the Fortune 500 list, is still a big global company with products that are still relevant and a brand that still holds sway. It is making investments in quantum computing, which could be the next big thing that drives customer value and the revenue to match. Today, it just doesn’t lead the category in the same way it once did.

Since 2011, , Apple’s formidable cash cushion has given it the luxury of staying power in markets and sectors where it wasn’t first but had the bank account to outlast others who may have been.  But GenAI has changed the rules of play, the speed of the game, and others are farther ahead.

The next year will be interesting to watch, as innovators (both known and still in stealth) use GenAI to drive the next big change in how people and businesses use digital to connect. Innovators with a different vision for how to use it to drive the connected economy forward are unconstrained by legacy products that may pay the bills today, just like Apple was in the early 2000s when the iPhone was little more than an idea.

In many ways, for Apple, it is a little like déjà vu all over again.

Smartphone upgrade cycles are getting longer. Consumers, iPhones in hand, might prefer to wait and see what a pure-play GenAI phone does and what makes it different before buying the iPhone 16, 17, or 18.

The GenAI-curious might buy a phone from a GenAI challenger to play around with while still using their iPhone before jumping in with both feet.

The Fan boys could be the last to bolt — although as early adopters, you can never really be sure.

The post Is Apple at Risk of Becoming the Next IBM? appeared first on PYMNTS.com.

We see this too. A recent PYMNTS Intelligence study of how enterprise CFOs view GenAI’s impact on their business finds that nearly two-thirds believe it is the most significant technological innovation of our time. They use words like “growth,” “success,” “impact,” “innovation,” and “future” when asked to provide a one-word description. None of the CFOs surveyed expressed a negative view, even though some admitted the need to know more about its application to their business.

Although the study finds investments in GenAI to be relatively modest and experimental today, 53% of CFOs say that they’ll loosen the purse strings and significantly increase those budgets company-wide in the next year. Even the CFOs who acknowledge its potential, but have been more conservative, are ready to jump in. Nearly two-thirds (65%) of those CFOs expect to increase their corporate-wide GenAI budgets by an average of 12% in the coming year.

The Need for a GenAI Organizing Framework

What’s missing in all the coverage of the models, investments, startups and GenAI applications is a framework for analyzing the link between the application of the technology and business outcomes — and how executives across an organization measure the impact of their investments to support it.

Looking at GenAI through that lens can inform the characteristics of the companies and industry segments that recognize it as a strategic enabler to their business early on. More important, it offers a consistent way to track the impact of GenAI on business and financial performance over time. As GenAI and LLM applications become an embedded part of a business, the only way to measure the impact of this technology will be by looking at its impact on overall business outcomes.

That is the thesis of a new monthly PYMNTS Intelligence study we call The CAIO Study. The first of these monthly reports will be released on Tuesday, May 14^th.

The overall study framework consists of a proprietary weighting and scoring methodology for each of 13 activities to classify them as routine or strategic uses of GenAI. The PYMNTS Intelligence team then uses statistical techniques to examine how each activity, and groups of activities, can influence business outcomes and the return on their investments to support it, as reported by the C-suite.  Each month will study a different enterprise C-Suite executive and in order to do a deeper dive into a particular business function.

The study branding is a nod to the speed at which GenAI is becoming an embedded part of business decision-making and executive proficiency. Successful businesses will be led by executives who see GenAI as the invisible engine that powers the business and who prioritize the people, process, and dollars to make it real for themselves and their customers over the next one, three and five years.

The CAIO Study will methodically benchmark that journey across the enterprise C-Suite and expects to have data on more than 700 such U.S. executives in its first year.

The May 14^th release will share what we learned after conducting a double-blind survey of a random sample of CFOs of 60 of the largest companies in the U.S. — $1 billion or more in annual revenue. For this issue of the study, we drilled into the applications of GenAI across the business, what is being invested to support those activities, and how CFOs currently measure its impact.

Starting with the fact that not even enterprise CFOs who’ve invested the most have a clear vision for how to effectively predict the impact of GenAI on the financial performance of the company in these early days.

 A Whole Lot of Writing Emails Going On

Here’s the good news: Right now, nearly all enterprise firms we studied are using GenAI to some degree.

Here’s the highly predictable news: Most of those CFOs have yet to see a demonstrable return from those investments.

There are a few very good reasons for that.

First, the enterprise firms studied are just getting their feet wet with mostly low-risk, low-impact, less complex applications of GenAI tech.

And second, those types of applications and use cases represent the bulk of their company’s experiences to date with GenAI. Most of what we see so far inside of these enterprise firms is the use of GenAI to create emails, summarize reports, search for information, produce graphics and write social media posts.

I won’t ask whether the last email you sent also had a little GenAI helping hand.

Roughly half of the GenAI use cases inside these firms can be classified this way — more routine than strategic, more for internal use than customer-facing, and mostly by individuals inside of the company to save time and improve the quality of their personal workflows.

It’s why we also find a relationship between the number of firms using GenAI to tackle more complex activities and the impact CFOs report GenAI has on the business right now.

Only 14% of the CFOs in our study say that GenAI-ing routine, less complex activities deliver a positive impact on the business. It is hard to measure the collective financial and business impact of better emails and snappier reports.

They have a much different view when LLMs are used in broader and more strategic ways.

More than twice as many CFOs report a strong ROI when GenAI is applied this way, even as CFOs right now are using more gut instinct than P&L performance to judge its potential impact. Strategic activities in this study include innovating products and improving processes and workflows for mission-critical business functions such as the production process, fraud and cybersecurity.

We also observe a surprising disconnect between what conventional wisdom suggests as popular strategic applications of GenAI and how CFOs project their bottom-line impact today.

For example, chatbots are widely popular and often talked about as a GenAI use case; it’s also one that CFOs say is an effective application of the tech. Yet we find roughly a third of  enterprise CFOs (32%) report a negligible impact of chatbots on financial and business performance.  It could be that the tech is still new and being introduced alongside people sitting in call centers, making it hard to predict its impact on business bottom line right now.

According to the study, using GenAI to generate code is a less widely used case, but one that CFOs report as having 2.5 times greater impact on business performance than others.  CFOs may find it easier to conceptualize GenAI’s impact on the cost of supporting a development team, for example,  when coding has the potential to become more widely distributed across the business.

More GenAI Means More Impact  

Nearly every firm in The CAIO Study uses GenAI to support an average of four routine, less complex, non-mission-critical tasks, as described earlier. Enterprise firms that use GenAI more strategically use an average of six applications across the business.

We also find that enterprise CFOs using six or more GenAI applications report an eightfold increase in the expected ROI impact of GenAI on the business compared to those using five or fewer. One might expect that going from four to six applications would be linked to CFOs reporting a change in ROI impact proportional to that increase. But we see that the addition of a few strategic applications can be quite impactful.

That’s even as only one in three CFOs studied are using the technology across the business to this degree (i.e. six or more applications).

We also find that when CFOs have more experience using GenAI applications to support strategic business initiatives, they have a greater appetite to invest more in its strategic use.  Those CFOs cite an average investment in GenAI applications at $4.6M, 88% more than those whose use cases are more routine.

What Gets Managed Gets Measured, Sort Of

Nearly a year and a half after the public launch of OpenAI and Chat GPT, we find that the methods enterprise CFOs use to measure the future value of their current investments in GenAI applications are still a work in progress.

It is admittedly early days, and one study of a small sample of enterprise CFOs does not make a trend. But we believe that what CFOs report as the drivers of a positive ROI may also undervalue GenAI’s potential business impact in the years to come.  There’s no data to benchmark or use as a guide right now. It is also difficult to forecast the impact across the business of such a transformative technology.

We  already see signs of how measuring GenAI’s impact might take shape. The enterprise CFOs who report that their firms have embedded GenAI into more complex, higher-value business functions also say the business and financial impact is stronger, and their reports of a positive ROI are more certain.

They report a more positive impact across the business in the areas of customer delivery, critical business process improvement and competitive positioning. More than three quarters (78%) of the firms who use GenAI this way count positive impacts in new product innovation, and 72% see positive impacts on market adaptability and business expansion — nearly twice as much as those who haven’t expanded their GenAI wings across the business.

Some of that can be explained by how CFOs see the staffing mix evolve over time and how it impacts the costs to support the workforce in the here and now.

Eight in ten enterprise CFOs in this study say that GenAI will have a big impact on staff mix, with nearly two thirds saying that their need for lower-skilled workers across the business has decreased at the same time the need for more analytically skilled workers has increased. CFOs have a direct line of sight into those staffing plans and forecasts, so they may be using it as a proxy for measuring business performance over the longer term.

We also see evidence that it is the blend of GenAI applications across both routine and strategic use cases that drives a stronger, more positive ROI outlook as reported by the enterprise CFOs we studied

And why we find little evidence that any single GenAI application is the “silver bullet” to take the overall business performance of the largest companies in the U.S. to the next level.

The post Why Measuring the ROI of Transformative Technology Like GenAI Is So Hard appeared first on PYMNTS.com.

By 2030, barely five years from now, Gen Z will represent a third of the workforce. Their disposable income is projected to increase by sevenfold and their spending by sixfold as their incomes rise and they begin to benefit from the $90 trillion transfer of wealth headed their way from parents and grandparents.

For that reason, Gen Z is the generation that all businesses are courting — they are their future workers, customers, business partners and investors. What makes this generation tick is the subject of intense scrutiny because decisions made now could stick for decades to come.

Especially when it comes to how and where they bank and how and where they spend their money.

Generation Mobile

I had the chance to present the results of new PYMNTS Intelligence research on this topic with those attending the PSCU Member Forum in San Antonio last week.

What Gen Zs want from their bank was one of several research outcomes from a path-breaking study of credit union members, credit union executives and FinTechs done with the support of PSCU.

The research objective was to examine the innovation required of credit unions to meet the needs of their members today — and to attract and retain the future generation of customers over the next five to six years. The research outcome provides a blueprint for Credit Union 2030 — and an index to measure the innovation readiness of credit unions to deliver member-driven outcomes over that period.

The study considered more than fifty products and services, along with financial metrics from the credit unions studied. It analyzed current member use and future expectations for current and future credit union product offerings. The study also examined the ROI of investments in innovation to identify top, middle and bottom performers. More than 4,500 consumers were studied, both credit union and non-credit union accountholders.

The PYMNTS Intelligence/PCSCU study generated more than one million data points and, for me, one important conclusion.

What Gen Z wants from a bank is what almost everyone now wants from their bank: personalized products and services that are easier to consume on their mobile devices.

But for Gen Z, using their phones to open accounts, pay bills, send money to family and friends, get financial advice, apply for credit including BNPL, invest and save money — aren’t just nice to have. They are a requirement. Their low bar: those products and services must be available on the phone, on demand, and without having to bounce between apps and screens to access them

Gen Z wants this easy and seamless access to banking and payments services because they are active consumers of banking and payments products — five on average, according to the research. And they’d use twice as many, if offered and available.

So, therein lies the rub.

Gen Z is more willing and able to switch banking relationships to get the banking services they want — and they do: two to three times more often than their parents, and four times more often than their grandparents.

