PayPal, Google Wallet Contribute to Digital Payment Evolution: Forrester

Merchants have a growing set of payment options that do not adhere to the traditional interchange or processing fee model. 

Digital disruptors are at work in the payments arena, removing friction along the path to the moment of payment and creating products and services that are stirring up a transformation in the consumer payments industry, according to a report from Forrester Research.

The study noted merchants and consumers will wield their influence in picking winners and losers as the array of alternative payment options becomes more abundant, more accessible and begin to deliver greater value and ease to the commerce experience, as evidenced by MasterCard's new fee structure for “staged” digital wallet providers such as Google Wallet, PayPal and Square. Under this structure, the merchant of record and other transaction details are masked from others downstream in the transaction flow.

"As the digital wallet wars continue in 2013, leading competitors will drive adoption by integrating capabilities that remove friction and transform the payments and commerce experience in contextually relevant ways," Denée Carrington, a senior analyst with Forrester, wrote in a blog post. "2013 will be a pivotal year in consumer payments. It will be marked by an increase in digital disruption by nimble, tech-savvy competitors. Payments incumbents will leverage their market power to battle disruptors."

While the report said traditional economic models will not disappear overnight, it would be a mistake for payment incumbents to dismiss the growing number of unique pricing schemes and the disruptors who are moving aggressively to gain a foothold in a rapidly expanding, but still nascent, market.

As trends in digital payments evolve, merchants can expect to see a growing set of payment options that do not adhere to the traditional interchange or processing fee model, and as merchants adopt these new payment methods, their expectations will reset and they will expect lower costs and greater value from incumbent payment service providers.

"Disruptors are creating better, lower-cost alternative products and services that deliver more value and meet broad-based payment needs," Carrington said. "Services that enable quick and easy conversion of cash for digital payments or prepaid products with rich features and capabilities formerly reserved for traditional bank products will appeal to underserved consumers but also other segments (e.g., younger consumers) and directly compete with checking accounts and debit cards."

Mobile-payment transactions are expected to rise nearly fourfold over the next five years, exceeding $1.3 trillion, according to an August 2012 report from Juniper Research. The research company expects sales using remote purchasing and near-field communication (NFC) technologies to be the primary drivers of the growth. Encouraged by the increased engagement of the wireless carriers and increasingly widespread rollout of NFC infrastructures, by 2017 these two types of transactions are expected to account for 54 percent of the total value of the mobile payments market.