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US interchange battle heats up

As the interchange debate heats up in the US, banks and credit card networks have seized upon a report by the Government Accountability Office (GAO) that claims a reduction in interchange fees would n...

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Interchange Battle - Superceded by Technology Innovation?

A few minutes in the lab can sometimes change the world.

Transactions are going to change. Settlement and interchange will too.

I can see how high interchange fees are more likely to encourage competitors in a market dominated by well established brands, and that lower interchange fees could theoretically discourage new entrants considering the infrastructure required may prove expensive. This is about to change. 

I don't see how US banks could use the Australian example where fees were not reduced for consumers, merely allowed to be added as a surcharge by merchants, depending on the payment instrument. Australia is not the US, in Australia there is an artificial '4 pillars' monopoly of 4 major banks, at least in the US they have the potential for a competitive marketplace.

Everything is going to change.

Why? Because it can be done - more efficiently. 

We have been experimenting with a new integrated mobile transaction + settlement system.

Bank to bank settlement time is just seconds and that's assuming the lowest common denominator in global infrastructure. 

During the system modeling process we concluded that the transaction processor could also be the settlement processor. The connections are already there in our model.

Transactions could operate over the internet or even run as a service on an existing network, or a combination of both and that fits our multi-factor multi-vector security model. Banks don't even require a connection to the merchants.

What is possible?

International credit or debit transactions to merchants and P2P payments could be performed with zero risk of personal or financial data loss, very low risk of fraud and at low cost, cleared and settled, bank to bank in just seconds.

What began as an e-commerce and authentication project has evolved into a better way to do transactions, interchange and settlement.

Everyone wins -

  • Consumers win with lower costs, faster money and no ID theft or fraud. It's multi-lingual and multi-national suitable for in-store, Internet, B2B and P2P.
  • Merchants win with lower transaction costs and reduced risk of fraud and data loss using the web or mobile for transaction processing or existing EFTPOS.
  • Banks win with reductions in counter-party risk, fraud risk, data loss, infrastructure costs, operating expenses and call centre costs. Customers can be enrolled in their millions via a TV broadcast, website or mail-out.

The new, easier and safer mobile transaction model is compelling and it is as different to current methods as snail mail is to email, and it's complete with privacy and security and lower costs for business. Mobile transactions do not need to carry legacy card infrastructure forward, it would be grossly inefficient, and legacy card transactions could be supported by the mobilisation infrastructure anyway.

It's about moving payments forward, not dragging the mobile back to 1950.

Integrated settlement

Consider the option of a new financial debit or credit instrument - manifested in the mobile and outsourced complete with all customer and merchant infrastructure, including interchange and settlement, within the integrated transaction process. 

Mobiles should really appeal to institutions which aren't burdened by legacy EFTPOS infrastructure.

What started as a solution for e-commerce has evolved into a complete transaction and settlement architecture, reducing customer risk, merchant risk, IT risk, and counter-party risk, and we didn't have to add any infrastructure.

Considering the many forward thinkers led by Chris Skinner who expound the undeniable logic and desirability of a centralised payment and clearing system, we really think we have something here. 

For you card carrying types, that's OK we can still do card transactions safer than the old way without the EFTPOS, so we can still let you use your card for a while yet(if you insist), but it will cost you more than using a mobile. Won't new merchants love it, no infrastructure and they can do card or mobile transactions (unless the credit card companies don't want to play, but I'm sure your bank can help you out instead).

Bank Branding

If any of the banks think that a single bank is going to be able to claim naming rights to the mobile transaction space - think again. Customers will be able to do transactions with their cards from your bank - just as if they were a Visa or Mastercard - debit or credit without all that credit/card infrastructure and interchange fees and with instant settlement - only they won't need to actually use or carry the card (and neither will the bank). Every transaction will reinforce your bank's brand in the minds of your customers.

We might just end up with a version of the CLS Bank for the retail transaction market, equally accessible to every bank, merchant and customer right across the globe.

Any suggestions on fees for such a service? Remember no infrastructure is required for your bank or customers or merchants.

Per transaction  - Per settlement - or all in one?  How much would it be worth to have your bank's branded (non visa/mcard) debit and credit accounts accepted by 4 billion other humans and the world's merchants, and you won't have to issue a single card? Somehow I don't think it's going to take a decade to get this revolution underway.

The Dr (on the phone to his broker to dump those Visa shares) has pronounced the card dead, it just doesn't know it's dead yet. RIP 'the credit card' 1950-2009.


Comments: (3)

A Finextra member
A Finextra member 19 May, 2008, 16:47Be the first to give this comment the thumbs up 0 likes


A CLS type model for the consumer market sounds interesting, but if we are talking about a centralised clearing system for retail foreign exchange that's suggesting that consumers are transacting their Foreign exchange, whatever the size, in some sort of a consumer marketplace.

Now that sounds like a good P2P model. A Retail currency exchange backed up by CCP!


A Finextra member
A Finextra member 20 May, 2008, 05:29Be the first to give this comment the thumbs up 0 likes

Hi Ralph,

FX P2P transactions will be part of the future of mobilisation. 