Generation Bank Switcher

PYMNTS Intelligence research finds that 42% of Gen Zs who bank with credit unions have changed their banking relationship over the last 12 months, as have 44% of Gen Zs that bank with traditional financial institutions.

Sixty percent of those switchers have kept their prior account open but no longer use it as their primary banking relationship — it’s no longer top of mind and/or top of wallet. Forty percent have closed their account completely. Fewer than 5% of these bank switchers came from FinTechs or neobanks.

Gen Z says they switch to get products and features that are highly mobile-centric. It’s not consistently what credit unions offer — or even say they plan to in the next three years.

Gen Z wants P2P from their bank or credit union, yet 41% of credit unions don’t plan to offer a solution that delivers a Venmo-like experience. (BTW, big banks don’t either.)

They would like to invest in crypto, yet 95% of credit unions don’t have anything like the Robinhood, Venmo/PayPal crypto investment option on their roadmap.

The pre-college teen Gen Z cohorts want debit cards and apps that suit their needs, yet 85% of credit unions say don’t plan to offer something like the Greenlight experience.

Forty-two percent of credit unions say that they don’t plan to offer instant issue cards, even though this generation lives on their phones and wants to use them to pay everywhere. Many don’t even carry a physical wallet, so virtual is the mode of payment product they want and use.

Of top-performing credit unions, 40% say they have no plans to offer a BNPL product, even though it’s regarded as an important budgetary tool for Gen Z consumers. That’s, sadly, the same share as the bottom performers.

These innovation gaps can be costly, even though 95% of credit unions say serving Gen Z is a high priority.

Not only have Gen Zs switched their primary banking relationships in the last year, they are also 2.5 times more likely to leave their current financial institution if these services are unavailable. Or delivered with an experience that has too much friction associated with it.

There is a silver lining.

Gen Zs say they’d rather get services like BNPL and financial advice from their banks and credit unions.

So there’s a chance for banks and credit unions to deliver a personalized set of products from the financial institution that also bank their parents, but are delivered in a way that is best suited to their mobile financial lifestyle.

With trust, safety and security as the common cornerstones of that relationship.

Not Your Father’s Bank

In 1988, Oldsmobile launched an ad campaign that would ultimately destroy the 106-year old car brand.

“Not your Father’s Oldsmobile” was a tagline promoting a new “generation” of Olds(mobile) models designed with a much younger buyer profile in mind. GM created the campaign to overcome the brand’s reputation as the safe and reliable car driven largely by Dads and Granddads. I can relate. As a kid, there was always an Olds sitting in front of the house.

The campaign’s objective was to persuade young drivers to give Oldsmobile a serious look. The television and print campaign featured famous parents in the passenger seats of new Oldsmobile car models driven by their younger kids. William Shatner, Ringo Starr, Leonard Nimoy and Rod Sterling were among those famous parents. Space-age themes were the ad’s cornerstone. If you have thirty seconds, it’s worth checking out the William and Melanie Shatner ad.

These cringeworthy ads backfired. It is reported that Oldsmobile sales between 1986 and 1991 fell by 50% and by another 50% at the end of the 1990’s. Oldsmobile buyers might have been older, but they didn’t like being stereotyped that way, as old and stodgy. Younger buyers didn’t want to be seen as driving the same car brand as Dad — and worse yet, getting his stamp of approval — even if those new models looked different and came with spiffy 1990-s vintage bells and whistles.

Oldsmobile was sunset as a brand twenty years ago on April 29, 2004.

The one thing that lived on was its tagline.

Not your father’s [fill in the blank] became shorthand for describing the distinct differences between modern products and services and those which older generations may have considered their go-to.

Including banking.

“Not your father’s bank/banker” has been used since the mid 2000’s to signal that the addition of online banking, credit and wealth management and investment services was an important upgrade to traditional banking customs and norms — even though not much else had really changed.

Today, it’s implicitly the value proposition of FinTechs whose slick mobile apps and easy onboarding appeal to many Gen Z and Young Millennials who view Dad’s bank as too old-school for their modern mobile ways.

Many Gen Zs find that the digital ease, simplicity and relevance of the banking products and services offered by FinTechs check their box. And work for many of their parents, who’d rather open a Greenlight account in their name for their 14-year-old than do the same thing at their bank. It’s easier to open, manage and monitor the spending and savings of their kids. Links to investment apps make it easy for their kids to learn about investing and open new conversations between parents and their kids about the impact of current events on stock and market performance.

But the shift to digital and more modern ways of engaging with people and businesses today crosses generational lines. Serving Gen Z well means delivering products and services to a mobile-centric consumer whose expectations for a seamless banking experience span generations — but whose requirements of those products and features vary based on lifestyle and lifecycle.

The smartphone has become the great financial services equalizer.

For every Generation Z consumer, there’s a parent or grandparent Venmoing them money, texting, and Face Timing with them, probably paying some of their bills online and ordering stuff online they may need.

Meeting the needs of Gen Z makes it a common denominator for all banks, and the call to action for how all banks adapt the banking experience to an entire generation of banking consumer that expects a better and more personalized digital experience. For Gen Zs — but also for everyone who lives life in a mobile, digital first world. And who values the safety, security, soundness and depth of services provided by a traditional financial institution.

Just don’t say this isn’t your father’s bank.

The post What Generation Z Wants From Their Bank appeared first on PYMNTS.com.

Most items carry a price tag ranging from $5 to $50, even though some items sell for two to five times more. Fashion influencers helped drive awareness and demand at the launch.

The exclusive DVF collection is the latest in Target’s 25-year history of exclusive collaborations with celebrated designers, starting with Michael Graves in 1999. Target claims more than 175 such partnerships that give consumers affordable access to designer collections they can’t get anywhere else.

Target’s online and in-store shopper base is an attractive brand awareness, marketing and product distribution engine for designers such as Alexander McQueen, Lily Pulitzer, Missoni and Jason Wu, who usually only sell in higher-end retail outlets and their own D2C channels. For those who have been out of the designer fashion limelight for some time, it is an opportunity for a brand revival and refresh.

For Target, it’s a way to pay off its “expect more, pay less” brand proposition and amplify the “Tarjay” moniker coined by shoppers who like the idea of buying upscale designer products without the upscale designer price tags.

It’s a playbook that Walmart has apparently been studying and is now rolling out at 800 stores — a strategy to turn Walmart’s physical stores into “Walmarche” one duck breast, pair of cargo pants and Bobby Flay Steak takeout meal at a time.

Maybe there’ll even be a Walmoi app for Walmarche shoppers.

Parlez-Vous Walmarche?

As reported by Bloomberg last week, Walmart will pilot a new merchandise mix and fancier displays aimed at high-income hipsters looking for cool stuff much cheaper inside those 800 Walmart brick-and-mortar stores. The article says private-label clothing items such as blazers and cargo pants, influenced by upscale designers like Brandon Maxwell, are more fashionably displayed inside of those stores. High-end branded grocery products and meat selections one might consider designer (e.g. duck breasts) are not only available, but reportedly selling for less than at rival grocers.

Walmart has also leased space in a limited number of locations to Marc Lore’s Wonder, a “fast fine” operation that serves high-end takeout using celebrity chef brands like Bobby Flay Steak.

Lore is the Jet.com founder who sold his eComm business to Walmart for $3.3 billion in 2016. Walmart unwound it in March of 2020 due to its lackluster performance.  This isn’t the first time Walmart has tried restaurants in its stores. Its first was a ghost kitchen, with Kitchen United featuring multi-restaurant brands, shuttered in 2023 after two years in operation.  We Wonder if things will be different.

On the surface, Walmarche is not a totally crazy idea.

Consumers, across all income levels, are spending less and trading down to manage the impact of inflation that still results in prices that are too high, according to PYMNTS Intelligence.  The appetite for fashion and home furnishing dupes is increasing across all shopper demographics, and influencers are taking to Instagram and TikTok to document how to buy the look and not the label for a lot less.

Looking at Walmart’s numbers, this move also seems important.

According to PYMNTS Intelligence, Amazon’s share of high-income consumers is 36% higher than Walmart’s and 2.5 times more consumers have an Amazon Prime subscription than Walmart+. More of Walmart’s customers earn less than $50,000 a year than earn more than $100,000 — roughly a third at each end of the income spectrum.

Thirty percent of Walmart’s shoppers live paycheck to paycheck and have issues meeting their monthly financial obligations, an increase of 10% over the last two years. Walmart’s shoppers are disproportionately lower-income consumers who also disproportionately feel the inflation pinch.

Having a shopper base that is less financially pinched is important as Walmart finds its share of overall retail spend declining against its biggest rival, Amazon. PYMNTS Intelligence analysis of retail sales using Q4 data from SEC filings finds Amazon’s share of retail spending in 2023 to be 10 percent to Walmart’s 7.3%.

Walmart is losing ground to Amazon in key retail categories that were once its bread and butter: electronics, health and beauty, sporting goods and hobbies, and home furnishings. Grocery remains Walmart’s huge juggernaut, at roughly 19% of all grocery purchases. But that’s a share that has remained relatively constant over the last couple of years. Amazon grocery, by comparison, looks anemic, even though its share has increased 10% over the last few years.

But Target’s Tarjay does not a Walmart Walmarche strategy make.

[In case you are wondering, Walmarche is a portmanteau of my own creation. Walmart execs should feel free to use it, with appropriate credit, of course.]

“Tarjay” is the mashup of known designer brands at affordable price tags bought by a shopper with a median income of $80,000, lured into the stores by the cheap, chic brand association — and the scarcity of the collections offered. While there, the shopper finds other cheap and chic fashion or home furnishing merchandise at lower prices.

“Walmarche,” as it’s been described, seems different — and a harder hill to climb. Walmart must first convince high earners that they’ll find recognizable designer brands or really high-quality dupes at cheaper prices than they’d find elsewhere, and then make shopping at Walmart a habit. It’s not clear that Carbone pasta sauce and knock-off navy blazers will be enough to change high-earner shopping habits — especially when most of the product mix and shopper profile inside of a Walmart store remains largely the same. And when many high-income shoppers make such purchases online for the convenience of not having to walk inside of a physical store.

There’s also the risk that becoming too much Walmarche could alienate Walmart’s core shopper.

That’s what happened when Target’s cheap and chic mastermind used the Tarjay playbook to attempt JCPenney’s reinvention a little more than a decade ago.

When Cut-and-Paste Strategies Won’t Cut It

If you like how Apple Stores are designed and the Genius Bar works, you have Ron Johnson to thank. It is he who devised the strategy — and the plan to see it through. His thesis was that spaces beautiful enough to walk into make buying a better experience and create opportunities for collaboration and enduring customer loyalty.

In his role as VP of merchandising at Target, it was Johnson who forged the partnership with Michael Graves in 1999. That partnership became the foundation for the “cheap and chic” product strategy that hooked a new shopper demographic.

The JCPenney board hired Johnson in 2011 to help plug the deepening sales hole created during the 2008 recession. Johnson’s plan was to implement a mashup of his Tarjay/Apple Store plans. He hired a former Apple colleague to help.

The plan was to create little branded store vignettes inside of JCPenney where shoppers could discover new designer brands, hang out, meet people and then buy stuff. Private label brands were sunset. Coupons, which were to JCPenney shoppers what Frisbees are to my Border Collie, were eliminated in exchange for everyday low prices.

