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Payment Rails of Yesterday Aren’t Connected to the Future

Stored value systems and closed-loop payments emerge as a solution to circumvent hefty fees and encourage deeper customer loyalty through prepaid wallets.
3/18/2024
payment on phone with woman's hands
Embracing these new rails is not just an opportunity — it's a necessity for thriving in today's digital and multifaceted commerce landscape. Payments can be a tool to deepen the affinity your most loyal customers, Goldberg writes.
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In 1958, the BankAmericard was sent to 60,000 residents of Fresno, California, marking the dawn of the general-purpose credit card. Prior to this, payment cards were either retailer-specific or purpose-specific, like the Diners Club Card. In the decades since, the hospitality industry has navigated various payment evolutions moving from cash to credit, from in-person to online transactions.

Credit card infrastructure, once a beacon of financial ingenuity, now poses challenges for owners and operators. Commerce is more dynamic today than the world in 1958, with consumers seeking the flexibility to pay how and when they want from physical, digital, and international purchases and via third-party channels. There is also greater variety in how brands engage with their customers through subscriptions, memberships, loyalty points, rewards, and refund credits. All of these realities that shape commerce today have led to hacky and stitched-together solutions. At best, it’s technical complexity for internal teams to manage. At worst, the customer experience can be negatively impacted. The legacy payment rails of yesterday are increasingly misaligned with the needs and business models of today’s hospitality brands. 

Payments Shouldn't Dictate How Commerce Works

For the hospitality industry, the adoption of digital payments, while beneficial for streamlining operations and enhancing customer experience, comes with a steep price. Merchants spend over $138 billion in fees each year, a considerable expense second only to wages. Despite being such a large expense, payments are often opaque, and solutions can feel “one size fits all.” 

There is no denying that fees can be a burdensome cost for businesses. This is particularly true for merchants with a loyal customer base engaging in frequent, low-value transactions. On a simple digital transaction such as a $4 latte, payment fees can exceed 12.5%, amounting to upwards of $90 per year per regular customer. There is an incongruence between business models for enterprises like coffee shops and the outdated payment rails they rely on — the unit economics are unsustainable. 

The right payment method for the right payment type 

Organizations are moving towards brand-affiliated payment solutions. Stored value systems and closed-loop payments emerge as a solution to circumvent hefty fees and encourage deeper customer loyalty through prepaid wallets. A closed-loop payment system refers to a payment method where transactions take place between one customer and one brand. In such a system, funds and transactions are controlled and processed by that single entity, typically offered by the merchant.

A strong example of this is the Starbucks Coffee in-app wallet, which has 23 million annual users in the U.S. The app’s balance feature not only facilitates rewards and drives customer order frequency, it also integrates mobile ordering for convenience and customer satisfaction. Starbucks exemplifies the potential for brands to revamp their payment infrastructure to improve customer experience, cultivate loyal customers, and reap financial benefits.

When it comes to integrating a solution similar to the Starbucks wallet, there are a host of advantages — especially for habitual use, low transaction merchants (or “HULT”) such as restaurants and quick-serve businesses:

  • Grow Loyalists: A wallet, especially when paired with incentives or a loyalty program, drives increased frequency and revenue. Offering a branded wallet not only encourages repeat business and brand loyalty — it unlocks the opportunity for brands to delight customers from celebrating their birthdays to personalized rewards. 
  • Richer Customer Insights: With these new payment platforms, businesses can gain a richer, more nuanced understanding of what, when, and how customers are making purchases. This data is imperative when it comes to tailoring menus, services, and marketing strategies to meet customer needs more effectively. 
  • Lower Transaction Fees: Stepping away from traditional payment rails and implementing more modern alternatives like digital wallets allows businesses to significantly reduce their cost per transaction.

In 2022, Starbucks had $1.6 billion held in customer balances — a financial reservoir that yielded a remarkable $21 million in interest for Starbucks that year. While these funds can serve as a capital float, more importantly, customer balances drive retention and frequency, in turn, boosting revenue. Starbucks’ success with its in-app payment system is no accident; it’s by design. 

For the hospitality industry and beyond, embracing these new rails is not just an opportunity — it's a necessity for thriving in today's digital and multifaceted commerce landscape. Payments can be a tool to deepen the affinity your most loyal customers have with your brand, not just a cost center. 

As we move further from the payment paradigms of nearly 70 years ago, the future of hospitality payments lies in embracing innovation. The transition from traditional payment rails to more adaptable, cost-effective, and customer-centric solutions is not just a trend but a necessity for the sector to ensure that payment methods meet the current demands of commerce and can anticipate the preferences of tomorrow's customers.

About the Author

Sophia Goldberg is the co-founder and CEO of Ansa — a digital infrastructure platform for embedded customer balances — and is the author of the best-selling “The Field Guide to Global Payments,” and self-proclaimed payments nerd. Goldberg is one of the leading product minds within the fintech payments ecosystem. Prior to founding Ansa, Goldberg spent several years at fintech payments platform Adyen, where she managed key global accounts, and worked across commercial and product roles in addition to serving on the board of PaymentEd. Earlier, she worked on Secretary Hillary Clinton’s finance team during her 2016 presidential campaign. She is fascinated by the physical mechanisms of the global economy, and lives in San Francisco with her French bulldog, Earl.

 

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