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Chris Brown

Trusek Technical

Chris Brown - Trusek

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Innovation in Financial Services

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

What will replace the card schemes?

07 July 2017  |  13179 views  |  5

 

There has been much talk recently about how card payments will replace cash altogether in the future. 

 

I have talked previously about my opinion that the card schemes (Visa, MasterCard, Amex etc) are past their sell-by date and we need an alternative. I have also discussed my vision of a future with a different type of payment network supporting instant settlement of any type of payment anywhere in the world. You could imagine that the banks and the merchants would be on board at this point: reduced fees, reduced fraud, better compliance and the end of the PCI council with its awful regulations and its massive fines. But what’s in it for the customer? Why would the end-user get on board with this when they know about cards and they’re are happy with them?

 

What would get you as a user to switch to another payment method?

 

This is clearly an important question. Apple Pay, Android Pay and Samsung Pay have been pushing their ways of making purchases by mobile phone for some years now and, according to PCM daily news, their transaction usage had reached 3% by Sept 2016. That’s down 20% on 2015!

 

I have an iPhone and an Apple watch and I have even bothered to register a card to Apple Pay. Yet I still only use Apple Pay for about 20% of my spending.

 

While it is whizzy and occasionally easier to use my watch to pay, especially if my hands are full, I don’t really have much faith that the transaction will work and I can’t use it for transactions over £30 unless the merchant has signed up to Apple Pay. That means I can’t leave my cards at home. So, instead of my life getting easier and having to carry around less stuff I now need to carry more stuff (if I want to use Apple Pay). How is that progress?

 

Clearly, then, in order to make a mobile-based payments system interesting it needs to offer something new. Some added value to the user. “Whizzy” isn’t enough and security isn’t enough either (since the banks and the merchants take the responsibility for any losses). So what would do it?

 

The answer, of course, is not to try and follow the rails set down by the card schemes but to use the new system to replace both cards and cash. My life is fundamentally improved only if I can confidently leave my wallet at home. Not only is cash grubby and constantly running out but I don’t have enough pockets for keys, phone and wallet.

 

It’s a tall order though. Cards have been trying to replace cash for decades and have only just gone over 50% in the last year or so.

 

Obviously the answer is to make it easy to sign up, easy to use, requiring no special hardware for a new merchant and then invest in some decent mass-media marketing to tell everyone about it.There is already quite a lot of pressure on small merchants to accept cards but it’s just too expensive and too hard to sign up. The POS rental and transaction fees make it uneconomic and the time to open an account and get the terminal delivered puts it all in the “future, never-never” on the to-do list.

 

To make this fly it must be possible for both the merchant and the customer to sign up, get an account and make the first transaction in less time than it takes for the customer to walk across the street to the ATM and back. 

 

That raises some KYC/AML issues that need to be dealt with:

  • The merchant needs to be told that they can do the transaction but they will not be able to draw the funds until after KYC has been completed. Money cannot be said to have been laundered until it’s in the control of the launderer.
  • The customer will, in the first instance, need to load their account using a credit/debit card. This means they have a bank account and have passed KYC with someone already. Also, their account will be limited to, for example, £100 per month and only in physical shops until they have completed KYC. This is no different than walking to an ATM and then paying in cash so there is no additional money laundering risk.

 

The objective is to get people signed up and getting value from the system before requesting long forms to be filled in and evidence of ID to be produced. Once they see the value, they will use it. Especially once they see the added value provided by the network: instant, low cost international transfers; simple, fast online payments; itemised receipt with transaction and which is accessible directly from their statement (if provided by the merchant). Parents will be happy too since transactions can be marked with a minimum age for restricted products (eg cigarettes and alcohol) making genuine child-friendly programmes a reality. 

 

The next point is that it must work on any hardware, anywhere in the world and make the best use of the handsets’ capabilities. It should use NFC if it can but seamlessly fall back to QR codes if they will work or even all the way back to SMS if that’s all that’s available. All transactions must be authorised in some way but the authorisation requirements should match the significance of the transaction. If the customer is buying an ice-cream on their own £700 iPhone that may be authorisation enough. If however they want to buy a new car it might be worth checking their biometrics and their PIN.

 

As you can see, this is all about using the hardware that’s all around us and making use of the richness of the data that can be made available if you introduce a new network to run it on.

 

So, if the technology exists, what does it take for merchants to promote this means of payment and the customer to have this as a preferred method of payment? Please let me know in the comments if you think I’ve missed something or you would like further detail on any points.

a member-uploaded image TagsCardsPayments

Comments: (8)

David Godfrey
David Godfrey - ACI Worldwide - Watford | 10 July, 2017, 07:53

Is the cost of accepting card payments really an issue for small merchants as you suggest? You can obtain plenty of mobile POS solutions (PayPal Here, iZettle, etc) for around £50 for the device and pay transaction charges of 2-2.5%. That small added cost is probably countered by the ability to sell to customers who don't have cash with them.

I'm also unclear on the benefit of your suggested alternative / replacement. You suggest customers would still need a card in order to load their wallet for purchases. This simply sounds like any of the hundreds of closed loop mobile wallets you can use for payment already.

You also have to consider everything that the card schemes give us...ubiquity of acceptance globally, dispute processes, scalability to handle tens of thousands of transactions per second, etc.

In my book, the areas that need to be focussed on are the speed of settlement (can take several days or more for the merchant to see their funds, transactions do not show on the customers statement immediately), and improved fraud prevention.