Less than a year into the launch of this new store concept, Johnson was shown the door by the Board. The CEO he replaced was brought back. The investors who lauded Johnson and his initial strategy discovered that the shoppers who drove billions in sales for the brand liked coupons, and the private label brands they carried in the store. The tried-and-true JCPenney customer didn’t want to hang out and didn’t like — or couldn’t afford — the hipster-branded merch sold there.

New young, trendy shoppers didn’t show up either. Soon, neither did those who kept the cash register ringing. Sales got worse, not better.

JCPenney filed for bankruptcy in 2020, then emerged from bankruptcy with new investors and a $1 billion turnaround plan in 2023. Gone are fancy brands and places to hangout. Operational efficiencies, improving the quality of its private label brands, upgrading its digital experience, and turbocharging its coupon and rewards programs, it claims, will support its goal to remain the shopping destination for America’s working families.

Tarjay worked for Target and not for JCPenney because Target didn’t try to force a round shopper profile into a square hole. The challenge for Walmart is balancing the high-income shopper expectations with the everyday-low-price proposition and merchandise assortment that supports the shopper who built its brand over the last 62 years.

Date Night at Walmart’s Food Court?

Walmart is the largest physical retailer in the world, on solid financial footing with sophisticated data analysts and strategists who know that it will take more than duck breasts, stylish mannequins and funkier looking baby cribs to attract more spend from high earners and bring more of them into their stores. Those are the shoppers with the greatest number of shopping options and stores who want their business.

Those are also the shoppers who don’t tend to switch merchants to find better deals. PYMNTS Intelligence data finds that high-income consumers don’t switch stores to save money, they just buy cheaper products at the stores they already shop. Lower-income and financially stressed consumers do. For those consumers, following the money often means finding a new merchant.

One of Walmart’s biggest challenges is getting a growing share of the consumers who shop there today for groceries to stay for clothes, toys, electronics and — increasingly — home furnishings. As their sales numbers reflect, and earnings reports confirm, they don’t. Getting more of those shoppers to convert seems like Walmart’s low-hanging fruit, and they probably don’t need duck breasts in the meat case to do that.

Will the wonder of Wonder be enough to make Walmart their new favorite dining and shopping hotspot?  Unlike the local carryout, you have to walk into the store to pick up the order — that’s friction.  And then there’s the product/market fit. Apparently the idea of shopping and grabbing a bite was not appealing enough to shoppers to keep Walmart’s Ghost Kitchen 1.0 a going concern. It’s been said that the fastest way to a man’s heart is through his stomach — we’ll see if fast fine is the fastest way for high-income shoppers to beat a path to Walmart’s new store format.

Here’s one thought. Walmarche could end up making Walmart more attractive for the lower- to middle-income consumers there already, especially since Walmart is subsidizing how much consumers pay to buy those fancy brands right now.  Maybe Walmarche ends up making more of the shoppers they have today more loyal — and budding gourmands.

Now what about that Walmoi app?

The post Will Walmart’s ‘Walmarche’ Strategy Lure High-Income Shoppers? appeared first on PYMNTS.com.

It took me less than five minutes this weekend to do the same thing. Until then, my Apple Pay Wallet included only my Apple Card and my Apple Cash card. Out of curiously, I checked my transaction history using Apple Pay over the last few years, since I felt instinctively my use of it had increased.

In 2021, I had 37 Apple Pay transactions; in 2022 I had 40. In 2023, I had 119 transactions — and so far in Jan and Feb of 2024, I have completed nearly half the number of all my 2023 transactions combined. My use of Apple Pay is exclusively in-app and, until this weekend, using my Apple Card.

The increase in use comes at the expense of PayPal and my bank account as funding sources — and as card on file at merchants I now shop using their app. There are exceptions like when I shop on Amazon, at department stores where I use my store card for rewards, and when I shop using my laptop.

But as my transaction history suggests, my increased use of Apple Pay reflects a shift in how and where I shop, which is increasingly using my phone/tablet and apps. Two clicks on the side of the phone and the transaction is done. Paying my Apple Card bill is easy inside the Wallet. Now, with the addition of my oft-used cards, I have payments choice before I double click. That might have the effect of reducing my use of the Apple Card, but probably not my use of the Apple Wallet when I am shopping in an app on my mobile device when it is available.

It’s not just me.

Digital wallets are how consumers seem to want to manage the everyday transactional parts of their lives — how they pay, who they pay, how much they spend, and how much they have left to spend. It’s one of the reasons so many consumers gravitate to the everyday app concept. According to PYMNTS Intelligence, three quarters of consumers say they want the convenience and simplicity of such an experience. Their bank is on the list of providers they trust to do that, but not at the top.

Aggregators, whether it is a platform like Amazon or Instacart or DoorDash or OpenTable, generally offer the one-stop experience with a number of choices and an end-to-end transactional experience. Digital wallets can play a similar role for consumers across the payments and banking spectrum. Apple Pay’s integration creates a sticky behavior that increases usage and can drive preference. Consumers don’t see their banks as being that aggregator, at least not now. A typical bank mobile and web app, even with Zelle integrated into it, doesn’t make it easy to do what Apple Pay does on the iPhone.

This behavior is a sobering reality for issuers that risk becoming invisible inside of a Big Tech digital intermediary whose branding is front and center for the consumer when checking out. Banks will probably have to pay more when consumers use their cards in that wallet. Apple Pay may charge them more as they face pressure to raise revenue in the face of slumping iPhone sales. Or because they must spend more to drive top-of-wallet preference in that wallet. That will be increasingly true as more transactions move to mobile devices — and especially to iPhones, which will capture the bulk of the spending in the U.S. and other developed countries.

The Same Digital Wallet Story, but with a Difference

The friction between banks and digital wallet intermediaries is nothing new.

PayPal rubbed the issuers and card networks the wrong way once it started to get traction, and rubbed users the wrong way when it made adding forms of payment other than a bank account a friction-filled experience. It would take until 2016 for PayPal, card networks and issuers to find common ground and make choice an easier and more visible option for consumers using the PayPal wallet. That decision helped to drive the growth and expansion of PayPal as an online digital option at checkout over the next several years and more volume on issuers’ cards stored in it.

Apple Pay will celebrate its tenth birthday in about six months. It’s a mobile payments intermediary that issuers weren’t all that enthusiastic about in 2014, given the Apple Pay tax levied on every transaction initiated in the wallet. Since Apple Pay at that time was mostly to be used in stores, and in-store use was (and still is) nascent, there didn’t seem to be much collateral damage.

Apple Pay is a different digital intermediary now even though the overall use of the Apple Pay Wallet in the U.S. remains small. It has its own credit card in that wallet and offers an integrated Pay Later option at checkout. The user experience is slick, and managing transactions is easy. Cash back on purchases is automatically deposited to the Apple Cash card, which can be spent or transferred to a bank account. Integration with messaging makes P2P payments just like sending a text.

It is becoming the aggregator for virtual cards that consumers have in their physical wallets today or get from brands that aren’t their bank, including those issued by brands that are not a bank.

Apple now offers a high-yield savings account on balances of up to $1 million as a feature in its wallet. It has a disproportionate share of high earners as iPhone customers here in the U.S. and, by extension, those who drive spend using that wallet and the cards in it. According to PYMNTS Intelligence, 54% of Apple Pay Users earn more than $100,000 a year and nearly half (45%) of iPhone users do.

A digital wallet that was more or less a dud at the physical checkout in the store for most of its post-launch life, Apple Pay has become a more material potential competitor to the banks as more transactions move in-app and on mobile phones and tablets — with Apple Pay offered as a friction-free alternative to checking out.  And Apple adds new banking and payments features to create more utility for its users when transacting in app, as it will surely do.

Those use cases might extend to a reinvention of how consumers check out in store, Apple’s initial payments target, which has been slow to gain momentum.

One of the biggest innovations for physical checkout is to replicate the digital experience for consumers who are standing inside of a store. The Click-and-Mortar shopper is here to stay, as PYMNTS Intelligence research, done in collaboration with Visa Acceptance, shows. Click-and-Mortar shoppers are the fastest-growing shopping segment worldwide, as consumers see the store as just another place to use their mobile devices to shop and pay. Customer satisfaction is higher with merchants who offer such an experience — and with satisfaction comes preference, and with preference comes more sales. Digital wallets, with payments choice, can be a bridge to the reinvented checkout experience. Whose digital wallet depends on who can deliver the better experience.

Maybe this is where banks and merchants could find common digital wallet ground.

The Digital Wallet Prisoner’s Dilemma

Stay with me. There is a point to this anecdote.

Sam Bankman Fried’s sentencing for his role in the collapse of FTX is set for March 28^th. Last week, we heard prosecutors argue for a 40-to-50-year sentence at the same time SBF’s defense team said 5 to 6 years should be the max. The three closest FTX colleagues who testified against their former boss will be sentenced later. Each of them made the decision, independently, to plead guilty and cooperate with the government in hope of a more lenient sentence.

They did so even though each could have pleaded not guilty with the hope that their group silence would make it tough for the prosecutors to win. The prisoner’s dilemma a year ago was whether to gamble that one of them would spill the beans in the hopes of a reduced sentence or hope that everyone would hang tough and maybe get little to no jail time.

The prisoner’s dilemma dynamic is evident in business almost every day even though we don’t call it that, and the outcome isn’t about whether anyone will serve time behind bars. But it is the essence of decisions that impact business outcomes — often in material ways.

A prisoner’s dilemma is about deciding whether it is more advantageous to just follow one’s self interest or collaborate with an adversary to achieve a better outcome. In a very connected digital economy, where competition and cooperation now define business, these scenarios have become more the rule than the exception.

It’s also a fitting way to describe the dynamic now between banks and digital wallets, and in particular Apple Pay.

The issue for banks, and the biggest ones with the largest card bases, is how to become more than just a feature in a wallet where they don’t control the experience, the acceptance or the cost to them of a consumer using it.

These decisions are being weighed while Apple is under pressure to boost revenues as iPhone sales globally fall and competitive (and geopolitical) pressures in China increase. This Bloomberg article suggests Apple is less like a Big Tech innovator and more like a value stock, citing Coca Cola as a relevant comparison. The writer says its lack of AI chops is to blame. The bigger point is that Apple has been largely unsuccessful at bringing a slew of blockbuster products to market under Tim Cook’s reign.

So, all attention is focused on Services revenue now to drive revenues and margin.  Apple Pay transactions are very likely in the consideration set of assets for Cupertino to monetize in new ways.

Banks, of course, know this. The big banks behind Zelle have banded together to create a bank-only competitor, Paze, as a digital wallet alternative to Apple Pay. It has little chance of being a competitor or getting any traction for all the reasons I outlined when it first launched.

We witnessed the challenges of getting a bank-operated payments consortia to scale in the U.S. with real-time payments and TCH. Business model failures hindered ubiquitous acceptance, coupled with a lack of clarity on use cases that would create the adoption and usage to get a flywheel going. The very adversaries that TCH was intended to unseat, the card networks, have only become stronger real-time competitors with push-to-card options that deliver a streamlined and ubiquitous consumer experience and consumer preference. If we think that getting real-time, account to account payments to ignite in the U.S. was challenging, which we are still working to do, just sit back and watch how painful it will be for Paze to try and do the same.

