Innovations in Payments
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Comparing Cards and ACH Payment Ecosystems with a view to seeing whether they discourage or encourage innovation.
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Innovations in Payments
- 3. Banks Payment Banks EUR GBPDOMESTIC Consumer - Mobile & P2P Services EBABusiness – Online CT ZAP Operator System Industry Body Oversight Scheme DoF/CB IRECC DD/CT IPSO Internet Banking EBA Clearing STEP2 Eurosystem SEPA DD/CT EBA EPC BACS FP Treasury/BoE UK PC Direct Scheme Members
Editor's Notes
- Gary Conroy, COO of Realex Payments – Payment Gateway side of the business. So, in looking at innovation and barriers to innovation, decided to look at the card acquiring ecosystem and compare it to the ACH system.
- Overview:Schemes – Debit and credit cards – set the rules for issuers of cards, and the acquiring system. In this case, I’m particularly interested in the acquiring side of the schemes. Acquiring banks are members of the scheme (pay a fee to the schemes – both annual and transactional fee in the form of interchange. Traditionally they were high street banks, but now often fall under global processors e.g. First Data, Elavon, Global Payments. These acquirers compete for merchants. They compete commercially, but also in the product offering. That product offering consists of Card Present and Card Not Present. And of course you have the consumer / cardholder, who wants to purchase the merchant’s good or service.2) In Card Present merchant Technology Innovations:Acceptance, traditionally you use the card paying for your shopping. Those terminals developed from PSTN to GPRS to IP based and wi-fi capable devices. Speed of transaction is important, so NFC and contactless payments has come of age since the Olympics. Then the big development was the ability to use phones as the acceptance devices – either through signature or CHIP and PIN. This allows developers to embed payment process into apps. 150 companies in Europe providing mobile acceptance.3) In Card Not Present Technology Innovations:Gateways allowed any applications to embed the payment processes into that application through APIs – so shopping carts, airline reservation systems, any application that could call out to the web.4) Technology Innovation supported by Commercial innovation:a) ISO / MSP allowing merchants to resell the acquiring services and to gain a greater revenue share by taking some or all of the risk.b) Speed of boarding is still an issue - Payment Facilitator has gotten over this problem, allowing resellers to set new merchants up in hours instead of days or weeks – within certain parameters.5) Consumers have actual card. And there are wallet providers who abstract / store the card details in both the physical and online world.6) How Does the Ecosystem work? Animation - VISA – Scheme but commercially involved at all levels in the ecosystem. Investor in CP (Square, Mobilise), bought CNP (Cybersource), and now moving into wallet space (V.Me).Acquirers – Enable ecosystem and compete for technology providers business through arrangements such as ISO/PF. Buy / Build / white label CNP technology providers – example of WorldPay who were very acquisitive. Technology providers – CP resell acquiring, and moving into consumer space (wallet). CNP resell acquiring, and moving more heavily into acquiring through PF. Realex, not just going after merchant, but actually allowing acquirers to compete by selling white label solutions to them. Consumers – Battle for wallets. Gloves are off – Mc quote “PayPal rides for free on the back of other business models.” This applies to the physical world where they feel most threatened. Speculation that the wallet could become the physical wallet, disintermediating everyone in the chain.7) None of it Works without an account from which the consumer can pay their credit card bill and to which merchant funds are settled – so, onto EFTS.
- PSD opened up payment systems across EU, and to regulate existing players. Now 500 registered PI’s.It achieved regulation, but did it open up systems to competition?1) Schemes – We are not concerned here with the ultimate daily settlement into the central bank, but by the payment systems between the banks.IRECC, scheme run with IPSOEuropean Banking Association – operates STEP2, Pan-European Clearing house CHAPS – only used for high value (£35 a go), BACS – takes three days to clear, Faster Payments – UK Payments Council, made up of the UK banks, awarded the build and operation of the technology to VocaLink, in turn owned by the banks.Technology provider, connection to all three schemes is via SWIFT.Notably Faster Payments is the only real-time system. All the rest take some time, from 3 day BACS to one day EBA and IRECC.2) So what services are offered where you might see some innovations – either technology or commercially:a) So what services are offered to merchants? In Card Acquiring world, showed Card Present and Card Not Present.In ACH world, Customer Present doesn’t exist – it’s cash or card, there is no way to directly access your account. However, Customer Not Present does exist. Online Banking allows people to access their bank accounts without being physically present.In Europe, several schemes have piggybacked that service in order to turn the Online Banking Credit Transfer facility into an online payment method.Where the Credit Transfer can win:1) Cost - Interchange fees have been the subject of controversy, particularly cross-border interchange fees.2) Fraud and non-repudiation - There is consumer and merchant concern around card payments – so a move to a fully authenticated, low risk, low cost online payment option works.Proven model in certain territories – iDeal, GiroPay (60%), Sofort (need to give them your details).And the EBA is looking to rollout this out across Europe with MyBank. This is the only one that provides SEPA CT. And for the UK, VocaLink, who run the Faster Payments service, are developing ZAP, which again is a solution to allow online banking as a payment method.b) So what about consumer offerings? The likes of PayPal and Western Union allow you to send money via Credit Transfer online. Getting those P2P transfers onto the mobile is often seen as a holy grail. Bank of Ireland have Pay to Mobile, which works as long as the recipient is also a Bank of Ireland customer. Barclays launched PingIt to allow any UK banked customer to transfer money to any other UK banked customer. But Vocalink themselves, who run the Faster Payments service, have announced their intention to launch a mobile payments solution.3) Conclusions:The problem is that, the technology is not open. We saw that by opening up the technology in the Card Acquiring space there was a huge ecosystem of companies all cooperating and competing. So you end up with either:Piggybacking a solution on top of the technology provided by the individual banks and calling that radical innovation e.g. Online CTOr having the technology solutions provided by the same people who are part of the members club e.g. VocaLink Mobile Payments. b) Commercially, the structures don’t support innovation. It’s because very few companies have access to the payments systems in order to put APIs and solutions together. PayPal are connected into Faster Payments, using the VocaLink Managed Services. So they’re not connected into the core systems, they still have to have access via one of the existing members. So it’s still a bit of a members club. And while the likes of PayPal can afford the costs associated with access, small startups like Realex Payments cannot.And we’re not the only ones to say this: read extract from UK Treasury report from March 2013.“The TSC expressed serious concerns about the governance of payment systems, describing the Payments Council as industry-dominated and lacking effective public accountability.”“The Government is now proposing to proceed with bringing payment systems under economic regulation, and establish a new competition-focused, utility-style regulator for retail payment systems.”“The Payment Council had not done enough to respond to the needs of payment system users…. And noted the slow pace of innovation.”“The cost and process of achieving direct access may not be clear…”“A number of large banks domniate the industry at every level. These banks domniate the decision-making process of the Payments Council; own the payment schemes; operate as direct users offering services to consumers; and operate as agents for smaller financial institutions who do not want, or cannot obtain, direct access to the schemes. Because of their involvement at each level of operation, there is considerable opportunity for these banks to manipulate their involvement in the process for their own benefit.”Stated goal of the PSD is to open up the payment systems to encourage competition. It’s been successful in regulating existing PI’s. But how many new PI’s connected into the network? Obviously where we would like to be would be offering payment account solutions to businesses and consumers with full, competitive access to the core payments systems.
- API’s are required to allow products and services to be created. Reliance on existing applications e.g. online CT, will not encourage radical innovationDespite PSD, access to core payments systems for Payments Institutions is not considered, or often at prohibitive cost. Commercial structures need to be in place to allow the ecosystem to grow and for the API’s to be created to allow innovation to flourish.