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Chris Brown
Chris Brown - Trusek - Amersham | 10 July, 2017, 09:12

Hi David, thank you for your comment. Let me try to answer each point in order:

Cost: there must be some cost disadvantage to small merchants in taking card transactions. Within 10m of the door to my office there is a cafe and a barber that cannot or will not. On Tuesdays there is a market and none of the stall-holders take plastic. Under the new scheme I have in mind all of these people would be served.

Using cards: in order to get that initial sign-up as described it would be necessary to allow people to load their account using one of their existing cards. I grant you that this is an example of continuing to use the old rails like all the myriads of others but I do not envisage people doing that for any extended duration. They have a new bank account now and it has new features and benefits over their old one. This will quickly become their current account of choice and they will deposit funds into it as would would into any other bank account.

Card scheme benefits: the card schemes have had many decades to build their networks and are the best we have available. That doesn't mean we should strive for something better when they aren't responding to the requirements of the market.

Focus areas: agreed, all of those issues need to be addressed and more besides. I have written at some length on the topic in previous blogs on this site. In this one I was very much concentrating on what we need to do to boost customer take-up of a new customer wallet since this is where everything has ground to a halt previously.

I hope that clarifies some of my thinking.

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David Godfrey
David Godfrey - ACI Worldwide - Watford | 10 July, 2017, 10:27

As to why more small merchants won't take cards...several reasons I think. A perception that it's very expensive and complicated (used to be true, but the rise of iZettle and the like have sorted that out), a perception that cash is "free"  (but you need to source change and keep a float, you can loose cash, you have to take it to be banked, your bank probably charges you for that, etc), and then the desire to keep everything under the radar / off the books by dealing cash in hand.

Other countries (Denmark for example) have almost 100% card acceptance, and in fact merchants given the ability to refuse cash as a means of payment.

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David Godfrey
David Godfrey - ACI Worldwide - Watford | 10 July, 2017, 10:36

When you say "That doesn't mean we should strive for something better when they aren't responding to the requirements of the market. ", I agree, but much of what I read and head about generally is about perceived changes that people who are very familiar with how card schemes work would like to see (e.g. the readers of pages like Finextra), or changes that merchants or other players in the payment chain would like to do to cut costs and disrupt/disintermediate the card networks.

If I think about "the man on the street", and what they would like, personally I don't hear too many people complaining about the hastle of having to carry a card with them, or the cost of making card transactions (although the need to have access to power if relying on mobile payments is a conncern). The common threads I hear are concerns about card fraud, especially when making online transactions, and the complexity of some of the authorisation mechanisms (Secure 3D for example). These should be the areas to focus on, if we are interested in serving the end customer.

 

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Chris Brown
Chris Brown - Trusek - Amersham | 10 July, 2017, 17:57

This is very much the crux of what I have been saying David.

Replacing the card scheme networks and all the other payments networks with a single new universal payments system would provide a great deal of quantifiable value to the banks and the merchants (reduced fraud, reduced settlement and reconciliation costs, better liquidity control, reduced fees, reduced fines, an end to the PCI council). None of this has any bearing on the customer however.

I am proposing a multi-facetted approach that will be good for all parties and it will clearly be a huge undertaking but sometimes you have to look at something and understand that it is broken and needs to be replaced, not just patched up. Part of that process must be to design a new user experience that is desirable and will provide the very fundamental reason for customers to learn a new system when they are perfectly happy with what they have.

The new system will include instant notification of payments, a full itemised transaction receipt, real-time payments anywhere in the world addressed by phone-number or email address... and availability of use at any merchant, however small.

The same system can be used online, with username and password, to validate the transaction and manage delivery addresses.

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 10 July, 2017, 18:54

Your alternative sounds like PayTM. It can work in underserved markets. Provided it gets humungous amount of funding and can sustain losses for several years. https://www.finextra.com/blogposting/13576/five-reasons-why-paytm-is-miles-ahead-of-its-rivals

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Chris Brown
Chris Brown - Trusek - Amersham | 11 July, 2017, 08:56

That's a great blog, thanks Ketharaman. Yes, there are elements of that, that I would like to see replicated. The frictionless onboarding, high profile user education and viral marketing are all key elements to growth of the service.

Where this differs to PayTM is the network on which it's based. One that will allow real-time payments of any type anywhere in the world, will enforce transaction security and enhance AML compliance. Because the UX I described above is connected to a bank account that has been enabled by this network, the hope is that it will entice customers to give up their cards.

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 11 July, 2017, 14:37

@ChrisBrown:

TY for your kind words.

I saw the following statement in one of your previous comments:

"Using cards: in order to get that initial sign-up as described it would be necessary to allow people to load their account using one of their existing cards."

From this, I assumed that your product does use a card for wallet topup. If so, that's how PayTM works. 

Now if you say your product will connect to a bank account, then it sounds closer to BHIM, an A2A fund transfer mobile app, that I'd referenced in my earlier blog post. (PayTM can also pull money from a linked bank account for topping up its mobile wallet but it's not an A2A product). For whatever reason, BHIM hasn't gathered much traction nor has it killed PayTM-type mobile wallets as was widely predicted during its launch a few months ago. Just in today's newspapers, there was an article where BHIM's sponsor has admitted lukewarm takeup and has appealed to the government to hike up the referral incentive from INR 10 to INR 25 to stimulate wider adoption of BHIM.

In any case, BHIM and your product sound like VocaLink's PayM in UK. Not sure why but I haven't heard much buzz around PayM during the past year.

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Co-founder and CTO of Trusek (trusek.com). Trusek is a FinTech development house with 3 products: a multi-currency core banking platform. A connections hub: for connecting FinTech service providers to...

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