Friend, Foe or Somewhere in Between

Deciding what’s in the self-interest of banks, especially the biggest ones, when it comes to their digital wallet strategy is more complicated than it was when Apple Pay first launched. Consumer preferences have changed, and Apple Pay seems to have momentum in-app. Apple also has an incentive to figure out how to make more high earners stickier, and to be the aggregator of the payments and transactional banking elements that consumers value in order to bolster its own bottom line. Almost anything could be in play.

At the same time, Apple is only half of the smartphone population in the U.S. — and even smaller globally — at a time when the smartphone landscape is going through its own digital transformation. GenAI will usher in a new generation of devices and operating systems; Open AI and ex-Apple iPhone visionary Jony Ive is working on such a device now. So is Google. Commerce and payments will move to a more distributed network of devices that are voice-activated and where smartphones and apps may be the receivers, and not the initiators, of transactions. Amazon isn’t going to sit back and watch the GenAI commerce train pass it by either.

The same banks that helped build Apple Pay success now find Apple to be the gatekeeper for the use of their cards inside of it.

In that world, determining who’s the real adversary won’t be that easy. Neither is figuring out whether a collaborator today may be an adversary in the future. Apple faces many of the same decisions in its core business. Just today, we read that they are contemplating a partnership with Google to license its Gemini product to fast track its own AI capabilities.  

The post The Apple Pay Threat Facing Banks appeared first on PYMNTS.com.

Soon thereafter, so did the thatched roofs of the houses people lived in. It turns out, DDT also killed the insects that ate the caterpillars that spent most of their day munching on roof thatching.

Then there were the rats.

DDT’s collateral damage spread to the food supply that poisoned most of Borneo’s cat population. Since the cats ate the rats that seemed impervious to the chemical, the island soon became overrun with them. That drove island-wide outbreaks of typhus and the plague and made island residents deathly ill.

Five years later in 1960, Borneo again asked for help to control the rat infestation. This time it was the U.K.’s Royal Air Force to the rescue. They parachuted 14,000 cats, packaged into little crates, onto the island to eat the rats in the hopes of restoring the island to its rightful ecological equilibrium.

This is a true story.

Operation Cat Drop, as the operation was dubbed, had its many critics. The images, like this one courtesy of Anifex, made light of the seriousness of the situation – and the seemingly Rube Goldberg-like solution that apparently only 14,000 flying cats could fix.

It is also one of the more extreme examples of what can happen when actions taken by those in positions of authority “for the good of the people” backfire when they fail to contemplate the downstream effects — the unintended consequences — of their recommendations.

Operation Credit Card Interchange Backfire

I am certain I’d have no trouble finding people from across the payments ecosystem to fund the purchase and transport of 14,000 cats — if airdropping them on Capitol Hill would derail Senator Durbin’s Credit Card Competition Act, aka CCCA.

For those in and around payments, the CCCA is the pending bipartisan piece of legislation that purports to create a more competitive credit card playing field. The bill’s intention is to drive interchange fees down by letting merchants choose  which network rails they use to route credit card transactions — under the assumption that they will pick the lowest-cost option. Merchants and merchant associations like the NRF and The National Association of Convenience Stores have heavily lobbied Sen. Durbin to write the bill and encourage bipartisan support to pass it.

The bill itself is short. It has essentially no details about how this would work in practice. If you have three minutes, you can read the legislation here. If you have five minutes, it’s worth glancing at Sen. Durbin’s Cliff’s Notes version here.

Like me and everyone else who reads the CCCA bill, you probably have a lot of questions about how it will work. Don’t sweat the small stuff, though — if passed, the payments ecosystem will have one whole year to figure out how it will work and implement new rules, processes and procedures to support it.

Unsurprisingly, payments lobbyists have been out in full force, all guns blazing, taking a whack at the legislation and its impact on credit card rewards if passed. That seems to have met with a collective lawmaker yawn, seen as the predictable response by big banks and card networks whose only interest is to “stick it to the merchants,” they believe.

I’ve been thinking about this a lot recently since it has become such a hot topic of conversation. Like many, I believe the CCCA is based on a flawed argument rooted in a lack of understanding of how the credit card system functions in the U.S. today — and a belief that merchants, not consumers, know best.

Unlike many, I don’t think the CCCA will reduce interchange at all — or if it does, by maybe an unnoticeable smidge.

In fact, it may even increase it.

On second thought, we might not need the cats.

Amex to the Rescue?

The bill, as written, is almost sanctimonious in its claim that the current card networks, Visa and Mastercard, have too much power. The intent of the bill is to force big banks to issue cards that have an alternative credit card network on the front or back of the card so that merchants can decide over whose credit card rails they route the shopper’s payment. The hitch is that issuers can’t put Mastercard on their Visa cards — or vice versa. But they can opt for one of the current three-party alternatives. There’s Discover and Amex.

The intention, as I mentioned, is to force Visa and Mastercard to lower interchange and network fees because they will have to compete for volume with an alternative network. But that assumes that issuers would default to putting Discover on their cards, which has lower merchant discounts (the equivalent of the interchange fee and network fee for the four-party systems.)

But why would big banks do that?

Any issuer that chooses to put Discover on their cards  is making a conscious decision to cut into the credit card rewards that consumers know and love, and drive top-of-wallet status for them.

So, if I am an issuer thinking strategically, I’m on Zoom calls with Amex to negotiate a higher interchange fee that will allow me to support consumer rewards at the levels they are now. Otherwise, they could threaten to put Discover on the card.

Then guess what would happen?

For Discover to be a competitive option for banks, they, too, would have to bid up interchange fees for issuers.

Who knows, maybe the reason that Capital One is trying to buy Discover is to capture more interchange fee revenue for the cards going over the Discover network by raising merchant fees.

Here’s another thought: The CCCA bill, which is an ode to three-party networks (but really Discover, since Amex is even more expensive for merchants than Mastercard and Visa), could give rise to even more of them in the U.S.

There is a short list of providers who have both issuing and acquiring, and those include the big banks. Who’s to say that one of them couldn’t emerge as a contender with their own network to be considered that competitive alternative? And  they would bid to have banks issue their third-party card in addition to Mastercard or Visa.

Notwithstanding a lack of understanding of how dual routing would work for credit card transactions, the flaw in Sen. Durbin’s bill is a lack of understanding of how the current credit card ecosystem works. And, more fundamentally, how platform ecosystems ignite and scale — and are monetized.

Starting with the small detail that Amex and Discover aren’t really three-party networks.

Both allow banks to issue their card products — there just hasn’t been much of an appetite for banks to do that. But Katie, bar the door now.

If passed as currently proposed, the effect on the merchant community may be the direct opposite of what Sen. Durbin and his CCCA legislation intended.

What Happened to Consumer Choice?

Although the Administration, Congress and CFPB are all very concerned with consumer choice, their voices have been surprisingly muted on this bill.

Let’s say that issuers  choose to cut into their own fee income and put a low interchange alternative on the back of their cards — basically issuing all of their cardholders a Discover card. There will be a material hit to card rewards — and that will have a noticeable effect on consumer spending and wellbeing.

It is also flawed thinking that merchants will re-allocate their interchange fee savings to consumer promotions and rewards, if past is prologue.

Research in the aftermath of the first Durbin reduction to debit interchange finds that merchants didn’t — and if they did, the savings were so insignificant as to be imperceptible to consumers. Home Depot even admitted in a 2011 earnings call that they realized a $35 million net margin increase from interchange fee savings after pledging to reallocate those savings to consumers.

However, consumers did pay more to keep their checking accounts at the banks that issued their debit cards, and to support other value-added services related to those accounts.

But these arguments are familiar and well-trodden.

One that isn’t: the CCCA, if successfully passed, would create potentially enormous confusion for the consumer at the point of sale.

It is crazier than it seems at first glance.

Wait, I Thought I Had a Mastercard from Citi?

Dual network routing for credit card transactions is a very different animal than dual network routing for debit. Debit transactions pull money out of a checking account. Processing a credit card transaction is about managing risk, extending credit and managing issuer balance sheets using a network that supports the issuer who underwrites the risk and establishes a credit line for that consumer.

That means that a consumer with a Visa or Mastercard — issued by a bank they know and trust — signed up for a card with a rewards program that suits their needs, a line of credit they know, and an interest rate on balances that they understand. When they present their card at the virtual or physical point of sale, their expectation is for those card program attributes to be honored as agreed. If there is fraud, they know who to call. If there is a dispute, they know who to call. When they get their statement, those transactions are easy to see and understand; their bills are easy to pay.

When merchants get to decide the network rail that processes the transaction, it is unclear how any of this will work.

Will the consumer have to be underwritten for credit by the alternative network? If so, will they have a different credit line and interest rate? Does the consumer have to agree to those terms for the bank to issue a card with an alternative logo on that card? What if they don’t?

Will all issuers and networks be forced to accept all consumers from the alternative network? If a consumer has a Mastercard from one issuer that chooses to add Amex as the second network, does Amex have to match interest rates and credit lines for that consumer? Can they say no?

And since this is all on a single card, when a consumer presents that credential at the virtual or physical point of sale, when will the consumer know what the implications of that transaction routing are? Did the merchant choose the card with the higher interest rate or one where the consumer was close to their credit limit and could be declined? Who is responsible if there is fraud or a false decline?

Oh, I forgot. The industry has 12 months to figure that out.

As written, the bill takes all these decisions out of the consumer’s hands to let the merchant decide what’s best for the consumer, based on what’s best for their bottom line.

It’s no different than ordering Skippy peanut butter from a grocery store online and being given a store brand for the same price because it buffs the merchant’s balance sheet.

Well, at least GenAI can help make bank call centers more efficient, since they will be flooded with calls from confused consumers if CCCA becomes the law.

Bring in the Surcharges and Friction

The CCCA is coming while merchants are using a variety of tactics to shift more of their costs of doing business onto consumers, often in sketchy ways.

Merchants can add fees to cover the cost of payments processing in all but two U.S. states now, even as many states have implemented caps on the amount charged. It is speculated that merchants will increase their use of surcharging regardless of the CCCA’s outcome.

According to PYMNTS Intelligence data, half of consumers surveyed in March of 2022 said they recall paying a surcharge to cover credit card fees. In that same survey, half of consumers who paid a fee said they would switch to a merchant that didn’t charge one — so consumers may have paid it once but were unwilling to pay it twice.

Only one in ten consumers who never paid a surcharge — or remembered doing so — said they would be willing to pay a surcharge at a merchant, which means nearly all say they would not.

At the same time, there has been a noticeable increase in tip options at the point of sale in places where the service element of the customer experience is questionable. Fast food, grocery and convenience stores have become notorious over the last several years for forcing tips on transactions for which the only “service” is ringing up the items and putting them in a bag. Processors make it easy to add a tip option on the checkout screen, so why not?

Consumers don’t like it.

More than third of consumers surveyed by PYMNTS Intelligence in October of 2023 say that the pressure to tip in these situations has gotten out of hand. Thirty percent of consumers recalled being asked to tip at retail and convenience stores, twenty percent at self-checkout. Nearly all consumers say that being asked to tip where there is no tip precedent is never acceptable, with 65% saying they will find alternatives rather than be pressured to add another 10 to 15% tax to their transaction.

