After companies have spent years struggling to build their own payments systems, the era of Payments 3.0 has arrived. This new domain is driven by technological innovators who take a product-centric approach to creating holistic payment systems from the ground up. 

In a recent PaymentsJournal podcast, Danny Shader, CEO of PayNearMe, spoke with Christopher Miller, Lead Analyst of Emerging Payments at Javelin Strategy & Research, about the virtuous cycle of innovation that has driven the payments market forward. They looked at how payment technology will continue to evolve, focusing on enhancing user experiences, adopting artificial intelligence, and empowering every stakeholder in the ecosystem.  

At the onset of electronic payments, card networks emerged and left businesses to figure out implementations on their own. Clients had to work with multiple vendors to put together a holistic system. This was Payments 1.0. 

In Payments 2.0, vendors consolidated various technologies under one roof, allowing clients to work with a single company. However, the disparate underlying technologies often resulted in service issues, driving up costs or reducing payment acceptance rates.

Payments 3.0 is about integrating these technologies into a holistic system, eliminating cracks, and allowing consumers to move seamlessly through the payment experience. 

“The classic Payments 3.0 experience is Uber, where you don’t even realize that you’re making a payment,” said Shader. “If you think about your local utility payment, it’s probably horrific. It’s about as Payments 1.0 or Payments 2.0 as you can get.”

Miller encountered exactly that during a recent utility payment. “They would not accept a credit card, but they will accept PayPal. I can use a credit card in PayPal, so it’s clearly an experience that’s disjointed; one that they don’t have a clear vision on what the technology is that they’re using or how it fits into an overall payment strategy. There’s a gap for them as much as for me, he said.”

Payments 3.0 is technology-forward, with technology embedded in and even driving actual business processes. The word holistic is important. It’s not just technology that can be easily integrated; it supports and improves the entire payment experience. 

There’s an analogy between what’s happening with artificial intelligence now and the dot-com era, noted Shader. Back then, people talked about internet companies, and any company with a dot-com at the end of its name suddenly became more valuable. Today, nobody would describe a business as an internet company; everything is an internet company. 

“Similarly, there are AI companies today, but AI should be infused into what all tech companies provide,” said Shader. “An observation we’ve made is that we shouldn’t build AI into our own help desk. We should rely on the innovation that Zendesk will build into their product. Since we provide the payments roadmap for our clients, it’s our obligation to incorporate AI into the payment experience that we deliver for our clients.” 

What can be done with data today is very different from what will be possible with AI in the future. Consider a lender on the last Friday of the month, a peak period with many transactions happening rapidly, who wants to know how they’re doing.

First, it’s essential to have a complete data set to compare with previous periods. Additionally, it’s now possible to anonymize the data and compare it against others in the industry. This comparison can reveal whether there’s a broader trend affecting everyone or if there is an issue specific to one organization. 

“That’s the kind of advantage that we have by sitting in the middle of so many clients in the same industry and helping them manage their experiences,” said Shader. 

The greatest expense in payments comes from managing exceptions. For example, because recurring ACH is incredibly inexpensive, a biller might think every consumer should use it, but that’s not correct. If that biller increased from 0% ACH usage to 80% recurring ACH or so, their transaction costs would decrease. However, the remaining transactions might encounter issues due to insufficient funds, leading to significantly higher costs from returns and customer service calls if they tried to reach 100% ACH usage. 

Leveraging data to ensure the right customers are on ACH can help billers reduce exceptions and costs overall.

“With all the data we are exposed to across our clients we should be able to optimize the tender mix,” said Shader. “And, once we know what the right payment is for the right person, we can lead with it because we present the user interface.”

Shader divides the industry into innovators and followers. Successful innovators typically have a champion within the organization who recognizes the vision and benefits of Payments 3.0 across their organization and works across functions to make it happen. The challenge is identifying these innovators who can appreciate the advantages. Over time, the followers grow envious of the innovators and adopt their best practices. The innovation becomes mainstream.

“The followers may be tempted to believe the slides their legacy provider presents talking about how they’ll deliver Payments 3.0 experiences in the future,” Shader said. “But inevitably, those vendors fall short because they fundamentally lack the holistic systems required to deliver a 3.0 experience.”

“My advice to billers is to be careful, but don’t be afraid,” said Shader. He emphasized that payments are mission-critical, so it’s understandable that billers are afraid to take risks. Yet, if they don’t innovate, they risk being left behind.

Billers should work with a payments provider that has developed their platform with the future in mind, is reliable, and has a proven history of innovation.

As companies navigate the complexities of modern payment systems, adopting a Payments 3.0 approach not only enhances operational efficiency but also delivers better user experiences, more loyal customers, and better economics.