I am proposing an architecture which provides the opportunity for seamless transactions locally and internationally, irrespective of the currency or country. A consumer in Spain could travel to Germany for the day, driving, paying for tolls, fuel, food, and shopping along the way all with funds from their home bank account or home bank credit facility, simply using their mobile phone to effect the payment.

Merchants could receive instant payment, the merchant's bank and the consumer's bank would also have the opportunity for instant settlement or at the very least be able to agree to settle when convenient, ie with a daily payment via Swift etc.

Risk would be minimised, transaction costs could be significantly lower and consumers would benefit from greater convenience. Banks could extend credit to their customers in the same way as they do via credit cards, without the credit card company in between.

The security of our architecture is a world ahead of any current mobile or card based transaction system.

Whether the participating banks choose to settle immediately or later would be up to the individual banks and may vary depending on agreements in place between banks and banking groups without any effect on the core system. The settlement would depend on various factors such as currency, location,  economics and participant risk profiles. 

The architecture also provides for P2P payments, B2B payments or theoretically any type of transaction either in store, internet, withdrawal of cash at ATM's etc.

The architecture provides for unbeatable efficiency and lower costs, security and risks, than could never be achieved by any other method we have seen or imagined.

I make the assumption that if your mobile was accepted everywhere as a form of payment that you may find no need to ever have a third party credit card.

Credit cards have thrived on fear.  They have filled a role in the marketplace to theoretically reduce risk through overcoming the unknown counterparty risk. They have done this in a very flawed way and the whole system and technology used to deliver this instrument is flawed and obsolete. Lack of trust in the individual and the unknown counterparty bank risk has allowed these instruments to flourish as a man in the middle, but those days are gone. The only thing missing was a superior mechanism to the credit card, and it's time has come, we have that with mobilisation.

As for security, I note McAfee are spreading the fear about mobile based transactions  in order to supply their defective solutions on the mobile phone, undoubtedly with the same level of (un)reliability that we've seen on the internet, and many mobile transaction systems are just internet transactions by another name. I would suggest that such products will continue to be as unreliable as ever and note that McAfee's products did not detect the fake code in spoofed Paypal sites when the 'green browser' rubbish was cracked.

I agree that most mobile transaction systems are totally insecure and will lead to massive losses by the participants, but anti-virus software and such like will not provide any protection. I will watch with interest for the outcome of RBOS's mobile transaction system, and believe it is doomed to failure before it begins. The only reason we haven't seen wholesale fraud in the mobile transaction space is because penetration has not reached a level to attract hackers and there are easier pickings out there.

I point out the example of Mac's - there were very few attacks on Mac's until they recently achieved enough market penetration to make it worth while for criminals to target them. Mobile transactions may experience similar respite until they reach a threshold of around 10% of transactions. I know that some of you will point to the Japanese and say they have been doing it for a while, however cultural peculiarities (they are curiously law abiding) and language barriers are the only thing that has kept them from experiencing the sort of attacks we see on credit cards.

As for NFC, it is a ridiculous idea and is certainly doomed to failure. It might be ok for a subway ticket in a big city, but it is ridiculous to consider deployment planet wide. We see roll-outs like in Australia where the limit on NFC transactions are $30, why is the limit $30? Risk. This is a useless amount, and not enough to buy a carton of beer or a quarter tank of gas. Who has the readers? What do you do when it is compromised? Spend another $50 billion plus to roll out the successor. Get real. The standard mobile can serve for this anyway.

I suppose banks could point to the Mac example and develop a multitude of systems each with so little penetration that hackers might not notice them, but they would die out like the other early entrants in the mobile transaction space that are already dead and buried.

It's time to move on, make it easier, safer and lower risk for the bank participants, and the participants are global so proprietary local systems will be usurped by global 'open to all' solutions. The banks which choose to follow the wrong path will be out of the business within 5 years. Customers and shareholders will see to that.

It reminds me so much of the record companies in the 90's that I have to hold back the laughter, the only difference here is at least some banks are trying something, however defective their attempts may be.

The consumers will be the ones to decide in the end, and if the ones we have tested are anything to go by, I think I know what they'll choose. If any of you were around when cards came out - think back to your idea of what the 21st century would be, and I don't think we've even seen a glimpse yet.

This year is rapidly shaping up as the year of disasters, and has illustrated how interconnected we all are, and the only seamless connection which isn't in place, and arguably the most important, is money. And I don't mean Mr 2-20% in the middle (aka Visa, Mastercard, Paypal, WU, or Swift). If CLS was a good idea, then this is even better.

A Finextra member
A Finextra member 20 May, 2008, 17:30Be the first to give this comment the thumbs up 0 likes

Hi Dean,


That's all very interesting.

The part of P2P FX that interests me most is where and how the actual Fx transaction takes place, whether its $50 or $50k.

I personally believe that it is possible for an exchange to exist, and by this I mean an actual centralised auction market, specifically for consumer driven FX transactions. Where in theory consumers with different requirements can transact directly with each other on a secure, transparent exchange platform. Certain parts of this could be automated, or, the consumer can be more involved and actually post a bid or an offer.

I'm working on something like this at the moment, the exchange technoology could dovetail well with your technology? 



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This post is from a series of posts in the group:

Innovation in Financial Services

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