Surcharging can only work if all merchants do it. The consumer’s willingness to pay weighs heavily on those decisions, which is why most merchants don’t. It seems only a matter of time before forced tipping in the absence of service will be marginalized if merchants want the pitter patter of consumer feet in their stores.

Operation Interchange Fail

It seems odd that a CFPB so focused on junk fees hasn’t expanded their definition to include one or both of these merchant-directed items.

It also seems odd that merchants seem so willing to introduce friction at the point of sale for their own benefit, particularly when consumers are more interested in their own balance sheets right now than those of the merchants they shop.

I predict that the CCCA will collapse under its own weight for some of the reasons I pointed out, and the many more that a deeper look under the hood will uncover. People in payments who know the industry, know networks and know credit know that this is an unworkable idea.

Just as Borneo discovered around the same time that the four-party model was introduced in the U.S., what may look good at the time creates years of chaos that can be hard to recover from. As I write this, the CCCA legislation has not been reintroduced. With any luck, it stays that way.

The post Why the Credit Card Competition Act Won’t Lower Merchant Interchange Fees appeared first on PYMNTS.com.

Football mythology says the winner of the coin toss has an edge in deciding field and receiving preferences, and so more likely to walk away with the Lombardi Trophy. Data would disagree. Of the last 58 Super Bowls, only 27 times did a team win both the coin toss and the NFL Championship.

More than half of the time, to the other side of the coin went the Super Bowl victory, so to speak.

That brings me to grocery shopping, payments and BNPL, where the other side of the coin is an oft-overlooked part of the narrative.

BNPL’s Other Side of the Grocery Payments Coin

The other side of the coin is an idiom originally adapted by W.B. Yeats in 1904 from a 500-year-old military phrase describing the opposite side of the metal badges worn on their uniforms. Today, the “other side of the coin” is shorthand for the opposite side of an issue, topic of conversation or outcome.

It is also a fitting way to frame the conversation about how consumers pay for groceries, and in particular, how they use Buy Now, Pay Later programs when doing that.

Critics, including regulators, decry the consumer’s use of Pay-in-Three or -Four plans for grocery shopping. Letting consumers buy food on credit exploits a desperate consumer just to create sales, they say. A consumer who uses credit to buy food, they add, suggests a financially constrained consumer at risk of creating a cascading cycle of debt for consumables.

But what if I told you that nearly a third, 31%, of all U.S. consumers used a traditional credit card to make their latest grocery purchase — including those who used a digital wallet with a credit card registered as their primary funding source? And that share of consumers has remained almost constant since December 2021?

Or that higher-income consumers — those earning over $100,000 a year — were 26% more likely to have used a credit card installment plan than lower-income consumers who used a BNPL provider to buy food?

And that only 5.4% of low-income consumers and 6.5% of the population overall used a Buy Now, Pay Later product from a FinTech to pay for groceries in the past year?

In other words, roughly 95% of consumers only paid for their groceries using debit cards, credits cards or cash.

That would make the other side of the coin in the grocery payments conversation something like this:

Four and a half times as many consumers used a credit card in their most recent grocery transaction as the number of consumers who used a BNPL program over the entire year to put food on the table at home.

Many credit card users take longer than 30 days to pay off their debt and must pay interest. Fed Data finds that 45% of credit card accountholders revolve their balances — balances that might include grocery purchases. BNPL consumers pay for those purchases in three or four installments usually within a four to six week window, sometimes  before a consumer using a credit card gets their monthly statement.

When the data does the talking, it’s not clear that consumers using this alternative credit product are any different, or using it any differently, than any other consumer who uses a credit card to pay for the groceries in their basket at checkout.

The Devil in the Grocery Data

Consumers have probably been using credit cards to pay for groceries for as long as there have been credit cards and acceptance of those cards at grocery stores. We just never talked about it because there was never any reason to make it a topic of conversation.

The line of credit that consumers are given by their issuer lets them purchase whatever they want with it as long as those purchases are in compliance with card network rules. That means that everything from groceries to games to green shirts to  gardening supplies and that special trip to the Grenadines can be purchased using credit cards, provided there is an available credit line.

The ability to earn rewards on purchases made on credit cards is an incentive to use them, with 67 percent of consumers citing rewards as a reason to use those cards for grocery purchases, according to PYMNTS Intelligence. That rises to 80% for consumers not living paycheck to paycheck. Part of the appeal of using credit card installment options to pay for any purchase, including food to be eaten at home, is the ability to rack up rewards or cash back for those purchases, with the added value of spreading out payments over time.

Eighty percent of consumers who used any type of installment to make grocery purchases report doing so as a convenient way to manage their monthly spend and pay bills. Consolidating everyday spending on a single card for one payment at the end of the month makes it easier for consumers to track, pay and finance, as necessary, while simultaneously earning rewards on those purchases.

Another incentive, consumers say, is the ability to use someone else’s money for free for thirty days — 47% of consumers who use any type of credit when buying groceries cite that as a reason they do. That’s true for consumers who say they live paycheck to paycheck and those who say they do not.

Consumers who use BNPL get the benefit of spreading grocery payments over three or four installments over a similar four to six week  period. Getting the use of the BNPL provider’s money, for free, over that period is enough of a reward for many consumers.

Especially when everyone across every income level feels the persistent pinch of food inflation.

Groceries Paid for Over Time

Even though the monthly rate of inflation has declined dramatically over the last 12 months to roughly 3.1%, overall prices have increased by 18% since January 2021. According to the latest CPI data, the cost of food is 20.9% higher in 2024 than it was in 2020. That’s why the crowing about reduction in monthly CPI continues to fall on deaf consumer ears. It’s their grocery store receipts that consumers look at when they say their wages have not kept pace with inflation.

According to PYMNTS Intelligence research, consumers across all income levels report cutting back on discretionary purchases or trading down to cheaper brands because of the impact of food inflation on their monthly purchasing power.

Four times more consumers said they cut back on all non-essential spending because of the high cost of food than said they felt no impact. Four in ten consumers who report not living paycheck to paycheck said they cut back on discretionary purchases, too —18% more than said they felt no impact.

Half of consumers earning more than $100,000 said they cut back, too, and more middle income (64%) than lower income (61%) said they had less to spend on anything but the essentials. Many of the paycheck-to-paycheck consumers with issues paying bills (68%) as well as those who say they do and can pay bills (61%) report increasingly making the tradeoff to put food in their grocery shopping carts rather than buying a nice-to-have item they’d want but don’t really need.

Although BNPL for groceries is scrutinized, data reveals it as part of a broader trend of credit use for essential spending, particularly for those who feel the strongest effects of food inflation.  The distinctions between BNPL and traditional credit cards blur when considering their shared role in facilitating consumer spending amidst challenging economic times.

The Other Side of the BNPL Grocery Coin

Although the motivations driving the use of any form of credit at the grocery store may be different, the data shows that the value provided to consumers is similar. Today, there are just different credit products that consumers without access to as many credit options can use, responsibly, and pay in full over roughly the same period as a credit card user who pays their balance in full.

Many of those options have been introduced by FinTechs who have since expanded acceptance of their credit option to any merchant that accepts Visa or Mastercard. Virtual debit cards give BNPL users an opportunity to turn any qualifying purchase into a Pay-in-Three or -Four payment plan.  That is how and why splitting grocery store purchases over equal monthly installments became a popular BNPL use case.

Yet as popular as BNPL has become, the incidence rate of consumers using those products remains quite low.

PYMNTS Intelligence data finds only 15 million people, 6.5% of the U.S. population, report using BNPL to pay for groceries in the last 12 months to manage their weekly and monthly food spending.

A tiny portion of all grocery shoppers and adult consumers.

The relevant question, then, is whether there is any difference between a consumer using a BNPL product to split a $350 grocery purchase in three or four installments and a consumer who puts a $350 grocery basket from Whole Foods on a credit card to pay in full 30 days later.

The data seems to suggest that BNPL is simply a modern adaptation of credit in the evolving landscape of consumer finance.

The post Who Uses Credit to Buy Groceries? The Answer Might Surprise You appeared first on PYMNTS.com.

Companies spend billions trying to “go direct” to gather first-party data, exert more control over the customer experience and cut out the middleman fees. Investors pour tens of billions into startups with tech to make it easier for brands to open their virtual storefronts, establish a social presence, find customers and make sales without using an intermediary. And regulators and lawmakers spend lots of hours working to break up the middlemen whose aim was to make it easier for buyers and sellers to find each other and do business at scale on a single platform.

Lots of middlemen are valuable, unavoidable — we’d miss them if they were gone. But that doesn’t mean companies shouldn’t look for the right opportunities to reduce their dependence.

That was what Eli Lilly decided to do. It launched LillyDirect.com on January 4^th, 2024, to deliver an end-to-end healthcare experience for patients with one of three chronic disease states: diabetes, migraines, or obesity. Eli Lilly makes prescription medications to treat each of those medical conditions, including a new weight loss drug, Zepbound, which was approved by the FDA in November of 2023 and is an Ozempic competitor.

LillyDirect has positioned its portal as the middleman between patients with one of these three medical issues, Eli Lilly’s medications and the doctors needed to diagnose the patient and write the scripts.

Except they really can’t be. That’s probably a good thing.

Their approach provides insights into what it takes to really ignite a platform and deliver value to its stakeholders.

How LillyDirect Made History

LillyDirect’s debut made headlines as the first pharmaceutical manufacturer to sell its medications direct-to-consumer, even though the industry has been pitching ads directly to consumers since the late 1990s. It was then that the FDA relaxed its advertising restrictions, which until that time only permitted doctors to promote pharmaceutical products to their patients. In 2020, Statista reports that 75% of all TV ad spend came courtesy of the pharma industry; in 2022, the total pharmaceutical ad spend was $8.1 billion. That’s up from $550 million in 1996.

Those dollars have delivered a strong ROI for those companies. Some sources say that for every $1 in ad spend, pharmaceutical manufacturers have seen their sales increase by $4.20.  Whether that’s right or not, it is true that the ads lead to conversations between consumers and doctors to get necessary care, saving themselves and the healthcare industry millions and improving the patient’s quality of life.

The cornerstone of the LillyDirect strategy is to use the portal to match patients suffering from one of the three chronic diseases they list with doctors in their area for either an in person or telehealth visit. Those doctors will offer an opinion on the patient’s condition and even one of Eli Lilly’s drugs for their condition if medication is required. The platform also allows patients with an existing script for an Eli Lilly medication to order directly from their digital pharmacy, cutting out the traditional retail pharmacist.

But the real impetus for the launch of LillyDirect seems to be their desire to catch a piece of the $150 billion weight-loss drug market fueled by the unprecedented success of Ozempic and Wegovy. These two Novo-Nordisk weight-loss blockbusters are said to account for 52% of Novo-Nordisk’s sales thru Q3 2023, $4.8 billion in Q3 alone.  And although Eli Lily and Novo-Nordisk both produce insulin drugs for the treatment of diabetes, Novo has twice as much market share in that category.

