Shades of grey

[Dave Birch] Right now there is a growing divide, particularly, in the USA I think, between those who think that NFC is the future of retail payments and those who think that it is being bypassed for a variety of reasons, not all of them technological. At the same time, there is a growing divide between those who think that the evolution of existing retail e-payment schemes is the right way forward (broadly speaking, the incumbents) and those who want a new generation of payment options that exploit new technologies (broadly speaking, everyone else, including retailers). Who is right?

Life is rarely black and white.

in other words, suppose they are all correct? To my mind, this is the most likely situation a generation from now. I think we can see a plausible set of routes through the social, business and technology roadmaps and these routes will have a couple of waypoints that are just about distinguishable now.

  1. NFC is used for payments, using the existing EMV infrastructure, but in time this becomes a niche application. Shops will have an EMV terminal just as they have a zip-zap machine now but schemes based on identity infrastructure will be the mainstream. Since NFC will be the most convenient interface for most people, it has a decent future.
  2. Decoupled debit becomes the dominant retail e-payment mechanism, taking us into the grey area of the “something present” (SP) transaction beyond the current black-and-white-again Card Present (CP) and Card Not Present (CNP) world. Just as cards replaced cheques, yet cheques still exist, so tokens (such as, obviously, mobile phones) will replace cards. Not instantly (after all, I still have a chequebook at home somewhere, even though I don’t remember where it is and only write about two cheques per annum) but in time. But the token serves only to identify you, not the payment system.

Going via these waypoints, then, we arrive at a plausible vision for retail payments: you tell the retailer who you are, the retailer ask for money, your payment provider sends it to them and then obtains the money from you via whichever mechanism has been negotiated between you. But, crucially, how you pay and how the merchant gets paid are now entirely separate. If this sounds like an extreme prediction to you, then I’d suggestion a William Gibson-style review of the unevenly-distributed innovation going on in that space right now. Take, for example, the pressure from retailers to do just this, because they want to go straight to your bank account and not bother dealing with acquirers, processors, schemes, interchange or anything else.

Fast Forward is a breakthrough new way to pay for your groceries and gas without having to carry any cash, checks or cards with you. Simply add* Fast Forward to your Safeway Club Card and you’ll be able to save and pay in one simple step at checkout.
[From Safeway - Fast Forward]

Fast Forward, I’m pretty sure, adds weight to my arguments about the centre of gravity in the payment space shifting more toward retailers. And it’s a perfect illustration of the “identity is the new money” meme. Safeway’s loyalty card and PIN combination is there to identify you. Once they know who you are, payment is easy. And I think I’m on pretty safe ground with the strategic inclination toward decoupled debit that I’ve shared here before, especially if the rampant rumours about Google’s plastic card version of the virtual debit cards in the Google wallet turn out to be true.

Still, it is hard to see the real benefit of adding a plastic card to Google Wallet.

[From Google Wallet Turning to Plastic? - PaymentsJournal]

I disagree. Merchants will be happy to accept the debit product, which will cost them a Durbin-mandated minimum amount and Google will be happy to pay the difference on the back-end card transaction because Google will know where you are and what you are buying and your card issuer won’t. The link with Durbin is complex. There were initial thoughts that the Durbin cap would render decoupled debit propositions uneconomic.

Banks, though former critics of decoupled debit, were quick to decry Tempo’s exit as the latest casualty of the Durbin Amendment. A recent article in American Banker began, “First it was free checking. Then it was spending rewards. Are decoupled-debit cards the next casualty of the Durbin amendment?”

[From Will Decoupled Debit Cards Go the Way of Rewards Checking?]

In time, though, opinion has shifted. I suspect that this is because the value of the data was underestimated in the original modelling. You can continue the thought experiment a little further along these lines. If the data really is valuable then the retailers will then do a deal with Google to get access to this data as part of the bundle of services that Google delivers to them.

Merchants may soon begin to impose a surcharge each time a customer pays with credit card, a practice Visa Inc. and MasterCard Inc. currently prohibit…. [But provision will likely go away as part of impending settlement].

The “accept all cards” rule is likely to undergo a huge change, with implications for Visa/MA earnings, new retailer led payment networks, mobile wallets, issuer loyalty programs, EMV reissue, and “new products” (ex. Instant credit, pre-paid, decoupled debit, …).

[From Retailers Discourage Credit Cards « FinVentures]

Debit is already the dominant non-cash tender at retail POS and with retailers incentivising the use of products such as Google’s (because they want access to the data) there will be real pressure on legacy schemes. And note that retailers aren’t the only people going down this route. Look at the “mpass” payment scheme that O2 has launched in Germany to see how mobile operators can deliver the SP transaction.

