All other things being equal, it seems to me that the merchants will want to move to payment solutions that go direct to the customer’s payment account. This mean incumbents have to innovate and deliver genuine value-added services to stay in the loop.

There was a discussion about decoupled debit at a meeting I was in last week. The context is not germane to this post, but I referred someone to a super piece about Target’s decoupled debit payment scheme that I’d seen in American Banker. It makes the central point that decoupled debit isn’t only about the cost to the retailer but about the overall purchasing experience, including offers and rewards. If it was only about costs, the decoupled debit proposition would be under some pressure.

Store-branded debit cards were supposed to die after price caps on swipe fees took effect in 2011, since one of its major advantages was that it allowed retailers to avoid paying the hefty interchange fees that banks were charging. Those fees have fallen sharply over the last two years. Yet Minneapolis-based Target is showing that under the right circumstances, store-branded debit cards can still work for retailers.

[From Target Card Tests Future of Store-Branded Debit - American Banker Article]

Target are not the only people who think that this is true, although in an odd way they might be a key reason for stimulating the sector, and not because of their (considerable) success in persuading customers to use the Target Red product but because of their rather famous Target data breach. Remember, when the Target data began sloshing through the interweb tubes, a clear media message was that scheme cardholders were vulnerable, but Target’s own cardholders were not.

National Payment Card Association’s merchant-branded decoupled debit cards may be part of an industry-wide solution to preventing the next Target breach.

[From 2014 - Will The Target Breach Kill Branded Debit Cards? | PYMNTS.com]

I was not joking about the success of the product, by the way. It has been incredibly successful. It’s something like 20% of the volume already in the early-adopting stores and set for further growth.

Consumers who have a Target debit card increase their spending by an average of 52%, according to a presentation the company made last year. In the second quarter of this year, sales on the debit cards surpassed sales on Target’s credit cards for the first time, according to the company..

[From Target Card Tests Future of Store-Branded Debit - American Banker Article]

Now, I suspect that this success has not gone unnoticed in a number of boardrooms, both in financial institutions and retailers.

some experts believe that store-branded debit cards will be part of the strategy employed by the Merchant Customer Exchange, or MCX, the fledgling consortium of retail chains that is looking to challenge the traditional electronic payments system.

[From Target Card Tests Future of Store-Branded Debit - American Banker Article]

The mention of MCX is interesting. Obviously there are all sorts of different models that MCX could adopt for its nascent payment scheme, but many observers focus on the direct-to-bank debit solution as the most likely nudge the mass market.

The MCX white knight, many think, is store-branded debit products, also known as decoupled debit.

[From Commentary - MCX and the Giant Payments Networks: A Payments Fairy Tale | PYMNTS.com]

I saw Dodd Roberts (from MCX) give an update on the scheme down in Melbourne recently, and he identified five drivers for MCX from the retail community.

• Customer experience.
• Consistency of solution.
• Security.
• Data.
• Flexibility.

He also talked specifically about payments as critical success factor, and about how to address (as they see it) the “payments imbalance” and the “efficiencies for issuers and merchants”, saying that  MCX are going to deliver a mobile commerce app that will deliver a better shopping experience on a secure platform that safeguards “stakeholders’ interests” and implements a “balanced, competitive payments ecosystem”.

We continue to believe the funding sources for MCX’s wallet are a combination of private-label credit, decoupled debit, and stored value (i.e., gift cards), rather than traditional (credit card) accounts… Merchants seem hopeful that the ACH system will move closer to real-time authorization, but acknowledged that scenario is likely a good 3-4 years away.

[From Retailers' Mobile Wallet Seen Delayed To 2015; Apple Boost? - Investors.com]

Now, the payment incumbents, such as Visa and MasterCard, are not stupid people — in fact they are very clever people — and they can read the newspapers just as well as me. There will be a new cost floor emerging as the merchants use mobile phones, apps and customer experience to drive consumers to choose ACH over alternatives (“Pay with your Tesco and get double points” is an easy proposition for them and the transaction is indistinguishable from a normal debit transaction tot he average consumer). Therefore, the advantages of using scheme credit and debit will have to come from value-added services that deliver something to consumers and merchants alike, otherwise they will be nudged out of the loop.

