The document discusses the future of payments systems and key factors that influence their development. It makes three main points: 1) The business case, not technology, drives changes to payments systems. New systems like mobile payments must provide clear value to major actors like retailers, consumers, and banks to be adopted. 2) There are three primary actors in consumer payments - retailers, consumers, and depository financial institutions. None will be replaced by new entrants like tech companies. 3) Past payment innovations like PIN debit were driven more by addressing issues like check fraud than by technology. Future changes will be slow to develop but can happen quickly once reaching critical mass.

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 PYMNTS.com 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
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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)
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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
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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 jack@4thqtr.com.
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