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DPAs will challenge traditional business models

August 14, 2013 by Terry Dooley — SVP & CIO, ITS, Inc

According to a recent Gartner report, device-based applications —  also known as digital payment advisors — that recommend the most appropriate payment product for a purchase have the potential to greatly alter the mobile payments landscape.

DPAs often encourage the use of alternate spending options, such as social currencies and loyalty points for purchases of day-to-day products and services. Helping customers use these rewards may give them more reason to complete the transaction.

In time, DPAs may effectively shift consumers away from making purchases with cards and cash. This is because, psychologically, spending money via cash or card feels different than spending loyalty points, which have been given freely by retailers or airlines.

Even so, research does not indicate that consumers will begin using DPAs for every purchase. A number of these applications will offer advice as to when their use will be most beneficial to the consumer, giving cost-conscious buyers the know-how to improve their transaction strategies. Thus, at least initially, DPAs will mostly be utilized for higher-priced transactions.

If DPA applications are to win favor with consumers, they'll need to present an unbiased front. That brand independence will not be possible if DPAs come from mainstream financial institutions or card companies.

However, a long-term opportunity may exist for FIs to gain a foothold in the management, exchange, and disbursement of loyalty points and social currencies for their customers.

DPA applications effectively cancel out some of the marketing and pricing issues today's payments market is facing by giving consumers a simple, clear indicator of the most cost-effective payment option for a specific transaction.

Additionally, by weighing certain aspects, such as potential loyalty points or cash back options, DPAs can highlight the most profitable payment application to use.

FIs should not ignore the potential impact of DPAs. Consider adapting or improving your FI's current strategies to be cognizant of the effect such advice and information will have on the payment market.

Read more about mobile banking.

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