The development of digital payment advisor (DPA) applications residing on customer mobile devices such as smartphones and tablets has the potential to fundamentally change the way consumers approach their choice of payment solution for higher-value purchase transactions, according to a report from IT research firm Gartner.
The use of DPAs will also be one of the key indicators of the shift in power from banks and payment card issuers to their customers, and the report projected that eventually, the impact of DPAs may stretch far beyond the immediate constraints of the payment market.
"By encouraging the use of alternate currencies—loyalty points and social currencies — for purchases of day-to-day products and services, DPAs may start to alter the very subtle psychological balance in place when customers make purchases using cash and payment cards," Alistair Newton, research vice president at Gartner, said in a statement. "Spending hard-earned money can feel very different to consumers, compared with spending loyalty points that may have been allocated freely by retailers or airlines. Such shifts will bring significant changes to the entire retail purchase experience and the associated payment value chain."
In addition, the use of smartphones to analyze and integrate historical transactional data with real-time location and contextual data places the power of informed decision making in the hands of customers. By offering the customer a clear indicator of the most cost-effective—or profitable, when aspects such as potential loyalty rewards or cash-back options are factored in—payment application to use for a particular transaction, digital payment advisors can cut through many of the marketing and pricing issues that plague today's payment market.
"Banks and financial services companies cannot ignore the advent of digital payment advisors," Newton said. "They must adapt their strategies to recognize the impact that the open availability of such information and advice will have on the payment market. Equally, retailers need to monitor the impact of DPAs on the purchase value chain that their customers will engage in."
However, the report did not suggest that customers would start using DPAs for every single payment application. Many of these applications will offer actionable and useful advice as to when their use will benefit the customers, meaning that DPAs will initially be used mainly for higher-value transactions.
Gartner analysts said it's unlikely that most customers will be willing to pay sustainable fees for such a service. As a result, to become economically sustainable, DPA applications will change quickly. Newton cautioned DPA applications would not initially be offered directly by mainstream banks or payment card companies, because by their nature they require brand independence to function effectively and deliver perceived independent advice to customers.
Overall, the use of DPA applications will bring greater transparency to the payment markets and drive change in the way consumers select their payment providers, especially for higher-value transactions, where the cost or benefits to the consumer may vary significantly depending on what payment solution the customer chooses to use, the report noted.