Thought leadership from Consult Hyperion
Bitcoin may never be the best retail payments mechanism, but that doesn’t matter, because retail payments aren’t really what it is all about.
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.
The horrible truth is that payments are boring, so they are going to go away.
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.
Cheques are expensive, insecure and slow. Digitising isn’t going to help them.
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.
Will Bitcoin make it into the mainstream. I don’t think so. But something like it will, and it won’t be for currency.
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.
How much friction is there is the US retail payments system? And what should we be doing about it?
In his keynote at the Early Warning Summit 2014, David Pogue said that conference slogan should have included “reducing the friction in payments”. That’s a great slogan. So where is the “friction” in the US payment system? As far as many people are concerned (apart from the retailers who have massive lawsuits against the card schemes, naturally) it’s all tickety-boo. Sucharita Mulpuru, a Forrester Research VP, is of this mind:
We don’t fundamentally have friction in payments in the U.S. People who want to use cash are using cash for a reason: They prefer to or they don’t want to be traced. As for credit cards, there is not something fundamentally inconvenient about them. They’re fast, they’re reliable, our networks are good
[From Quote About Why E-Wallets Have All Been A Total Disaster - Business Insider]
I think this represents rather a narrow perspective. Yes, OK, there are drug dealers and corrupt politicians and tax evaders using cash, but as for the rest of us there’s nothing fundamentally inconvenient about cards? That depends on how you measure the costs and benefits, doesn’t it?
Because our payment system is broken and does not have real security in place because the credit card companies that control the system can push the costs of fraud onto retailers.
[From Broken Payment System Guarantees Another Breach Like Target - Bank Think Article - American Banker]
This may be a harsh phrasing, but it makes a valid point. Just as an engine loses energy because of friction, so the economy loses energy because of payments friction. Effort that should be spent on developing new products instead goes on papering over the cracks, effort that should be spent on helping customers gets diverted into annoying them and effort that should be going into creating fantastic new services instead goes into PCI-DSS certifications and sending out breach letters.
And so one way to think about credit card fraud, is credit card fraud is a two-to-three percent drag on the entire economy.
[From Freakonomics » Why Everybody Who Doesn’t Hate Bitcoin Loves It: Full Transcript]
I enjoy credit card fraud as much as the next man, but this is something of an exaggeration. I’m pretty sure the cost of the US payment system as a whole isn’t two or three percent of the entire economy. Credit card fraud as measured by the issuers is around seven basis points. That’s still a few billion dollars, but it’s a tiny fraction of the volume of charges running through the system.
That’s not the end of the story. To these fraud losses have to be added the cost of trying to prevent the losses due to the hello-1949 infrastructure. When you add in the costs of CNP fraud born by merchants, fraud written off as bad debt, the cost of PCI-DSS and everything else, it’s still less than one percent. But it’s still way too much and the root cause is, as Marc Andreessen points out in his piece, the system was never designed for use in the modern economy.
The US leads the world in card fraud, at least in part because it has lagged in the adoption of the EMV (Europay, MasterCard and Visa) Chip & PIN standard, and continues to use signatures for verification. One result, said Carolyn Balfany, group head for US product delivery at MasterCard Worldwide… is that the US leads in card fraud with 47% of local fraudulent transactions although it does only 23% of the transactions globally.
[From Lack of EMV means US leads the world in card fraud » Banking Technology]
I do remember, as an aside, that the question that was nagging me throughout the Money 2020 session last year on EMV migration in the USA was about the roadmap. If the payments industry, regulators and other stakeholders had some sort of roadmap for the evolution of retail payments (they don’t) so that EMV was a step rather than the goal, then what is
We’ve got a few ideas in both cases. The status quo is unsustainable.
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.
To what extent should society tolerate people using expensive and inefficient payment mechanisms when more cost-effective (to society as a whole) alternatives are readily available?
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.
A guest post from a CHYP Friend for many years, Leo van Hove, Professor of Economics at the Solvay Business School of the Vrije Universiteit Brussel, looking at the issue of costs and consumer choice in retail payments.
‘Tis the season to take stock of the past year and look ahead to the next. As far as the payments sector is concerned, picking the Technology of the Year is a no-brainer. Or perhaps 2014 will prove to be Bitcoin’s year. Time will tell.
Whatever the outcome, the Bitcoin hype has had one beneficial effect: heightened interest in the hitherto unsexy topic of payments and, in particular, in the efficiency gains that innovation might bring.
For payments in the off-line world, surely with all the QR, RFID, NFC and Bluetooth experimenting going on, a bright and wonderfully efficient future awaits us. That remains to be seen. Under the hood, many of the new mobile payments initiatives look decidedly un-novel. Worse, in the current setting there is no guarantee that the payment instrument with the lowest social cost will prevail.
