Dorado Industries asked me to comment on Karen Webster’s article, “The Six Things that will Change
the Future of Payments,...
markets and other retailers were seen more as competitors than as customers in trouble. This conflict
has prevailed for fo...
substituted for a fixed in place POS terminal, with dedicated networking, still gets its data input from my
plastic. But, ...
MasterCard? Separated from Visa and MasterCard – customers now, not exclusive owners – the banks
are free to deploy their ...
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Dorado Industries TW Jack Benton Op-Ed column Q3 2013


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Jack Benton Op-Ed column for Dorado Industries TrendWatch Q3 payments industry overview.

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Dorado Industries TW Jack Benton Op-Ed column Q3 2013

  1. 1. Dorado Industries asked me to comment on Karen Webster’s article, “The Six Things that will Change the Future of Payments,” published on the website, August 19, 2013. To begin with, I enjoyed her piece and found very little with which to disagree. However, given this opportunity, I will attempt to add some nuance to her words and also to bring some historical context to her observations. In the final analysis, the direction of future payments systems is all about the business case. It is not about the technology, per se. It is not about trends. It is about what works and makes money. A clear case from my personal experience related to the British experiment with EFT/POS Limited during the mid 1980’s, an architecture for PIN based Debit. RSA security technology was the differentiator from DES based PIN Debit, being launched in the United States in 1983 by the California banks, under the Interlink brand. A man named Dick Allen, who was driving the effort for the Bank of England, insisted that RSA was critical. RSA would require almost entirely new acquiring infrastructure. I pushed back that the buyers and suppliers of terminals - the actors who had the most at stake in the acquiring front end and who had been working this space since 1970 - had made almost no money, and were only now starting to install the critical mass of devices that would allow financial success. Why would anybody support the notion of tearing out that infrastructure simply to implement RSA? Well, they didn’t. In fact, the big British banks ended up starting PIN Debit with a direct connect architecture which was inferior to the switch model used by Interlink. Interlink became the dominant back end model for all future payment systems. The British banks did this because the requirements of EFT/POS Limited were just too over whelming. Instead, they chose a field expedient. EFT/POS Limited was eventually shuttered after spending a great deal of money. So, whatever the idea, for example, mobile payments, there must be a hard core business case. Is NFC in mobile another RSA like situation? Does NFC justify the increased infrastructure cost? Depending on which actor (see below), does NFC produce enough concrete value for the primary actors to allow a fourth actor control over a critical path? It is said that Google has abandoned the point of sale and moved back to the Cloud, after spending a great deal of money. Did they have an RSA-like experience? I believe that the three primary actors in consumer payments have all along been the retailers, the consumer, and the depository financial institutions. (Large Telco has tried many times over the past twenty-five years to become a dominant actor in this space, and has repeatedly failed to do so.) The clash between retailers and banks is not new. The battles over current interchange pricing are simply this age’s manifestation of that battle. The fact that the Federal Reserve sits in the middle of the conflict is not new. The Fed has always been the fourth actor in payments, indeed, the funder in the early 1970’s of almost all of the original research which led to both the ACH and PIN based debit. Back then, supermarkets in Southern California were being deeply hurt by losses from bad checks passed at the point of sale, sometimes costing them 30 percent or more of their profits. They reached out to the banks. The banks wanted no part of their problem. As the banks built out PIN based debit, the super Page 1
  2. 2. markets and other retailers were seen more as competitors than as customers in trouble. This conflict has prevailed for forty-five years. I think, for the retail industry, decisions about payments have been dominated by two things: their impact on costs and their impact on customer convenience. For consumers, it has been first about convenience, and secondarily about cost. For depository institutions, it has been about protecting their proprietary relationship with their customers, and increasingly over the years, about fees. The current regulatory impasse (Dodd Frank, etc.), following on the heels of the financial crisis, should be a reminder of the power of banking institutions. They generally get a lot of what they want and they are not easily pushed around. I simply do not buy into the notion that Silicon Valley is going to replace in importance any one of these three actors with respect to influencing the future of the payments system. Hence, I obviously buy into Karen’s statement that “merchants are a key customer, worth listening to.” It always has been that way, and it always will be, and hopefully the “worth” statement will lead to actual listening. The difference today as compared to the earlier years of electronic payments is that the retailers have substantially more leverage. However, I would add, that I am always amused when I hear of yet another attempt by the retail community, or some other non banking community (Large Telecom, for example), to set up some kind of controlling apparatus in the payments space. Again, my view is that there are three core actors, none of them are going away, and each of them needs to be taken very seriously. The pricing tension between credit and debit has also always been there. The people in the retail banks who were leading the charge on PIN based debit were payments people who were focused on changing the payments system. They came from retail banking and operations. They were not primarily focused on fees. From the beginning, they were a serious threat to the credit card people, particularly the people on the acceptance side, who had been around for twelve to fifteen years, had a great gig going on both the acquirer and issuer side of the game, who were earning huge discounts by today’s standards from any retailer who took their cards, and saw PIN debit as a threat. Signature debit grew out of that conflict as a way to impose credit card pricing on debit transactions. This was a horrifying development for the hundreds of pioneers, many of whom were C-level executives in our biggest banks, who had designed and implemented PIN debit with an extraordinary respect for security, the consumer and, yes, even the retailers. But the business case for signature debit stomped all over these lofty concerns. Duplicity triumphed. We all know how that eventually worked out. Initially, huge profits were made. Then, in time, the retail industry fought back. Law suits were filed and won. And the game goes on right up and through today’s debates and a judge’s declarations on interchange rates. These are the forces that drove payments development, not technology, which was a primary enabler, but not a prime mover. What can you believe that people want from payments? We all know the answer. It is ease of use. Less so, for the consumer, it is also freedom from embarrassment. When a mobile payment at a physical site is as easy to use as a piece of plastic, is as fast, and is as inexpensive it becomes a logical substitute. But, to really be adopted, it must be better at these three things. The most significant change I have experienced in retail payments is shopping at an Apple Store. But the device (their smart phone) Page 2