Eli Lily’s Zepbound is available to patients on the LillyDirect platform — provided they have a prescription from a doctor to get it. Visitors to the portal must complete an online weight-loss assessment before being directed to a list of doctors in their area who will make an independent assessment of their condition. Patients who are given a prescription for Zepbound can fill it and refill it there and have it shipped to their homes.

Therein lies the catch — and the friction. And friction, we know, is what platforms must eliminate, not create.

The Doctor in the Middle

Doctors are the most important healthcare middlemen — and the lynchpin for any disruptive healthcare play. Without a doctor there is no diagnosis. Without a diagnosis there is no course of action for a patient, and no prescription medication if needed. Without a prescription there is no opportunity to prescribe Eli Lilly’s or any other pharma manufacturer’s medication to the patient.

Regulations forbid pharma manufacturers from giving doctors incentives to prescribe their drugs — and that’s healthy, pardon the pun. It’s also a point that LillyDirect reinforces on their site. Doctors are trusted by their patients to be the independent caretakers of their physical and mental health and, as the Hippocratic Oath says, first, do no harm.  Second, don’t prescribe unnecessary medication. Third, don’t take payments from Big Pharma in exchange for writing scripts.

The LillyDirect portal offers links to partners and platforms that aggregate doctors for both virtual and in person consultations.

They’ve partnered with telehealth providers (Cove for migraines, for example) and Healthgrades, which is a yellow-pages directory of doctors founded in 1998 that filters providers near to where a patient lives. Site visitors are taken off the LillyDirect site to those platforms. There, would-be patients must still vet providers and get in touch to make appointments to be treated.

When I poked around the site, I discovered a dog’s breakfast list of providers, some 399 doctors near me when I did a hypothetical search for migraine specialists. I found many who didn’t seem relevant (e.g., ophthalmologists) and many who had no ratings, pictures or notes were taking new patients. I suppose these directories could be helpful for some, but it didn’t seem any better (in fact, a lot worse) than doing a ZocDoc search or using a telehealth platform, including those offered by employer plans, to find a doctor.

Finding a doctor isn’t the hard part, though. Getting an appointment is friction. Telehealth can solve some of those issues by providing more flexible options for seeing a healthcare practitioner, particularly for those consumers living in underserved communities or more rural parts of the country. For the medical conditions that LillyDirect addresses, it’s hard to see how making a conclusive diagnosis without seeing a patient and getting diagnostic tests is possible — or desirable.

Connecting patients with doctors directly isn’t something that LillyDirect can do. It also isn’t how the LillyDirect.com portal will make its money.

The Online Pharmacist is Ready to Refill

LillyDirect says that it can offer better pricing to patients with a prescription for one of their medications. That could be a big benefit — if, in fact, their pricing is more competitive than other online alternatives. It should be, particularly for the drugs that may not be covered by insurance like Zepbound, and where they say payments plans may be available to qualifying patients.

This makes LillyDirect.com more about disrupting the retail pharmacy channel for patients with existing scripts — which is a red ocean — than changing the nature of healthcare delivery.

Unless, of course, the LillyDirect strategy is about using the popularity of GLP-1 weight loss drugs to drive consumers to their site to fill a prescription given to them by a doctor who has prescribed it.

That assumes that consumers know Zepbound as a name brand, that their doctor feels comfortable prescribing it, that they are directed to LillyDirect somehow to get it filled and refilled, and Eli Lilly is the name brand pharma company behind it all.

You know what they say about assumptions.

What’s In a Name Brand?

Taylor Swift is a global brand even though most people don’t have a clue who produces her music. James Patterson is a best-selling author even though most people don’t know or care who publishes the books he writes. The Martin Scorsese film Killers of the Flower Moon raked in several Golden Globes awards a few weeks back even though most people can’t name the movie studio that released Scorsese’s latest masterpiece.

The answers, in case you’re curious, are Big Machine Records, Hachette and Paramount.

Pfizer and Moderna became household names during the pandemic as the manufacturers of the Covid Vaccines, even though most people would be hard-pressed to name the companies who make the flu shots that went into their arms this past flu season.

Patients may know name brands of the drugs they take regularly because they refill them at the pharmacy — Lipitor for high cholesterol, Eliquis for AFib — but have no idea who makes them. Even those who take Ozempic and Wegovy may not make the connection between the brand name of the drug and Novo Nordisk, the pharmaceutical company that manufactures them. Pharmaceutical companies have chosen not to throw their ad dollars at promoting their brand names, but at the names of the drugs they hope consumers will ask their doctors about.

Eli Lilly wants to use LillyDirect to turn its brand into a household name — and more specifically wants to use Zepbound as the stalking horse to achieve that. The hope is that Zepbound is to Eli Lilly what Taylor Swift is to Big Machine Records  — the big hit that elevates their branded weight-loss product, and that of the company that manufacturers it, beyond the Pharmacy Benefit Managers, doctors and pharmacists who know it today.

That’s a big lift, even though the popularity of the weight-loss category is a tailwind.

Some consumer brands — Weight Watchers that bought Sequence and now offers Ozempic by subscription, online weight-loss sites like Ro and Noom that have added Ozempic and Wegovy to their offerings — have existing members as a starting point to sell into. LillyDirect is a cold-start platform that requires their key stakeholders — doctors and patients and insurers over which they have no control nor a direct relationship — to find value and get on board.

Maybe we will see a few Super Bowl ads.

What’s Next

Innovating how patients with chronic diseases and doctors find each other to improve the delivery of care is the essence of the connected healthcare ecosystem we see unfolding today. It is a tremendous opportunity for new players and incumbents to use connected devices, AI, technology and payments to disrupt market dynamics and reallocate profit pools.  It’s one of the five foundational principles of digital transformation that I’ve been writing about for the last several years.

But I wonder if Eli Lily is the right player to advance that opportunity. Or whether its best shot is as a platform that connects someone else’s with a critical mass of doctors or patients to overcome the platform and regulatory impediments that will make ignition a slog.

I suppose LillyDirect could become an ad supported, AI-driven, souped-up version of WebMD for specific disease states with the addition of content and advertising — but that sure seems like an expensive consolation prize based on the current hype and expectations. Maybe that’s the best they can do given the current regulatory environment, especially since there is also no guarantee that the doctors that patients find using their portal will prescribe their medications. Or that patients will want to manage their medications across different online channels.

But I also wonder whether LillyDirect is one of those ideas that looks really great in a deck. You can just see the slide showing how LillyDirect gets all the sides on board and is just like Visa or Amazon or some other successful platform. When the reality is that it can’t deliver enough value to its customers to get the virtuous circle going.

The post Can Eli Lilly With LillyDirect Change the Delivery of Healthcare? appeared first on PYMNTS.com.

• One: Companies monetize certainty as businesses and consumers prize predictability.
• Two: Shopping shifts from buying to editing as replenishment models change retail dynamics.
• Three: GenAI becomes a feature, and everything has a conversational front end.
• Four: Platforms gain power as point solutions seek distribution, businesses say no to “another” integration and consumers crave curation.
• Five: Investors and executives get back to basics as “that vision thing” takes a back seat.
• Six: Money mobility powers new ecosystems and disrupts payment network economics.
• Seven: AI-native startups marginalize the role of incumbents.
• Eight: Brands date GenZ, but they marry boomers.
• So What and What’s Next?

2024 is going to be my best year ever. I know that for sure because that’s what an online astrologist told me. My biggest creative and intellectual bets will pay off, I’m told — and so much so that I can anticipate a promotion and substantial (I added the bold for emphasis) salary boost. Wowee! March, May and August are the three months in which my professional achievements will rev into high gear, provided I pay attention to my health. Noted. Red is my lucky color and nine my lucky number.

For me and my many fellow Scorpios in 2024.

‘Tis the season for astrologers to cast their eyes to the skies and forecast what’s in store for every person based on their Zodiac sign. Nearly 30% of people in the U.S. believe in the power of astrology to predict their future, nearly 40% of people under the age of 30 do, and a quarter are on the fence. Whether the predictions sound good probably has a lot to do with who counts themselves as believers.

The most famous astrologer is Nostradamus, who celebrated his 520^th birthday last December. More than five centuries later, the 942 passages in his book Les Prophéties, are studied by scholars, historians, journalists and modern-day pundits to see if, in fact, his powers to predict the future, well into the future, are as claimed. One of Nostradamus’ most famously accurate predictions is that he would die the day before he did. Whether he was a prophet or just someone who knew he was really sick and his time on Earth was coming to an abrupt end is a secret he took to his grave.

Many believe that Nostradamus’ 942 writings, just like those of my online astrologer, are sufficiently vague so they only seem prescient when things coincidentally come true. It’s not a bad strategy when it comes to predictions. British economist John Maynard Keynes was quoted as saying he’d rather be vaguely right than precisely wrong, a maxim based on using data and frameworks to forecast big trends and then monitoring the market to see how things play out.

I’ll buck the trend and spare you vague predictions for what will shape payments and the digital economy in 2024. Instead, I’ll give you eight pivotal strategies for the future — based on data, frameworks and hundreds of conversations with many of you who are reading this right now. No astrologers were consulted. Hopefully, by the end, I can count you as believers.

One: Companies monetize certainty as businesses and consumers prize predictability.

A huge source of friction for everyone is not knowing.

Not knowing whether taxicabs would show up on time to get to the airport or be available during rush hour is what helped Uber get its start and scale to become the $118 billion platform it is today.  Not knowing if the check really was in the mail or when it might arrive is what sparked the digital B2B payments revolution that’s finally chipping away at paper payments. Not knowing a company’s cash position has ignited innovations in real-time treasury. Knowing when stuff will actually show up is why 200 million consumers globally pay Amazon $139 a year for a Prime Membership to get their purchase in one or two days, with same-day now available for more and more items — and why 97% of U.S. Prime Members renew each year. Consumers pay more for streaming services without ads for the certainty that their listening or viewing pleasures won’t be interrupted by ads featuring retired football players selling reverse mortgages or term life insurance.

1.7%

When it comes to payments, getting money instantly to consumers — and particularly to businesses — is the great promise and potential of scaling instant payments. The prevailing wisdom that instant should be free, which has been the bank and FinTech mantra for years, should be and is changing. Consumers have and do pay to send money faster than snail mail checks or regular ACH — it costs more to send a wire and same-day ACH. In fact, a quarter of U.S. consumers say they’d pay as much as 1.7% to get their money right away. And when they do, their satisfaction with the business enabling that option increases by 13%.

Businesses will too, and small businesses who need the money to cover cash flow are especially willing to pay 3.3% of the amount or $67k a year as a fee to get their non-recurring revenue (aka Ad Hoc payments) from buyers instantly. Consumers will pay for small-dollar, short-term cash advances from trusted sources for the certainty of aligning bill payments with payroll when funds are tight. New customer-friendly models help platforms monetize the risk while giving consumers the necessary lifeline.

In 2024, smart companies across the digital landscape will use data to create pricing frameworks that optimize the value/certainty/time payoff.

Payors will increasingly give up on the notion that certainty — as defined by instant payments — is an automatic feature without putting a premium on paying for it and offering receivers a choice to pay or not. Clever instant payments orchestrators will find ways to monetize both sides of the transaction with new business models. Consumers and businesses can decide if and when to pay for certainty — just like they do in every other circumstance — and how much it is worth to get it.