Unless… Here’s a thought experiment. What if the schemes decided to disrupt themselves? What if the schemes developed their own decoupled debit proposition that used “hard” tokenisation and the internet instead of plastic cards, chips and proprietary networks? I mean, I know Christensen is somewhat unfashionable this week, but he has point doesn’t he? They could call it super debit or turbo debit or something. Couldn’t they?

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 post Targetting decoupled debit appeared first on Tomorrow's Transactions.

The US should take a bold step forward and forget about patching up the old, creaking ACH infrastructure. Build something for the 21st century!

Tim Sloane from Mercator wrote a super piece on how the US ACH infrastructure isn’t quite up to the job of providing the real-time funds transfer infrastructure needed for a 21st-century economy.

in the best possible scenario they are more or less correct; funds will appear in the consumer’s prepaid account on some random day in the future

[From Prepaid Program Managers Take the Blame for the Problems of the ACH - PaymentsJournal]

Here in the UK, the picture is different. The new ACH, the Faster Payments Service (FPS), is working splendidly well and is already spawning new payment products (e.g., Barclays PingIt, Zapp and Paym). It’s not perfect (it would be nice to have messaging with more and structured content, for example), but it’s pretty good. Surely it can’t be that complicated for the top 10 banks in the US just to build something similar — but better, with messaging and APIs — and then open it up on the same basis as FPS: free to retail customers.

Per my blog yesterday, ACH debit tokens can work, particularly if the consumer doesn’t have to enter them. Also in ACH, banks are in a position to influence acceptance.

[From Payment Tokenization | FinVentures]

Following the Federal Reserve’s consultation process, NACHA has indeed said that it will look at delivering a more modern infrastructure for the US, but I still think (as we said in our response to the Federal Reserve consultation) that tinkering with the disco-era systems in place isn’t the best solution for the US.

The expense of making technology improvements is widely seen as a key reason that some banks opposed the 2012 proposal to modernize the automated clearing house network.

[From Nacha Revives Faster Payments Plan|PaymentsSource]

Indeed. So why bother? Leaving the existing network alone and build a new Faster Payment Service (FPS) on cheaper modern technology, using 20022 XML, and go push-only. Let the old ACH, and its pull services, wither 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.

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I’ve had another business idea. I want to open up a new market sector. My slogan will be “Buy your Camberwell Carrot with Doobie Debit”.

It’s not often that we get to discuss recreational drug use on this blog, since we don’t generally pay any attention to news stories that do not involve electronic transactions. That’s why, for example, there is no story here concerning self-confessed dope smoker Nigella Lawson and her ex-husband’s socially irresponsible habit of using cash. However, recent events in the US mean that we can no longer avoid the topic.

Now that several states have legalized medical, and in some cases recreational, use of marijuana, card networks have to decide if they will process these transactions on their network.

[From Card Networks Take Positions on Marijuana Purchases - PaymentsJournal]

As Mercator point out, this puts the networks and acquirers in an interesting position. After all, while it is not legal everywhere, it is a huge cash-based business that is ripe for conversion to electronic payments.

The broad acceptance of credit and debit cards could eventually be a big boost for the card industry, which is eager to convert everyday cash purchases into plastic. Colorado marijuana shop owners estimated that they rang up $1 million in sales on New Year’s Day, the first day recreational pot became legal.

[From Card Conundrum Develops in Colorado Over Marijuana Sales - WSJ.com]

Reading this led me to wonder whether cards or other electronic payments are used to facilitate marijuana sales elsewhere? It’s very hard to find any actual figures for this. In the UK, for example, it’s illegal to sell marijuana. So while I don’t doubt for a moment that enterprising unregulated pharmaceutical executives are already using mPOS and P2P and FPS to facilitate transactions, there are no statistical analyses that I can refer to. Then it struck me: Amsterdam. That’s the only place I can think of where people can buy marijuana. Given that The Netherlands is a heavily debit-centric market that is making an effort to reduce cash usage, surely the famous coffee shops might provide a case study. But alas not, and for a reason that hadn’t occurred to me when I first wrote on this topic.

