Trade Journal | May 16, 2016

New Payment Technologies: Back to Basics

By: Sujit Chakravorti
Source: Transformation Digital En Los Medios De Pago (Funcas)

How individuals shop for goods and services continues to evolve. Commerce is increasingly occurring via mobile devices across national borders at all hours of the day. Meola (2016) cites a new study by BI Intelligence that mobile commerce will make up 45% of all U.S. e-commerce sales by 2020. Today, a traveller can purchase her plane ticket, use a car service to get to the airport, get through security, board a plane, use a car service at the destination, purchase meals along the way, and check into her hotel room by using her smart phone. These changes are possible because of rapid advancements in telecommunications, computing technology, and widespread adoption of mobile technologies.

The line separating brick and mortar from online or mobile purchases continues to blur. For example, Seamless is a network of physical restaurants that diners can choose to purchase meals to be delivered. 2 Food orders and payments are made via mobile devices or personal computers generally without human intervention. By using an online platform to access restaurants, diners are offered convenient dining options while restaurants increase their sales without increasing their seating or wait staff. Similarly, traditional online merchants such as Amazon are considering physical stores. With greater use of smartphones to make purchases, the retail marketplace requires more efficient, accessible, cost effective, and secure payments to meet the needs of end-users—buyers and sellers of goods and services.

While advancements in technology have increased connectivity among buyers and sellers, these advancements have also changed the way we pay for goods and services albeit at a slower rate. For example, mutual funds have made investing in various equity and debt markets relatively simple and effortless for retail investors. However, while the proceeds from the sale are credited to a customer’s account by the end of the day, it may take more than 3 business days for the deposit to be available at the customer’s financial institution to make other payments. If these mutual funds are part of a special tax-advantaged college savings account from where payments are made to a college, the sale of the securities and making the college tuition payment may take longer than a week via the Automated Clearing House (ACH) network in the United States. Given today’s technology, we should be able to do better in terms of the speed and efficiency of the conversion of payments into cash equivalents to be used in future transactions.

Payment innovations improve the payment system in at least four ways. First, innovations may improve the existing clearing and settlement processes required to convert payments into cash or bank deposits. For example, the ability of a check recipient to deposit checks via her mobile phone by taking a picture and uploading that image to her financial institution improves the processing of checks. In addition, financial institutions without widespread physical presence are able to better compete with those that have extensive branch networks for demand deposit (checking) accounts with remote check deposits. The remote capture technology is generally being offered by financial institutions but need not be.

Second, payment innovations may provide access to existing payment networks for buyers and sellers that have not traditionally had access. For example, PayPal allowed individuals to indirectly accept card payments in an online environment. Although PayPal’s initial success was a payment solution for eBay purchases, its payments reach has grown and now includes point of sale and non-eBay online sales. Other innovations are geared towards providing financial services to those that for whatever reason do not have banking relationships. 

Third, large retail and social networks are well positioned to make future payment innovations especially those that leverage extensive network connectivity to promote greater sales which might otherwise be lost. For example, Facebook would like to increase sales of its advertised products by providing a seamless payment option via its messenger service. We will discuss why Facebook and other large platforms are entering the payments market.

Fourth, new payment systems may be created from scratch because existing infrastructure is outdated and may prevent future innovation. New payment systems are difficult to build because building new infrastructure is costly and usually has to occur alongside existing infrastructure with buy in of many stakeholders. The faster payments initiative in the United States aims to create a more efficient payment platform that is more secure and convenient for end-users. The Federal Reserve System (2015) outlines several desired improvements in speed, security, efficiency, international reach, and collaboration. Payment providers have already started to address these categories.

With the number of payments increasing among buyers and sellers that are non face-to-face purchases and who do not know each other, paper-based payments such as cash or checks may not ideal. However, acceptance of electronic payment instruments continues to be challenging for certain market segments such as peer-to-peer (P2P) payments although PayPal and Square along with other new payment providers are closing these gaps by allowing greater access to existing electronic payment networks. In other cases, new payment solutions are necessary because of the high cost of safekeeping and transporting cash. For example, M-Pesa, which uses text messaging to initiate payments, is a successful replacement for many cash payments in Kenya.

To be successful payment innovations that are targeted at end-users generally have certain attributes. In this article, I put forth eight attributes or necessary conditions for payment innovation to be successful:

  1. Increase Benefits to End-Users
  2. Penetrate a Niche Market
  3. Change End-User Behavior
  4. Provide Incentives for Adoption and Usage
  5. Offer Profit Opportunities for Payment Providers
  6. Forge Partnerships between New and Existing Payment Providers
  7. Provide Necessary Security
  8. Adopt or Create Industry Standards

After discussing the payment infrastructure, we will discuss these eight attributes. We will also discuss how large networks or platforms such as Amazon, Apple, Facebook, and Google will continue to expand their presence into the provision of payments. Finally, some conclusions will be offered.

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