It’s not just payments. Retailers will use AI and better inventory management to train consumers not to wait if they really want something because waiting for inventory to sell at a discount will be a fashion faux pas in 2024. Some will work with influencers to create demand, at full price, for trendy merch to monetize FOMO.  Consumers say they will pay as much as 11% more to purchase sustainable products, and retailers will get on the bandwagon.

On the other hand, things will go off the rails when businesses ask consumers to pay more when there is no value. The tipping backlash, as well as surcharges added to checkout to cover merchant processing costs, has more than half of consumers just saying no to tips — and, increasingly, to the businesses that levy tips and surcharges.

Two: Shopping shifts from buying to editing as replenishment models change retail dynamics.

In 1796, Harding Howell and Company opened its doors on Pall Mall in London. It was described in the local press as a place “where women could browse and shop, safely and decorously, away from home and from the company of men!” (Exclamation point added). Merchandise was kept behind a counter. Buyers walked up to one, inspected the merchandise and then paid the sales associate for their purchases.

Over the next 228 years, innovations in store layouts and merchandising put products in the hands of customers, and operational efficiency experts figured out ways to manage checkout queues to move consumers through them more efficiently. Electronic terminals, banks, payments processors and card networks replaced cash and checks with cards at the checkout counter. More recently, contactless cards and digital wallets have made paying at the checkout faster.

But 228 years later, when consumers actually march into the store to make a retail purchase and pick out the items they want to buy, they still wait in some sort of line or walk up to some sort of counter to “check out.”  As you know, fewer and fewer consumers did this in 2023 and over the last three years. According to PYMNTS Intelligence, only 63% of consumers made their last retail purchase in a physical store, and 80% made their last grocery purchase in one.

2024 will be the year that brick-and-mortar retailers will be forced to think beyond incremental improvements in in-store checkout and begin using their physical footprint to support the shopping journey that consumers want. And not because busy consumers use digital channels more often, but because consumers have embraced new digital buying options that keep them away from the store entirely.

At immediate risk is the $18 billion in monthly spend across all U.S. consumers on essential products like groceries, pet food, like health and beauty supplies, garden supplies, and other odds and ends that consumers use as part of their regular routines. “Stocking up” is now the domain of the replenishment economy — and the items consumers add to those stocking-up lists are expanding.

The replenishment economy turns the notion of shopping into editing (if need be) an already curated list of items that are frequently purchased at a specific interval. PYMNTS Intelligence data finds that more than 30% of retail subscribers and 20% of all consumers say that most or all their personal products are bought using auto-fill methods. Forty percent say that auto-refill has reduced their need to go to the store and 70% say they’d like to do more so that they skip the store entirely for those purchases.

Today, replenishment is done across a variety of direct-to-consumer sites, retailers who want in on the recurring sales opportunity for relevant SKUs, and Amazon Subscribe & Save, a service that now counts 18.5 million U.S. consumers as customers.

But it won’t stop there.

Savvy retail innovators will tap into the consumer’s appetite for auto-refill and get creative. Instacart could send consumers an email with their shopping carts filled with all the items they usually buy every week so that all they need to do is add or subtract. Grocery stores get the sales but not the foot traffic. Instacart’s advertising network could influence brand preference for what goes in the cart.

Specialty retailers could send an email every month to loyal customers based on purchase history with ideas for adding a few things here and there to complement what was previously bought and reminders to stock up on fresh white shirts for the summer. Or Nike could set up an auto replenishment that ships my Nike Alphafly 2 running shoes six times a year instead of me forgetting only to discover my size is sold out.

Seems like such a no-brainer.

Or Amazon can do all of that instead.  Amazon’s 2013 anticipatory shipping patent — packaging and shipping items before consumers order them — was clearly devised with the replenishment economy in mind, using data from the hundreds of millions of consumers who order products from them every year to refine it.

Retailers think they’ve checked the digital and digital transformation box because they’ve “gone online” and embraced omnichannel. Yet for many, omnichannel is code for getting consumers into their stores after picking out something online. Thinking store-first cost retailers dearly when the world moved online in the mid-2010s, and today they are paying the price. According to PYMNTS Intelligence, Amazon accounts for 8.3% of all retail sales and 53% of online sales.

2024 should be the year that retailers think and execute customer-first by closing the book on 228 years of store-first traditional thinking — before consumers close their wallets on them.

Three: GenAI becomes a feature, and everything has a conversational front end.

Once upon a time, GPS was a separate gadget that consumers bought and stuck on their windshields to help with navigation — until it became a standard feature in 2007. It wasn’t until 1969 that more than half of all cars on the road in the U.S. came equipped with air conditioning — before that, it was an expensive option available mostly in luxury cars. Wi-Fi wasn’t integrated into consumer devices until Apple did it for the first time in 1999. Many software upgrades came as an a la carte option at a price. Alexa started out as a disembodied voice inside of a tall round cylinder in 2014 before an SDK made it possible to be embedded in third-party connected devices a year later.

Consumer demand, government regulation, competitive dynamics and improvements in technology made embedding these once-separate features — and many more like them — into products cost-effective and made the quality of those features better.

GenAI and GPT-esque apps are now mostly accessed through a separate site, a separate log-in and a separate app on the phone. But not for long.

OpenAI has opened the GenAI floodgates and made innovations using it accessible to almost everyone. It is one of the most powerful forces for innovation that our economy has seen in the last century.

Innovators will create GenAI-powered conversational applications that fall largely into two distinct buckets: librarians and assistants. Like software, GenAI applications will become specialized and embedded, solving specific problems for specific use segments.

Librarians will make finding content and data faster, easier and — with training — more accurate. Assistants will manage complex activities and transactions against an expected outcome, including commerce. GenAI will make voice an integrated, ambient part of those experiences, creating the voice-activated conversational front ends that more than 50% of U.S. consumers told PYMNTS Intelligence in 2023 they wanted — that likely as many businesses will, too — and more than 30% of consumers said they’d pay a monthly fee to use.

30%

And it will happen quickly given the accessibility that developers will have to develop innovative use cases based on large language models that touch every person and every business.  Just like the internet and app economy, these GenAI-focused entrepreneurs and business leaders will build apps and app ecosystems to connect devices with AI-powered experiences.

As I wrote in April of 2023 before OpenAI’s Sam Altman teamed with Jony Ive to create a new GenAI-operating system and handset, we will see new GenAI-powered operating systems or new versions of iOS and Android with embedded identity and payments credentials at the core, with voice the ubiquitous access method. Innovation will happen at the application level, and innovators will compete to create novel experiences for consumers and businesses that are embedded into their existing workflows and routines.

Whether it will be one of the BigTech players that have a strong voice presence today or someone who’s working under the radar remains to be seen. I get it that Microsoft invested, but it did that only after it bagged its own efforts and doesn’t appear to have any protection from OpenAI competing with it.  That OpenAI pulled ChatGPT off was, and is, a wake-up call for BigTech.)

And  we are already staring at the future. OpenAI is launching its app store later this month (January 2024), Sam Altman and ex-Apple execs are creating an AI smartphone and operating system, and Google is releasing a version of its own GPT on its own Pixel device.

We’ve gone from research think tanks in 2015 to commercial release in 2022 to mass distribution of GenAI across many use cases in 2023. And the voice operating systems that we have been talking about since 2014 will be ignited and set to scale.

Four: Platforms gain power as point solutions seek distribution, businesses say no to “another” integration and consumers crave curation.

The average small business has 172 separate software applications to manage, middle market companies 255 and large enterprise companies about 644. That’s reported to be fewer than it was a year ago. At the same time, CIOs and HR teams say tech resources are becoming harder to hire and taking a job doesn’t necessarily mean staying in the job — the average tech worker tenure is about 2.7 years.

The last time heads were counted in startup land, there were 11,651 FinTechs in the U.S. That’s probably about 11,651-point solutions looking for a nice cozy bank or business to call as a customer home and potentially a non-humiliating exit.

When PYMNTS Intelligence talked with CFOs across a variety of industry segments about a variety of payments and digital economy innovations and asked about the biggest inhibitors to implementing new tech — including mission-critical tech like AI fraud solutions to battle financial crime — CFOs cite access to tech resources as being in the top three.

Half of PayFacs in wholesale and logistics cite workforce issues as their biggest challenge to bringing innovations to market. Twenty-nine percent of independent software vendors in multimedia and communications said the same. It’s getting harder for point solutions to break through, even if they add value, since internal resources are so scarce.

On the consumer side, the endless aisle of choice is beginning to be more friction-filled than fun. Three-quarters of Google searchers never make it past the first page — and depending on whose survey data you like better, anywhere from 50% to 36% of consumers don’t even start there. It just takes too much time to scroll, click and then scroll again.

There may be 80 apps on the average person’s mobile phone screen, but most only use eight or nine every day. PYMNTS Intelligence finds that 44% of consumers used a single store for all their groceries in the past month, while of the consumers who ordered food online, 32% ordered from the same place. There are 1.06 million retailers in the U.S., but most consumers shop for most of what they buy at fewer than 5 of them.

The flip side is that choice is valuable to consumers and businesses.

Platforms and platforms called by other names — intermediaries, aggregators, orchestrators — will become even more powerful in 2024 as consumers and businesses say “yes!” to choice but “no!” to having to figure it out on their own.

44%

Whether it is embedding payments into software to make transacting more efficient, embedding tax and compliance solutions into ERP systems or acquirer’s tech stacks, orchestrating payout options so that consumers have the ubiquity of choice and payors manage a single integration to provide it, or aggregating lenders so merchants have more credit options for their buyers and lenders more customers for their products, platforms will simplify the complexity of integrating to multiple rails and processors using APIs.

This, of course, is what platforms have been doing for millennia. Modern-day platforms have accelerated the trajectory of the digital economy over the last 30 years.

But over that same period, technology and access to capital have made it easier for point solutions to emerge, targeting sticky problems for consumers and businesses. Endless commerce and digital payments innovations have bred an explosion of direct-to-consumer brands. The problem for consumers and businesses is too much choice — and too much time required to pick through a long list of options — and then decide — and then support them.

In 2024, consumers and businesses that prize their time will prioritize efficiency and happily outsource the complexity of integrating choice and innovative new solutions to an intermediary with whom they already have a trusted relationship. They get the benefit of choice and a better experience without the hassle of doing it all themselves.

Direct-to-consumer brands, even the big ones, will increasingly embrace platforms that offer a critical mass of the right customers who can boost conversion. The big ones with brand names and their own critical mass of customers may create their own. Innovators will use tech to solve the problem of first-party data/attribution/targeting while giving these brands customer and data control.

On the B2B side, buyers and suppliers will increasingly embrace doing business online because business pressures will force a more competitive and cost-effective supply chain.

Platforms will introduce a new competitive dynamic in 2024.

This dynamic will put pressure on point solutions to be better, differentiated and a true value-add for their customers. Not every point solution or product will succeed, and we will see increasing numbers in 2024 shrivel and die as businesses turn to trusted platforms, with networks operating at scale, to offer them the best of all worlds.

Five: Investors and executives get back to basics as “that vision thing” takes a back seat.

