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A Next-Generation Digital Payments Network

 

Most people in developed countries are comfortable paying with plastic cards (i.e., debit or credit cards issued by banks); however, for the bulk of people in the world—cash is still king.  Although huge infrastructure investments have been made over decades to accept cards for payment, cash is still used for 85% of retail transactions.  This blog looks at the need for creating a next-generation digital payments network—for cash—which brings new benefits to all ecosystem stakeholders.

 

Some perspective:  The magnitude of legacy card payments

Card payment networks were initially created in the 20th century (i.e., back in the 1950’s and 1960’s) well before the advent of newer digital, Internet, and mobile technologies.  Nonetheless, plastic cards are still widely used for payments.  The Nilsen Group states there were 15.8 billion credit, debit and pre-paid cards in circulation worldwide at the end of 2013; this number was up 9.9% over 2012.

Card payment network providers, such as Visa and MasterCard, have developed well-defined rules and regulations to effectively govern all participants who use their networks.  The 840-page Visa Core Rules document and 571-page MasterCard Chargeback Guide for merchants are representative of the depth of this payment card infrastructure build-out.

 

The challenges:  Rising modern-day consumer expectations

However, these legacy card payment networks are increasingly fraught with growing challenges.  Having to issue plastic cards (with credentials printed on them) seems an outdated process—especially to millennials who have grown up with mobile and digital technologies.

Beyond the well-documented security/fraud challenges, card payment networks were designed, for example, with a fixed minimum cost for every transaction.  This trait often makes their usage cost-prohibitive for sending small amounts of money or using for in-store purchases with smaller transaction sizes of, say, less than US$5. 

These are but two examples of limitations which make legacy card payment networks seem increasingly archaic in today’s digital and mobile era.

 

The opportunity:  Migrate to digital payments network

Although a huge investment has been made in card payment infrastructure, cash is still used for 85% of all retail transactions.  There is a significant opportunity to establish a new, all-digital payments network which uses a country’s fiat currency—that is, cash—for payments.  In the Accenture report entitled “Digital Payments Transformation, they estimate the enormous magnitude of this innovation opportunity:

“Every 10% of cash payments and 10% of plastic card payments migrating to digital payments represents a total of 300 billion transactions per year globally with a combined value of US$1.3 trillion.”

Accenture has this advice for banks:  In pursuing the opportunities presented by mobile/digital payments, banks need to recognize and accept that card revenue will be cannibalized.  This is inevitable.”

McKinsey & Co., has also written about this digital payments opportunity in their report, entitled The Digital Battle that Banks Must Win.

Similar to the computing paradigm in terms of how some developing countries “skipped” PC adoption in favor using mobile phones to access the Internet, a similar phenomenon seems to be happening in payments.  Many Sub-Saharan countries have not widely adopted using plastic cards for payments (relative to more developed countries); rather, they are “skipping” cards to use newer mobile money initiatives (typically driven by Mobile Network Operators).

That said, as Quisk has written before, almost all MNO-driven mobile money initiatives are not interoperable which limit their usefulness.  What is needed is a next-generation open-loop (i.e., similar to payment cards model of acceptance) all-digital payment network designed from-the-ground-up to digitize cash (i.e., the local currencies regulated by central banks).

Ideally, this new payment network would leverage the huge infrastructure investments already made for card payment networks and enable integrated merchant-specific marketing and loyalty programs while ensuring state-of-the-art security and privacy.

 

The pay-off:  Significant benefits for all ecosystem members

A next-generation digital payments network would do for cash what Visa, MasterCard and others have done for credit.  Most importantly, it offers new value for all stakeholders.

Central Banks/Governments:

  • Greater financial inclusion
  • Opportunity for higher economic growth
  • Greater transparency to prevent the development of a shadow economy

Banks:

  • New revenues from participation in digital cash transactions
  • Strengthened customer relationships
  • Increased ROI and reduced need to open bank branches

Merchants:

  • Higher revenues and increased customer loyalty
  • Opportunity to dramatically reduce interchange fees
  • Increased ROI and business transparency

Consumers:

  • Simple to use and convenient
  • More secure than cash or plastic cards
  • Saves time and money

Yes, creating a next-generation digital payments network is certainly a very bold endeavor; however, we believe it is well worth the effort.  Let us know what you think.

 

Next generation digital payments network
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Comments: (2)

Abhishek Chatterjee
Abhishek Chatterjee - Gartner Inc. - London 13 January, 2015, 21:39Be the first to give this comment the thumbs up 0 likes

do you think US can completely skip EMV cards and move to Digital wallet infrastrcuture to same huge cost?

A Finextra member
A Finextra member 13 January, 2015, 22:26Be the first to give this comment the thumbs up 0 likes

Interesting question/potential applicability of "skip a technology generation" concept... given the significant legacy card payment infrastructure and their continued usage within the U.S., it seems unlikely.