The economy, it seems, has turned on a dime in just a few weeks.
We’re facing the triple threat of inflation, rising interest rates, and the pressures on consumers grappling with high gas prices as they navigate uncertain times.
On top of that, data shows that as of January, 64% of Americans reported living paycheck to paycheck — and these numbers are on the rise.
Call it the perfect storm — and as with all storms, turbulence and bumpiness are in the mix. For consumers, the pain is real, each and every day. Because inflation is at a 40-year high and supply chains remain snarled, everything from gas to groceries takes more of wallet share than has been the case in quite some time.
All these things raise uncertainty but also are a clarion call to action for payments firms, Payroc CEO James Oberman told Karen Webster in a recent interview. But there are some nuances to consider, he cautioned.
And those nuances extend well beyond the confines of technology — modernization, contactless payments, or mobile apps. The digital shift has been in place for years, he noted, greatly accelerated by the pandemic.
The move to go all in on digital efforts through the past few years has been a bit like shifting from an acoustic guitar to an electric: Some things have been amplified — the movement from cash and check to card and especially card-not-present (CNP) transactions) — even if the song remains the same.
As for that tune: Payments providers have to truly consider where and who their customers are (i.e., merchants) and who their customers’ end customers are, where they are, and what they want.
This time is — at least a bit — different, remarked Oberman, due to the macroeconomic developments.
“This is a unique inflationary environment because it doesn’t seem like consumer demand is waning yet,” he said. Indeed, there’s some pent-up demand, but it’s not necessarily coming from the paycheck-to-paycheck consumer, which in turn means that the pent-up demand, tied to the supply chain pressures, is coming from a relative minority of individuals and families in the United States.
Just how that all plays out remains uncertain. We might in fact be in a bit of a bubble, he said, where that pent-up demand translates to spending on big-ticket items that have been more generally available in various supply chains, but are largely out of reach for paycheck-to-paycheck populations.
Ebbs and Flows
As payments volumes ebb and flow, he said, providers face the same concerns that any business faces in an inflationary environment: They need to examine their operating expenses under a microscope, to see if budgets take into account their own mounting costs of doing business. As processing volumes continue to rise, he said that payments need to evaluate their own strategic priorities.
Of that payments provider mindset, he said:
“You also have to think how this inflationary ripple effect not only affects the consumer and payments volume, but clients.” For Payroc that includes examining and anticipating the needs of acquirers and the ecosystems that support those acquirers. And that means adopting a longer-term horizon when evaluating spend, he said.
Firms must examine whether, due to their merchant bases, they have exposure to rural or urban areas (which can impact a gas station’s fortunes), and to end-consumers’ discretionary spend (high-end restaurants, for example). There have been a significant number of businesses formed through the past few years, and many of those young firms may see pressures on their own operations, which has an ultimate impact on their payments providers via attrition.
Keeping track of all this is no easy task, but while navigating the immediate challenges and looking out over a few years, there is one overarching principle to keep in sight:
Automation, automation, automation. Automating back-office functions, he said, can help payments firms that are seeing a bump in revenues, tied to processing volumes, but also to the higher dollar amounts of those transactions (goosed by inflation) even in and when volumes slip a bit.
He noted that there are several transactions where payments companies do not have as much volume today, but can get a “tremendous lift in volume” just from the spend that is not discretionary. More people will be making their rent, HOA and other payments through electronic means (and those payments are getting more expensive), which translates into top-line torque for payments firms.
Looking ahead, he said of the payments industry, “Whether this is a long storm or a short storm, we may be able to weather it much better than many other industries.”