These coffee shops are being pressured to start accepting cards so that more of their operations are on the books. This is, of course, a good idea… But the coffee shops, tolerated under the Dutch system, have a supply chain chain that is not. The wholesalers, so to speak, have expressed a marked reluctance to be paid by SEPA credit transfer.

[From The Dutch retailers and the war on cash - Tomorrow's Transactions]

Why does any of this matter? Well, it seems to me that the use of electronic payments is a badge of respectability. People who run legitimate business want to accept electronic payments: it marks them as being socially responsible, taxpaying businesses mindful of their role as guardian of the complex rights and responsibilities that create the conditions for commerce to take place in ways that benefit all of us. Conversely, if I see a sign on a restaurant door that says “cash only”, I naturally assume that the owners are tax evaders or a front for organised crime.

In ten years time, one panel moderator predicted, “cash won’t be something that nice people do.” Instead, he thought, “the C word” will be tied to drugs and other illicit dealings.

[From A Dispatch from the Future (of Money and Technology Summit) — Cultural Anthropology]

This echoes one of my all-time favourite quotes from one of my all-time favourite books from one of my all-time favourite authors. In the brilliant “Count Zero” by the brilliant William Gibson, we read:

He had his cash money, but you couldn’t pay for food with that. It wasn’t actually illegal to have the stuff,it was just that nobody ever did anything legitimate with it.

I can see the problem in the US because of the difference between state and federal law but I can think of at least one solution: why doesn’t an issuer in Colorado come up with a “Colorado Card” that can only be used within the state? Then the acquirers and processors could handle the transactions and everyone is happy. I’ve said before that I would be perfectly happy for Barclays to mark my debit card as UK only and block all CNP usage. Since almost all physical retail transactions are local (I don’t know what the figures are for the US exactly, but I’d imagine that 98% of offline debit card use is local) this should be workable. If the issuers don’t do this, then a State-only decoupled debit or ACH front end is on the way! I’m going to nip out and register “Doobie Debit” as a trademark.

As Karen Webster says, though, “there’s always Bitcoin”. Could legal marijuana sales be an opportunity for Bitcoin to gain some mainstream transactional action? It would be lovely to think so, but I’m afraid I doubt it. The comments of the marijuana sellers quoted in the articles above, and others than I’ve read, make it clear that the preferred option of both buyers and sellers are, as in all other retail environments as far as I know, debit cards. Hence if anything I would expect to see a measurable growth in Square, GoPayment, PayPal Here and friends rather than a spurt in Bitcoin transactions. Maybe some people might think it is cool to buy illegal drugs using Bitcoin (although, frankly, almost all illegal drugs are purchased with cash) but once the excitement of the black market is removed, buyers and sellers of reefer will judge the payment mechanism the same way as buyer and sellers of shoes: convenience, costs and consumer protection.

What’s the direction of travel then? When it comes to weed, maryjane, grass, hash, bhang and ganja, I’m certain that payments will follow the trajectory of the sector as whole (although possibly with a greater focus on two-sided conditional anonymity as a transaction model) and the payment will soon vanish into the app.

The U.S. medical marijuana industry now has its own mobile app. Medical Cannabis Payment Solutions, which describes its mission as providing end-to-end management across multiple systems for medical marijuana operations, announced the launch this week.

[From Medical marijuana payment company launches mobile app | MobilePaymentsToday.com]

I looked it up. The app handles push notifications, in-app messaging, social media integration, e-commerce, third-party integration and multimedia but not, as far as I could see, payments. It’s only a matter of time. Surely some enterprising venture capitalist is even now funding the bastard son of Uber and GrubHub with in-app payments, ratings and one-click Ben and Jerry’s. And if the gear doesn’t show up in 30 minutes, it’s free.

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 post Don’t Bogart that Square, my friend, pass it over to me appeared first on Tomorrow's Transactions.

