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The Payments Parallax

There are two types of retail payment systems that support the overwhelming majority of today’s retail payment transactions. These are: (1) card payment systems (2) automated clearing houses – ACH – or inter-bank funds transfer systems.

These are like two train tracks running parallel to each other. These systems are different and separate but now a select number of initiatives are underway across the globe to merge the two tracks at least for some types of payments. This will allow ACH’s to process debit transactions and alternatively card networks will be able to process bank transfers.

In many markets there are real-time gross-settlement systems that ensure bank to bank transfers / payments happen instantaneously. Others have net-settlement systems which are near-real-time and depend upon accounts being cleared multiple times a day. These real- or near-real time systems pose a threat to card payment systems because they offer features that neutralise two fundamental core advantages of card payment networks.

Payment cards (credit, debit, prepaid etc.) are good for merchants because they offer (a) guaranteed funds, and (b) immediate funds. Guaranteed funds means that merchants do not have to worry about checking the credit worthiness of complete strangers who buy from them. No bad debts either. Immediate funds eliminate cash flow problems for merchants. If they had sold something on credit to even their best customers who prefer to carry cards not cash, they would still need to wait for some time to collect the money. With real or near real time bank transfers these advantages disappear because the merchant gets the funds in their accounts instantly. And ACH transactions generally are much cheaper.

But this approach ignores customer preferences and time entrenched habits. Consumers may want to use their credit cards because they need to buy on credit or they get the necessary buyer protection that credit cards offer and ACH systems do not. Payment card transactions can be reversed or refunded. ACH payments not so.

It remains to be seen whether this convergence will happen on a major scale or if it will be limited to a segment of customers or to some products only such as debit cards. It depends how you envision the future. Whether these rails will merge or if seeing these merge in the future is just an illusion.

But one thing is certain that new players entering the payment market are not thinking of laying a “third track” – at least in the short term -  this would be a totally new payment system – like Bitcoin perhaps. They are focusing on how they can move forward using the two existing rails and develop products that provide flexible payment options for consumers who like passengers on a train just need to move forward without the need to see what rails they may be using.




Comments: (2)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 01 April, 2015, 17:41Be the first to give this comment the thumbs up 0 likes

Boku, Zong et al did attempt a third rail - carrier billing - via TELCOs. While it hasn't totally derailed, it failed to pick up steam and had to change track to the card rail, as I'd highlighted in Banks Have Nothing To Fear From TELCOs.

A Finextra member
A Finextra member 09 April, 2015, 10:55Be the first to give this comment the thumbs up 0 likes

Good post.  You are absolutely right that real-time ACH transactions pose a serious threat to debit cards worldwide.  The most immediate threat is in e-commerce and m-commerce, where using debit cards is painful for both the customer and the merchant. 

Point of sale is a harder nut to crack, but eminently achievable if existing POS technology can be re-used. 

It won't happen overnight, but I expect to see significant migration from debit cards to Faster Payments in the UK over the next few years, starting soon.

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