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Payments work fine, why are you bothering us?

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[Dave Birch] I’m always puzzled when I give a presentation about the future of secure electronic transactions and explain the pressures for change in the industry and someone puts their hand up and asks me, essentially, “why bother?”. Their line of argument is that credit and debit cards work fine so why do we need non-bank entrants, cloud-based payments or mobile wallets. I can remember seeing the same line of argument in action a few years ago when we wrote a report for a European MNO suggesting an SME and micro enterprise strategy around bundling a merchant acquiring agreement and card acceptance app with a handset and contract. “Who would want this,” was the management response, “because anyone who wants to accept cards can just go their bank already.” (Note that in the US, where there are about eight million “traditional” merchants, Square has already signed up a million customers). The fact is that the current payment system does not work perfectly, does not address all requirements and does not enable new forms of commerce. In the US, I think this problem is acute, because I’m sure that there are kids developing stuff in basements right now, stuff that would be great except that it doesn’t work with credit cards or PayPal.

Taking the failure of the US to develop a mechanism for immediate funds transfer (IFT), such as the UK’s Faster Payments scheme, as a key theme, Summers pointed out that neither the Federal Reserve Board nor prominent private sector organisations have either “the interest or the ability” to lead payment system development into the digital age.

[From Finextra: US payments system failing to meet the needs of the digital economy]

Ouch! And that’s an ex-Fed guy talking. The “old” system seems to be working, but that’s because it works for the old commerce. It works most imperfectly for the new commerce, and for some people it doesn’t work at all. In a world where social networking means that communities can spring up across the world, interact in deep and meaningful ways, stream data to each other, create value and trade it, it seems a little disappointing, to say the least, that payment systems haven’t quit kept up (although I guess the Bitcoin guys would say that they finally have!).

What was worse, however, is that she lives in a Middle Eastern country. Her business partners were scattered across the rest of the world. Co-operating online was easy between them. Paying them was next to impossible.

[From What price for a truly flexible online currency? – The Irish Times – Thu, Mar 29, 2012]

Bingo. The money of the industrial revolution is dragging back economic growth in our time just as harmfully as the clipped and debased pre-industrial coinage of Stuart England subverted the nascent industrial revolution itself. In the 17th century, the response was a new monetary order unimaginable just a generation before: a central bank, paper money, token monies and the gold standard (in less than a generation, in fact: from between 1690 and 1720). So what is going to be the response of our post-industrial revolution? What kind of money do we want to replace fiat currency, notes and cards, coins and the US dollar? What kind of institution will replace the central bank less than a generation from now? Where can we look for ideas?

The change is inexorable. New technology creates both new types of commerce and the new types of money that it needs to support it (albeit with a lag). And we already know what the key technology is. Danny mentions M-PESA in the article referred to above, and it’s certainly true that there are lessons to be learned from the new mobile-centric payment systems growing up around the world in Kenya and Korea, in the Philippines and Finland. One of the lessons might be that institutional change is inevitable. It doesn’t seem much of a coincidence to me that the really exciting stuff happening at the intersection of mobile and money has almost nothing to do with banks.

And at long last, banks have finally taken notice. While they have given companies like PayPal a decadelong head start, nearly all of the big institutions offer some sort of person-to-person service, and three of the biggest — Bank of America, Chase and Wells Fargo — have joined up to create their own back-end system for processing the money… clearXchange.

[From Why It’s So Hard to Transfer Cash to Your Friends – Your Money – NYTimes.com]

I’d be interested to hear from any of our American readers who have used this clearXchange system, which sounds great. In particular, I’d be interested to hear from people who have been using it for P2P cash substitution. There ought to be plenty of examples to look at and compare and contrast, since P2P cash substitution is Holvi an absolutely huge market and it can only be tapped though mobile.

Nearly two-thirds of Americans give money both for birthday and holiday presents at least once each year, according to a 2010 study by Aite Group, a research and advisory firm. Another quarter handed off financial support, often to a relative. All told, this adds up to 11 billion transactions and $865 billion annually.