Debit interchange cap – $0.21 plus 5 bps (for both signature debit and PIN debit)
Fraud prevention adjustment – $0.01 (interim rule)
Routing restrictions and network exclusivity – Option A (two unaffiliated debit network)
Card Present vs Card Not Present – No distinction

[From Federal Reserve Issues Final Rule on Durbin Amendment]

Now there will be a lot of comment from people far better qualified than me on what all of this will mean for the payments industry, so I don’t want to get into those specifics here, but there’s something that bothers me about the whole thing. I went back to Steve Bartlett’s article on Durbin in the EFPLP [Bartlett, S. Announcing the death of the debit card in E-Finance & Payments Law & Policy (Mar. 2011)] and it prompted me to have another reflection on the Durbin process as it seems (to a foreigner!).

Plenty of lawmakers are anguished about their swipe fee position, but largely because they’re worried about falling out of favor with good friends in the corporate world.

[From Swiped: Banks, Merchants And Why Washington Doesn't Work For You]

I think what this means is that they knew that government price-fixing is wrong, but that big companies (particularly retailers) spend a lot of money on lobbying. This isn’t something to be cynical about, it’s just the real world. I’m happy to offer these lawmakers a solution though. Why not go down the European route and create a regulatory framework that allows competition from non-banks? There is no reason for payments to be a banking business, and competition rather than regulation is a better way to reduce costs to the rest of the economy.

There are other ways to reduce total costs too, but these mean some short-term spending (which no-one wants to do) in order to improve the situation for the longer term (which, naturally, congressmen don’t care about).

The Federal Reserve could, and should, use the Durbin Amendment as a vehicle to move the United States onto the EMV smart card standard

[From Why The Fed Should Use Durbin To Push EMV ( - Industry Verticals )]

Why would this save money in the long term? It’s because one of the key reasons why US debit card fees are so much higher than elsewhere is that they are predominantly signature debit transactions. Moving to PIN, and offline PIN at that, and offline completely for low-value contactless transactions, ought to kill a few birds with the same stone.

the Fed has the power to change this equation. By allowing card issuers to recover some of the costs of issuing smart cards in the form of higher interchange, it could make it profitable for banks to issue smart cards. At the same time, card networks such as Visa and MasterCard could then impose a liability shift policy, similar to that deployed in other regions

[From Why The Fed Should Use Durbin To Push EMV ( - Industry Verticals )]

In reality though, none of the lobbying seemed to be about pursuing the best long-term strategy for USA Inc. It just all came down to fighting between banks and retailers. I assumed that banks were going to lose.

Lobbying on behalf of banks is a bit of a lost cause at the moment, so you can’t blame the retailers for striking while the iron is hot, but if Congress wants to reduce the fees paid by retailers for payments, then it should create a regulatory environment that allows new entrants to come in and provide (non-bank, if necessary) solutions to the marketplace.

[From Digital Money: If you don't like cards, don't take them]

Well, despite their (entirely deserved) lack of popular support, it looks as if I was wrong about the banks’ capacity to lobby. They mounted a serious campaign.

Last year US banks generated $536.9 billion of interest income, according to FDIC data, and while that is down from heights of the boom years, it is still a hefty amount of revenue. Non-interest income, which includes fees, climbed to $236.8 billion last year from $207.7 billion in 2008.

[From Bankers, Hear My Plea: Stop the Fee Insanity - Bank Innovation]

It’s very difficult to obtain an accurate picture as to what proportion of the non-interest income relates to payments. The last figure that I have that I believe to be reasonably accurate was 45%, but many commentators seem to think that this is too low. So let’s say that all of the “other” category of non-interest income reported is payments, and call it 50%. There was a paper published last year called “Banks’ Non-Interest Income and Systemic Risk” by Brunnermeier, Dong and Paliac that showed that the higher the proportion of non-interest income, the greater a bank’s exposure to systemic risk. In other words, the more a bank depends on income that comes from outside of the core business of savings and loans, the more exposed it is to changes in market conditions (eg, Durbin amendment, non-bank competition, that sort of thing). I read this as meaning that it’s better for the economy as whole if banks make less money from running debit card systems.