Two thousand years ago Aristotle wrote of the unmoved mover, the concept of a foundational element that moves all other things but cannot itself be moved. The modern-day rendition of this two-millennia-old scientific thesis is the notion of first principles. Understanding the root cause of a problem or friction becomes an opportunity for disruption and innovation and is often the key to figuring out what’s best for customers and investors.

That hasn’t been the case for  many investors and companies who have spent much of the last five to ten years funding fliers that didn’t solve real problems but sounded cool: the metaverse, crypto and stablecoin as global payments alternatives, Web3, and the 250^th neobank built on top of a fragile interchange fee model with loads of customer churn. The result is billions of dollars of capital and millions of hours of executive time wasted pursing things that didn’t (and couldn’t) solve a fundamental problem for businesses and the end-customers they served.

2024 will be the year that serious players use their time, money and resources to solve real problems because they see the opportunity to leapfrog the competition and build an impenetrable moat when they do.

There are a lot of first principal problems to work through across payments and the digital economy.

Take electric vehicles. The automotive ecosystem, along with the government, is in a mild state of panic now over the consumer’s growing EV ambivalence. The Biden Administration says they’re committed to funding 500,000 EV charging stations in the U.S. (by way of comparison, there are 153,000 gas stations with multiple pumps in the U.S.). Innovators, including C-stores, are investing in strategies to make charging stations more entertaining since consumers will spend three to as much as one hundred times longer “filling the tank” when they do.

But the real problem to solve is making a better battery since more charging stations can’t solve the fact that charging is a massive time suck. Until someone can figure out how to produce a battery that can reliably deliver a 500-mile range, range anxiety will keep the mainstream consumer from jumping in. That’s not an easy or quick problem to solve. In the meantime, OEMs should shift their focus from getting people to buy EVs to getting people to buy their cars, making them smarter, safer and more fun to drive. And then their EV models, once the fundamental problem of battery life can be solved.

Then there are retailers and the returns. The $1 trillion retail return problem is a huge logistical and financial problem for retailers and a growing pain for consumers. Retailers have responded by charging for returns to make consumers think twice before sending something back and teaming with innovators to present consumers with options to get immediate store credit to keep the money inside their ecosystem. Influencers describe how things look on them and how sizes fit their shape in an effort to help consumers make better size choices. But so far none of that is making a big dent, as more commerce moves online and returns just keep piling up and retailers aren’t solving the real problem: There is no sizing standard to help consumers pick the right size.

Then there’s payments.

The G20 is pushing for faster cross-border payments, but payments providers caution that faster increases the risk of violating sanctions and escalating fraud. I guess we’ll keep being slow until someone solves the fundamental problem that is knowing the customer, with certainty, in the digital world. Of course, that becomes harder as AI solutions for detecting fraud race with AI solutions for committing fraud.

Merchants believe that consumers in the U.S. will gladly link their bank account directly to them when making a purchase so they can save the merchant interchange fees. It’s not a new idea, but it remains as challenging in 2024 as it was in 2011 when merchants formed MCX to create their own payments network. Consumers don’t think they have a problem paying today, and in fact want even more options at checkout to pay for what they buy.

The fundamental problem isn’t how much merchants pay to accept cards, it’s making sure that consumers have a reliable, secure and ubiquitous payments experience.

Six: Money mobility powers new ecosystems and disrupts payment network economics.

A little payments 101:

The history of on-us transactions is as old as check writing and banking. A depositor who walks into a bank and presents a check from the same bank can get that check cashed immediately, provided there are sufficient funds. Transaction costs are lower for the bank since the funds stay within their own closed ecosystem. The ability to manage risk is more efficient since banks see both sides of the transaction. Clearing houses clear and settle funds for intrabank transactions.

As transactions moved online, clearing and settlement networks did too. Today, card networks enable any consumer with any card from any issuing bank to present it to any merchant for payment and have the right merchant and issuing bank accounts debited and credited. Card networks monetize that service through network fees and use interchange to provide incentives.

Over the years banks and large acquiring platforms have invested to connect both the issuing and acquiring banks inside of a single platform; that can reduce transaction costs, increase bargaining power with card networks to reduce fees, manage risk more efficiently and capture better data to inform customer and business trends.

2024 will be the year that we begin to see the green shoots of what I call money mobility-powered networks — to create new on-us networks that recast the current payments economic model.

Over the last five to 10 years, money mobility networks have emerged to enable the end-to-end flow of funds between B2C or B2B payors and receivers. These networks offer multiple options for money in and money out — including branded embedded payments and finance options — to keep money inside of their ecosystem. These new branded payments options can be network-branded cards or account-to-account off-network products to monetize transactions within these new money mobility-powered ecosystems.

New business models will change the payments economics within these networks. Money mobility network operators can create incentives for consumers and businesses inside of that ecosystem to spend or store funds there for future use. Businesses and banks with large, actively engaged customer bases will model the viability of using this technology and payments-powered networks at scale to capture more of the payments economics and use data to create more value-added products. That will include monetizing third parties, who could add value for their customer inside of their networks and keep them engaged and spending.

Seven: AI-native startups marginalize the role of incumbents.

You all know the story. Jack McKelvey, part-time glassblower, was tired of losing sales because he didn’t accept cards. A call to his friend, then CEO of Twitter, Jack Dorsey, resulted in founding Square, which produced little white square dongles that turned smartphones into credit card terminals. The business model was as innovative as the technology, and a new SMB payments platform was born in 2009.

Critics said Square would never amount to much — what did Jack Dorsey know about payments, anyway — and fraud would eat Square alive. He didn’t and it did in the early days. What Jack Dorsey knew at the time was that digital payments for small and micro-merchants was broken, and technology and thinking differently could fix it. The Collison brothers and Stripe would do the same thing for mobile payments in 2011. Sam Altman and OpenAI have done the same thing for GenAI at warp speed.

All three, and many more like them, changed the sectors they entered and marginalized the incumbents hundreds of times their size who never saw it coming. And then had to spend lots of time and money catching up.

In 2024, we will begin to see how AI-native startups introduce new ways to solve old problems that marginalize incumbents, as disruptors are known to do. There are many AI-native startups already at work doing that.

VC firm Accel says that GenAI is the new unicorn breeding ground, including innovators who managed to capture about $10 billion in capital despite the 2023 VC drought. Many of those unicorns and unicorns-in-waiting are developing applications that will be embedded into existing workflows, giving consumers and businesses new conversational front ends that will change how and with whom they interact.

Although there may never be the Bank of AI, GenAI and its powerful models will give innovators, including Big Tech, the capability to realize their banking and everyday app ambitions.  A voice-activated and conversational front end will simplify the many banking, investments and payments transactions that today may require multiple accounts, multiple steps and even multiple banks. There will still be a bank — but the interface, the front end, won’t be the consumer’s primary bank. How banking services are delivered and by whom is ripe for disruption.

There might never be the Hospital of AI, but AI-native innovators are already changing the delivery of healthcare. Device manufacturers will continue to miniaturize diagnostic devices to outsource healthcare monitoring to the patient and an app. Remote access to specialists with AI-powered diagnostic tools democratizes patient outcomes and accelerates time to treatment as needed. The role of traditional healthcare providers is marginalized at the same time patient outcomes are improved.  There will always be doctors, but how healthcare is delivered and by whom is ripe for disruption.

There might never be the University of AI, but AI-native innovators are creating new ways to personalize curricula to students, and new conversational front ends to automate and assist with students who need help learning outside of the classroom.  There will always be teachers, but an AI-powered educational ecosystem will disrupt incumbents by creating new ways for students and content to engage.

The Car of AI is squarely within reach. Even though self-driving technologies are regarded by 45% of Americans as unsafe, the technology is improving, and OEMs are integrating it into car operating systems. It is entirely possible that AI-native innovators will perfect the technology and use it to power a driverless car platform to compete with Uber and DoorDash. Maybe even solving the pain of EV charging with cars that drive themselves to charging stations to power up.

Eight: Brands date GenZ, but they marry boomers.

Charlie Munger died a month shy of his 100^th birthday. He left behind his 93-year-old business partner Warren Buffett, who is regarded as one of the most successful investors in history. Munger was active in business until the end. It was a real shock when we all learned of his passing.

In 2023, there were more than 89,000 people aged one hundred and older, twice as many as 20 years ago. A study done by Johns Hopkins reports that a random scan of a room full of 80-year-olds would find only 15% of them to be so frail as to be unable to do much. The rest are out and about, some more robust and energetic than others, spending money on traveling, eating out and otherwise enjoying good health.

An anecdote in one of the most interesting books that I have read recently, The Perennials, written by Wharton School professor Mauro Guillen, describes the dissolution of Brooke Astor’s $100 million estate when she died at the age of 105. The feud was scandalous and included her only heir, who was 89 at the time.

In the book, Guillen posits how advances in technology and healthcare increase longevity, shift the composition of the workforce and change how people view retirement — including the fact that many don’t retire.  He documents how this dynamic will threaten the gigantic transfer of wealth that Gen Xers and their millennial and Gen Z offspring might be expecting when their parents and grandparents pass. There might not be as much left to go around — and that transfer of wealth may happen much later in their lifetimes.

That will impact how and how much people spend, in both the short and long term. Retailers are taking note.

There are 76 million baby boomers in the U.S. and 68 million Gen Z, those between the ages of 11 and 26. Boomers control about $78 trillion in wealth across the U.S. and 80% of all of the net worth.

80%

Because they are healthier, living longer and working (even well past “retirement”) to put more disposable income in their pockets, boomers are spending machines. It is reported that boomers have an overall purchasing power of $2.6 trillion dollars and spend $548 billion a year. Seventy percent of their income is disposable. Gen Z’s spending power is $44 billion a year, and most of their income is anything but discretionary.

In 2024, marketers will continue to spend billions to get the attention of Gen Z — and entertain them on new social channels. After all, they are the future shoppers, even as it remains unclear how many of the GenZs who spend more than five hours a day on TikTok spend money with the brands they see there.

At the same time, brands will double down on how they woo their grandparents.  The demographic group buying the most cars are the 55 to 64 year olds. BCG says that middle-aged millennials outspent boomers for the first time in 2023 when booking luxury travel, but Boomers continue to drive a boatload of spend at five-star resorts — and on the clothes and jewelry needed when they get there.  Their sources of income aren’t dependent on whether they have a job or a big raise. They have more freedom to spend, and many have a different attitude about how they spend their money. They’re brand loyal and value a great experience — music to any marketer’s ear.

Of course, Gen Zs are retail’s future, but it will take time for their spending power to catch up. Meanwhile, retailers and brands looking to make their numbers this year and over the next several, would be wise to focus their dollars on the boomers who are going to be around for a lot longer, and spending a lot more of their money.

So What and What’s Next?

It is too early to tell if 2024 will be the best year ever for payments and the digital economy. But I do sense a more optimistic mood this year than last among the many business leaders with whom I have spoken. The last two years have bred a more confident, disciplined and efficient business focused on execution — a business that seems ready to to capitalize on the eight strategies I have outlined.

2024 is interesting for another reason. It is the year that will take us into the halfway mark of the decade of the 2020s. I believe it will be a year defined by innovation, brimming with excitement and energy and focused on outcomes. I can’t wait to watch it all unfold right there with you.

The post The Eight Pivotal Strategies for Payments and the Digital Economy in 2024 appeared first on PYMNTS.com.