[From Why It’s So Hard to Transfer Cash to Your Friends – Your Money – NYTimes.com]

The headline of this NYT article sums up the frustrations of a lot of people. I was talking to my son about some sort of party that he’s organising with some friends. They’re hiring a hall and having some local bands play – they’ve done this kind of thing before. The whole thing is being organised on FaceBook and he asked me why he could send money to his friends through FaceBook as well. I don’t have an answer. He doesn’t use PayPal, doesn’t have a cheque book, has a debit card but some of his friends don’t have bank accounts (and in any case he doesn’t know their account numbers). I told him to use PingIt, but he can’t install PingIt on his iPhone because it’s been jailbroken. What he wants is a stored-value account linked to his FaceBook profile, that he can load from his debit card and send money instantly to any of his FaceBook friends. Surely it’s only a matter of time.

These are hardly new thoughts, but the pressure is growing. If the US wants to maintain momentum in innovation then it needs to create a better framework for innovation in payments. One way to do this would be to follow the European lead in beginning to regulate payments separate from banking so that new players can obtain a payments licence of some kind without having to obtain a banking licence or partner with a bank. Whether it’s FaceBook or FirstData perhaps it should be non-banks who lead the charge in developing the payment systems that we want for a digital age. The kind of thing I’m talking about is, for example, Holvi. Holvi was one of the pitches that I voted for at Finovate Europe 2012.

The “bank-like” Holvi definitely deserves attention. Those behind it have created a payment institution (a PI, regulated under the Payment Services Directive, or PSD) around a sophisticated interface and a simple account for the purpose of making and receiving payments and accounting for them usefully. It looks like a no-overdraft current account, but it is really a pre-paid payment account. They are on to something. A great many people do not really want a bank account, and a great many banks do not want to carry on losing money providing them to the people who do not really want them.

[From Finovating – David Birch]

This is just one example, but there are many more. I think the development of the in-app payment world shows just how quickly an entirely new payment sector can grow when there’s a platform in place.

Amazon has been testing a new in-app payments system with several top-tier mobile developers for several months.… It’s obvious that they would do that, given their experience in online payments and commerce and need to compete with Google’s app store.

[From The Interesting Part About Amazon’s In-App Payments Beta Is That Developers Have Pricing Control | TechCrunch]

Who knows what the next sector to open up will be? Pop festivals? Social media? Retailers? It’s hard to say, but that’s what makes this such a fun business to be in at the moment.

These are personal opinions and should not be misunderstood as representing the opinions of
Consult Hyperion or any of its clients or suppliers


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One thought on “Payments work fine, why are you bothering us?”

  1. s.ketharaman@gtm360.com' Ketharaman Swaminathan says:

    Banks offer accounts, some of your son’s friends won’t have them; Bank accounts offer cheque books, but your son won’t have them. Apple offers non-jailbroken iPhones, but your son won’t have them. At the risk of sounding facetious, is there a chance that your son and / or his friends won’t have banknotes unless they (say) carry their own photos in them? I’ve no doubt that some bright startup will come up with a new payment product to cater just to such kinds of target audiences. If somebody claimed that, where GenY population is sizable, such an audience is not small, I won’t argue. However, with the amount of fees your son and his friends might be willing to pay for such an innovative payment product, the question is how long that startup will survive. Even behemoths like Nokia Money have realized that, while innovation and consumer experience are important, they won’t pay the bills by themselves.

    BTW, with a workaround or two, won’t Facebook Credits work for your son’s use case already?

    With Square, there was so much friction in the status quo, as merchants who’ve tried to get an acquiring account from their banks know. Square dispensed with the need for merchants to get their own acquiring account. It also dispensed with the need for a merchant to buy / rent costly POS equipment. Whereas, unfortunately, I don’t see any parallel between Square and your son’s use case: People have been getting cheque books and genuine iPhones for ages and there’s no friction involved in the process. (BTW, Square doesn’t work on jailbroken iPhones either).

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