Take PayPal’s Check-in. In order to be able to use it, you need to download the app to your smartphone and upload a selfie. Once you have the app ready and fired up, you can check-in to a store that accepts PayPal by selecting it from a list and swiping a button from left to right. As soon as you enter the store, your name and picture then appear on whatever touchscreen the shop uses as a point-of-sale system. When you reach the cash register, you simply say you would like to pay with PayPal and the cashier clicks on your photo. The receipt is sent via e-mail. You also get a notification on your phone but during the payment there is no need to pull it out – or perform any other manual operation.
Fascinating stuff, you say? Indeed. Will I give it a try if and when it reaches my favourite shops? Absolutely. But because my PayPal account is linked to my credit card, as is the case with most PayPal users, my seemingly state-of-the-art payment will, behind the scenes, actually be a run-of-the-mill credit card payment – with all the costs that entails.
Indeed, PayPal basically piggybacks on the existing credit card back-ends and has simply added a new front-end: my phone and picture replace my card as the authentication device. The problem is that a longer payments chain, with an extra intermediary, translates into higher social costs – and higher merchant fees.
On the Internet, PayPal has clearly generated added value. It has made it possible for mom-and-pop businesses to accept electronic payments. But in the off-line world, do we, as a society, really want to displace, say, existing debit card payments with more expensive payments of the kind just described?
The problem is obviously not limited to PayPal. The bank-driven scan-to-pay or tap-to-pay solutions are, for example, not necessarily faster than ordinary cards. Especially not if customers end up typing in a PIN or signing a receipt after all. Hence, in stores that already accept cards increased customer throughput may well be illusory. For tap-to-pay to benefit society it would need to be successful in penetrating as yet untapped sectors, and provide a cost-effective alternative to cash there.
This is not to say that m-payment technology does not hold much promise. My point is simply that one should not fall victim to ‘innovation infatuation’ and think that just because a new initiative uses the latest in technology it is by definition more efficient in all circumstances.
Now, why would a merchant in her right mind accept mobile payments if they are so costly and if the additional benefits are limited? The hip factor is part of the explanation. Also, in a competitive marketplace merchants are afraid of losing custom and will therefore tend to accommodate their customers’ preferences.
And this is where the fundamental problem lies: consumers are insufficiently steered in their payment behaviour. This is because in the payments sector pricing is pretty anomalous. Whereas both merchant and customer derive utility from a payment, in most countries only the merchant faces direct, per-transaction fees. Yes, consumers often pay annual fees, and, yes, in the end consumers as a group always foot the bill.
However, the reality is that at the check-out consumers do not worry about whether a specific payment instrument is costly for the merchant or for society; that is, unless the merchant passes on part of the cost. But most of the time consumers are not confronted with the consequences of their choices and do not realise that collectively they will, somehow, somewhere, end up paying for an inefficient payment system. In short, what is missing on the consumer side are cost-based transaction fees, as signals of underlying costs and set in such a way that the instrument that is most costly for society is also most costly for consumers.
So, will m-payment technology prove to be the game changer many pundits think it will be? Quite possibly. But in order to make sure that the future payments landscape is not only technologically advanced but also lower-cost for society, it would be best to first change the rules of the game and give consumers financial incentives to think about their choice of payment instrument. Only then will we have a fair beauty contest
.
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.
Some of what is reported about Bitcoin, even in reputable journals of record is, frankly, mad. The media is missing the most interesting aspect, which is the technology.
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.
In her 2012 book Bankrupt, Carol Realini put forward the idea of a “banking superhighway” for the US. This sort of thinking has been gaining ground although not, unfortunately, with everyone. The Federal Reserve is having a consultation about it at the moment (it’s just about to close in fact), following on from NACHA’s decision not to move forward in this area.
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.
[Dave Birch] When I was at a mobile payments event a couple of weeks ago, someone asked the usual question in the coffee break: why bother? The existing payment systems works pretty well, they said. Who cares about mobile wallets, they said. (And so do the public, incidentally!). You can see why people think like this.
“Credit, debit and cash all work pretty good in the United States,” says Gene Signorini, a vice president at Mobiquity, which designs and builds mobile applications for corporate clients. “Those payment options aren’t really broken.”
[From Are Mobile Payments Fixing Something, Or Just Hot Doggin' ? | Wired Business | Wired.com]
Gene is a smart guy, and he knows what he’s talking about it. The payment options aren’t broken. But as to whether they are pretty good or not, you have to ask: “pretty good” for who? Who does cash work pretty good for? Not for me. Last time I went to an ATM in the US I got charged $5 to draw out some money. Who do credit cards work pretty good for? Not for merchants, apparently, as they are in the process of turning down a multi-billion dollar settlement and continuing legal action against Visa and MasterCard.