The lesson here is that if we want serious regulation of banks, we can’t trust it to be done by bank regulators.

[From The Fed Bails Out the Banks...Again - Credit Slips]

Therefore, it seems to me, that the ruling wasn’t that bad for banks. If you have to have a cap, from the banks’ perspective, it might as well be this one. Retailers wanted a cap, and they got it, but the cap is high enough that banks won’t suffer a catastrophic collapse in fee income, so the banks ended up with not such a bad deal provided that they shift signature debit to PIN debit. The banks will lose some fee income because of this, retailers will pay a bit less and customers won’t see much difference because the difference won’t be passed on them. I disagree with observers who think that Visa and MasterCard will see big trouble because of the loss of signature debit transactions. I think that Visa and MasterCard won’t be too affected because they will boost their PIN debit offerings to make them more attractive to banks and they will push PIN debit into mobile, online, retail and so on. This means that the income lost from signature debit transactions can be made up by replacing cash and other kinds of transactions with PIN debit (I think – but I’m keen to hear from others who know far more about the US market dynamics).

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

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 post State-mandated price-fixing is not the answer, but as it goes this isn’t too bad appeared first on Tomorrow's Transactions.

Perhaps the most obvious example of tender steering in Europe is in eCommerce – where Ryanair (and other low-cost carriers) surcharges considerably for all but a single method of payment (currently MasterCard Prepaid cards)

[From Will Retailers Use “Tender Steering” to Control Interchange Fees? |... | LinkedIn]

While the point about surcharging in relation to the spread of new payment mechanisms is interesting, what’s going on with the airlines isn’t really surcharging (Ryan Air said specifically that “these are not surcharges”, and they are correct). What these charges are are a transaction tax that everyone has to pay (I’d be curious to find out how many people actually pay with Ryan Air MasterCard prepaid cards). Unsurprisingly, a great many people were unhappy about this practice (ie, advertising an air fare as £10 then charging £18 because the customer pays with a credit/debit card) as it smacks of unfairness.

A super-complaint is to be launched about the “murky practice” of surcharges levied on customers who pay by debit or credit card

[From BBC News - Credit and debit card surcharges 'are excessive']

Bear in mind that if you are booking tickets for a family, these transaction fees can easily become significant: if they were folded into the price of the ticket, it would give a more accurate guide to the public.

I recently used Ryanair and cost me £30 in booking fees and another £48 in online checkin fees to use my printer and my paper and my Ink. Can anybody explain how that works ?

[From Which Launches Super-Complaint Into Credit And Debit Card Surcharges With Office Of Fair Trading | Business | Sky News]

Well, the solution to that seems pretty straightforward: don’t book Ryanair. It’s not just them, by the way. I understand that EasyJet charges £8 (EIGHT QUID) for a debit card transaction that costs it, what, 15p? Personally, I won’t use any of the “low cost” carriers, so I don’t know what the exact figures are. Anyway, today the OFT ruled on the super-complaint (and I can’t wait to Ryan Air’s response because they will undoubtedly go bonkers):

Travel companies have been ordered to end the use of hidden surcharges for passengers paying by card. Airline, ferry and rail passengers typically have to click through four to six pages of an online booking before the charge is added to the price. Now the Office of Fair Trading (OFT) has ordered them to make all debit or credit card charges clear immediately.

[From BBC News - Hidden card charges for travel tickets to be banned]

But that, to me, isn’t the interesting part of the ruling. This is:

It also wants the law changed to abolish altogether charges for using debit cards.

[From BBC News - Hidden card charges for travel tickets to be banned]

Much as I dislike government intervention in the pricing of anything, unless the costs of cash are to be distributed properly (which they won’t be) this is the only sensible course of action. Making debit cards the “zero” and allowing retailers to surcharge other payment mechanisms (including cash) is fair, with one proviso: that pre-paid cards are counted as debit cards. This is necessary to deliver financial inclusion.

Perhaps the European Commission could be persuaded to adopt this as part of its SEPA initiative and make it common throughout Europe so that pre-paid and debit cards become the “normal” way to pay?

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

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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