Customers have two options as to how to settle the amount later. Users can either have the amounts debited conveniently from their current account by direct debit, or they can top up credit via bank transfer to the mpass account which is opened on registering.

[From Telefónica uses MasterCardPayPass: contactless payment via mpass]

Incidentally, the idea of a sort-of-debit-card that chooses the means by which you pay is not new or confined to Google.

Wallaby is a cloud-based digital wallet that stores the information about all of your credit cards and automatically picks the best card to charge in each transaction, based on your preferences.

[From App Combines Credit Cards And Picks The Best One To Use For Purchases - StumbleUpon]

When I read about this I thought it was quite interesting, because we worked on a feasibility study for a similar product for a UK financial services company back in 2007. They decided not to go ahead with it for commercial reasons that were none of our business, although as far as I recall the technical architecture that we came up with was plausible. I bring this example up here because it shows again how a combination of mobile wallet and decoupling can bring into the market wildly different products, way different from the current credit and debit card products.

The transition to SP is an inevitable consequence of this trend and it seems to me that there is a growing recognition among our clients that digital identity is at the heart of the SP transaction. Which means, of course, that the organisations who to provide SP infrastructure must have an identity management strategy. This is, I think, actually quite difficult for them. As I’ve noted before, there is at least one important difference between identity strategy in the financial services sector (and the payment strategies that they have historically been party to) in that identity strategy sits inside cross-sector national and international identity management frameworks. The financial sector has to develop within these frameworks and not develop its own special-purpose or proprietary solutions. We are not far away from the first NSTIC (in the USA) or IDA (in the UK) payment scheme.

Incidentally, and with the usual IANAL caveat, it looks to me as if someone else has spotted the decoupled debit strange attractor in the currently chaotic world of mobile wallets and done something more about it than putting it in the executive summary of client reports and, later on, witless e-scribbling on blogs:

The patent is United States Patent Number 8,205,791, titled “Payment System and Methods”. The patent contains 28 claims, including various independent claims for a consumer to fund a mobile wallet via an ACH payment method for the holder of a United States checking account with a financial institution to accomplish a purchase at a retail site. Some examples of a payment token useable by consumers include a smart phone, a cellular device, and a wireless device.

[From NPCA nabs patent for decoupled debit on mobile]

I suppose this means that in the future we will generically classify these as “lawyer present” rather than “something present” transactions.

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

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.

Comments

  1. Darcy says

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  2. James Sherwin-Smith says

    Dave, thanks for retweeting, I missed this the first time round. A few (potentially naive and far-fetched) thoughts jump out at me, so would be interested to get your views. 

     “… a plausible vision for retail payments: you tell the retailer who you are, the retailer ask[s] for money…”

    I wonder whether the nature of who is initiating the payment is changing, which is a somewhat nuanced point but I think has an important impact on security, identity and the role of different players in the activity chain.

    I’d argue the predominant non cash payment method today is for *pull* payments. The retailer asks for payment, the customer selects a mutually acceptable payment instrument, provides the retailer with some form of identifying credentials (signature, PIN etc.), and the retailer then requests (pulls) funds using these credentials. This is the same whether cheque, debit/credit card, or direct debit.

    The new payment tech that’s coming though strikes me as a migration to *push* payments. The customer is releasing a quantum of digital value at transaction time to the retailer e.g. direct bank transfer, digital money from a stored value card, bitcoins etc. This for me is different for a number of reasons:

    - The receiver of the payment (merchant, acquirer etc.) is no longer responsible for identifying the customer
    - The payment institution that sends the money is now the first step in authorising a payment at transaction time (before it was an order taker at the end of the chain, now it does that at the beginning)
    - The process of moving money from A to B is much leaner, reducing time, cost and risk.

    This has important ramifications on various dimensions, but in the context of this article, this would suggest to me that 

    + the debate over CP/CNP becomes moot as the identity (and liability) challenges lie with the entity sending money, not those receiving it. Why should I have to identify myself to a retailer if the money is guaranteed? What business is it of theirs? (In your Safeway example, they have become the payment institution and therefore take liability for a push payment to themselves as the retailer.)

    + with interchange tending to zero in Europe, the debit / credit card debate also becomes a moot point to me in the retailer environment. The differential between the use of different card types will become insignificant in my mind for both retailers and customers alike. The natural progression for me is to an instrument that facilitates the transaction, and then the customer decides at or after transaction time whether to debit from funds or to take credit terms – potentially on the open market rather than tied to the payment institution.

    + identity management, rather than being more widely syndicated across the payment activity chain, becomes more concentrated at the initiation stage. (That’s not to say that we won’t see more payments institutions than fewer.)

    For me the real winners will be those that have the best architecture and security protocols for pushing payments rather than pull.

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