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The hare and the tortoise

After the Edgar, Dunn & Co ‘s 5th EDC UK Cards and Payments Council in London recently, one of the participants commented that it was ‘interesting to see contrasting presentations from an industry stalwart and an innovator’. The guest presenters were Paypal and Vocalink; perhaps surprisingly, there was no consensus as to which was which.

Attendees heard how POS-payments has evolved quickly in the last 2 or 3 years. Until remarkably recently, a retailer only needed to ask the buyer at the till – ‘will you be paying by card or with cash?’  But retailing has transformed. The payment (or collection or refund) is no longer an isolated process; it is one of the increasingly few opportunities for the seller to interact directly with the buyer. In an era when one upmarket dress retailer suffers 40% returns on online sales, it is a second opportunity to close the sale.

Paypal is also evolving, from P2P payments to a fully integrated multichannel retail service. Such a strategy encompasses business requirements holistically, from pre-sale (incentives, couponing) through to fulfilment (returns management), and understanding and acting upon different customer behaviour across multiple channels. Coupling a customer’s online research with previous buying behaviour across all channels with the frequency and duration of store visits offers insight into ways to improve both buyer and seller experiences.

Paypal have gone further; by launching pilots addressing different use cases in retailing. Some have doubtful business cases; others may strike the right chord and gain adoption.  Consumers have come to expect convenience and ubiquity; they expect ‘an app for that’. Paypal clearly recognise that a payment does not exist in isolation, and have extended into the consumer/merchant interaction to deliver benefits to both parties. They have a scale, userbase and revenue that is the envy of most banks; banks seem notable by their absence in this space, which is perhaps surprising given the considerable fees they earn through interchange.

As the speakers at the event pointed out, such overlay services can only operate if the core services work well.  Vocalink is in the opposite corner of the ring. A brand name barely known outside the payment industry, it is responsible for the safe, secure processing of close to €6trillion, across over about 10 billion transactions. It has never lost a payment; indeed, since a major failure would disrupt payroll, cheque clearing, Direct Debit, BACS, Faster Payments and the UK’s ATMs, it operates to the highest technical and operational standards. Without Vocalink, Paypal, credit cards and much more wouldn’t work.

Over recent years Vocalink has been through massive technology and systems change programmes; today it is probably over-engineered for its core purpose. Which may be timely. As the audience heard, Vocalink has new ambitions, to take on more, and to deliver more. To a marketeer, its key attributes are trust, reliability, predictability; qualities on which banks are currently challenged. With banks also under assault from the increasing barrage of regulatory demands – which consume disproportionate amounts of management effort and investment capital – utilities are well placed to upshift their game.

Transaction banking is ripe for change. Many of its components – whether the current account, the payment card or correspondent banking – were born mid last century. Recent research shockingly pointed out that “the unit cost of intermediation [in financial services] has increased since the mid-1970s”. Yet recent changes in technology have been dramatic. For example, according to one of the EDC presenters, every day we create 2.5 x 10 to the power of 18 bytes of data. One industry estimate suggests that the total network bandwidth used by banks in making international credit transfers is approximately equal to downloading 10 videos a day.

Perhaps a collaborative model can unlock more value. Interchange  – the fees paid by card transaction processors to card issuers – offers a precedent. Interchange is a necessary feature of the ‘four corner model’ on which card payments are based – which only came about through collaboration.

Industry utilities are frequently considered to be repositories for the least cost way of providing a common service. But the financial services industry is unlikely to reap the economic dividend of Moore’s law, the internet or the mobile phone if it sets its goal as a better way of doing the same thing. As Paypal showed, we also need a better thing. According to Vocalink, the time is right for new revolutionaries.

So, are we now clear which is which?

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