A long-running legal dispute pitting Visa and MasterCard against a group of retailers over payment processing rules and fees might finally be reaching a settlement that would compel the card networks to relax some of the regulations they currently impose on merchants who accept their cards.
[From Credit Card Surcharges May Be Coming to a Retailer Near You — moneyland.time.com — Readability]
Credit cards do work for me, since I never use a debit card for anything except getting money out of an ATM. One of the reasons they work for me is all the people using debit cards are subsidising the frequent flier miles I get from my credit card — thanks guys — for no benefit of their own. Does debit work pretty good? Well, if it did surely Congress wouldn’t have found it necessary to regulate debit interchange, would they?
How to make sense of this? How should we think about what’s “good” and “bad”? You have to separate the medium from the message. There are two different issues here and they need to be discussed separately. One is the payment instrument — prepaid, credit, debit etc — and the other is the payment mechanism — paper, card, phone etc. — and the feedback loop is complex.
So, for example: I really, really want a good set of mobile payment options because I always have my phone with me but I don’t always have my wallet with me. This leads to one set of potential outcomes that centre on taking the existing plastic card products and shoehorning them into the mobile phone.
But there’s another, more general path. Suppose mobile doesn’t replace cards payments. Suppose it replaces other payments. Cash, obviously, but there are electronic options that may be open for disruption. Consider another commonly-used payment mechanism, the direct debit, another example of something that appears to be working well. But is it?
I like reading the problem pages in the personal finance sections of newspapers because they give a useful window into practical issues. Can we find any guidance there? Well, yes. In the Daily Mail (23rd October 2013, page 48) is just such a useful sidelight. One of the letters concerns an SME account (for a charity) that keeps losing small amounts to direct debits. Each time it happens, they complain to the bank, and the bank (acting entirely correctly under the terms of the direct debit scheme) refunds the money. The customer is protected, yet everyone’s time and money is wasted (and not accounted for). The root of the problem, as noted in the response to the letter, is that it is too easy to set up a direct debit and no way to approve them individually. Of course, it’s not only criminals and idiots who fill out the wrong numbers who can loot your bank account using this mechanism, it’s also companies with legitimate mandates who, for one reason or another, take money and infuriate customers. Here’s just such a typical member of the public (well, actually, a typical sister of the Mayor of London and fully-paid up one-percenter, I should clarify, which is why her whinge is in the national press in the first place):
What makes this so easy and legal for companies, and maddening and opaque for consumers, is partly the direct debit system. In theory, it should make life easier – about six billion automated payments, worth £4.3 trillion, are made in the UK per year.
[From RACHEL JOHNSON: We've been mugged - and they did it by direct debit! | Mail Online]
Once you have set up a direct debit mandate, the money can be taken from your bank account without you knowing anything about it. I remembered seeing another news item about direct debits in the same newspaper a few months ago. A quick google, and sure enough….
A holidaymaker was left £27,000 in debt after mobile phone company Orange extracted £120 an hour from her account for almost a week.
I know this is just a stupid technical error, but it served to make me think about the future for the direct debit as a payment instrument in a world with laser beams, transistors and mobile phones. It seems to me that direct debits exist because of a technical limitation on the communications between the the biller, the bank and the consumer. It the olden days, before year zero (1995, when the Netscape IPO heralded the modern age), it was impossible to imagine how a biller might communicate a bill to a consumer instantly, have the consumer authorise payment instantly, and the the money transfer from the consumer’s bank account to the biller’s bank account instantly. So it made sense to set up the complex, centralised, batch process around direct debates and introduce the notions of mandates and then pass a new set of laws around them.
But now imagine that someone has invented just such a mechanism. The gas bill falls due, a message pops up on the consumer’s phone, the consumer looks at the bill, the consumer is bounced to their bank app for authentication and they then authorise the bill payment. The payment is sent by FPS directly from the customer’s bank account to the gas company’s bank account. That’s it, sorted. I think the generalised solution of pushed e-billing has wide applicability in a mobile age and might well have the potential to replace a significant fraction of existing non-cash payments in time.
What I found quite interesting is the strange obligation for non-bank payment operators to be able to offer direct debits and account services to former bank-account customers.
There is no need for direct debits, whether SEPA or otherwise, in a world that has FPS and Dwolla, smartphones and apps. Direct debits are a hack, a disco-era (my new favourite payments phrase) workaround for the days before real-time payments, the internet and mobile phones. They are, in essence, an anachronism.
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.
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