  3. 3. substituted for a fixed in place POS terminal, with dedicated networking, still gets its data input from my plastic. But, wow, was that a different retailing experience. You almost don’t know you are paying. The business case must be great for Apple: they get to show-off their iPhone (isn’t this cool that we can do this?); combine the check-out function with the sales function; increase customer convenience (it is really fast); and increase efficiency. Is that a winner or what? Today, our acquirer terminal can be a tablet, a smart phone, or a television set. This is a huge change. However, the traditional payments system still dominates. It’s the same components, even the plastic, except that you need to manually enter all of the card data. (That is, it is not the physical plastic, but rather the data on the card. Storing it, capturing it and moving it without the presence of a piece of plastic does not alter the fundamental architecture of the front end of the payments system.) If that’s a bother, then you buy a little square device from Apple that attaches to your phone or iPad which allows you to swipe the card. Sound familiar? What is not familiar is how the camera in the phone has truly changed our lives. I am in awe of this. For almost forty-five years we have been searching for an easier way to get deposits into banks. Then comes along the third or fourth generation of smart phones, fantastic cameras, and a software app that can connect all of that to a unique deposit transaction. That is a change I can admire. Years ago, when we were bringing process analysis to payments, we struggled to understand what the consumer wanted/needed when making a deposit. Suffice to say, it is a pretty slick thing when you can sit at your desk at home or in your office and make a check deposit with your smart phone. This is cool. It beats an ATM by a mile. And for the banks? Yikes! Banks have spent millions on about anything that will stop checks (digitize them) almost before they leave your hand. Now we have the consumer funding the acquiring terminal (the smart phone, of course) and feeling good about it. This huge win just dropped into the laps of banks. I believe as others, such as Google, that the profound changes are to be found behind the point of sale, where data is massaged and turned into information. Almost any information that encourages the merchant to treat me as a unique person may be a pleasant occasion. The delivery system could be very conventional or it could include mobile devices or wrist watches. In the end, it is about the information stupid, not about the device, or front end delivery architecture. But, one caution. Let us not forget NSA, you know, this Snowden guy. How much pause might this disaster cause in consumer attitudes about big data bases, particularly one’s that hold their personal and transaction data? Let me reflect on another point, most assuredly from a high elevation. There are many new players in the game, for example, companies offering new schemes which could circumvent Visa and MasterCard, and other long time players in the game. It is said that Pay Pal is close to Visa in dollars and may even surpass it. MCX has developed as a mobile commerce switch and claims a majority of retail as participants. FIS’s Paynet scheme has ambitious plans to disrupt conventional payment patterns. Some of the largest banks are, at least, cooperating with these new schemes. I cannot help ask this question: how much room would there be for these entrants if the banks had not been forced to sell Visa and Page 3
  4. 4. MasterCard? Separated from Visa and MasterCard – customers now, not exclusive owners – the banks are free to deploy their enormous power against Visa and MasterCard, should a dominant business case come forward. This reality encourages disruptive ideas. The banks are good at deploying power. I wonder what if the banks had not been greedy and hidden the debit transaction behind their credit cards? What if they had respected the unique PIN debit architecture and operating rules that so many leaders supported? What if they had engaged the retail industry instead of exploiting it? How much would they have really left on the table? Finally, a challenge for the industry! When are we going to start taking payments improvement to the health care industry? “Advanced payments” in a Starbucks store seems a bit like overkill when Visa and MasterCard had already advanced payments efficiency in Starbucks and other merchants when they simply said, “hey, these are small dollar transactions. You don’t need to get a full authorization.” But healthcare, the combination of payments and insurance authorization, is ripe for improvement. The payments and claims railroads need to come together, much sooner in the process. There are so many points of sale: the Walgreens of the world; doctor’s offices; 24 hour urgent care, the ER, hospitals, physical therapy, pain centers and no one, consumer or merchant (yes, let’s call them what they really are) really knows for sure what is going to happen until the transaction is well under way, i.e., approval or rejection. In addition, health care probably is the zone in our economy with the highest pay-off from massaging information, indeed, the saving of lives, by inter-connecting payments, insurance, medical encounters, medical history, and so forth. Why do the entrepreneurs keep going back to Starbucks, or Target, or whomever? Why don’t they spend their energy on a really tough problem? Maybe there is a good business case buried in that mess. Karen notes that “changes in payments are historically slow” and she’s right. However, I had a favorite phrase that I thought caught this situation better for planners, and it was this: how could anything that took so long to develop, have happened so quickly? This phrase captures two realities, and both of them are warnings. Bring more capital to the table when you are building, because you will need it. All changes to the payments system have taken longer to achieve their critical mass transaction thresholds then the best Harvard Business School types have forecasted – and they have consequently cost much more to develop. But, at the same time, if you are not paying attention, you can find yourself overwhelmed by a payment system change that has achieved critical mass. Jack Benton was the Executive Director for the National Commission on Electronic Fund Transfers throughout its two-year existence in the late 1970s. The Commission’s final report led to enactment of the Electronic Funds Act. Jack subsequently founded Benton International, a payments consultancy, and held key executive positions with Perot Systems and eFunds Corporation. Jack can be reached via email at Page 4