What will replace the card schemes?
There has been much talk recently about how card payments will replace cash altogether in the future.
I have talked previously about my opinion that the card schemes (Visa, MasterCard, Amex etc) are past their sell-by date and we need an alternative. I have also discussed my vision of a future with a different payment network supporting instant settlement of any type of payment anywhere in the world. You could imagine that the banks and the merchants would be on board at this point: reduced fees, reduced fraud, better compliance and the end of the PCI council with its awful regulations and its massive fines. But what’s in it for the customer? Why would the end-user get on board with this when they know about cards and they’re are happy with them?
What would get you as a user to switch to another payment method?
This is clearly an important question. Apple Pay, Android Pay and Samsung Pay have been pushing their ways of making purchases by mobile phone for some years now and, according to PCM daily news, their transaction usage had reached 3% by Sept 2016. That’s down 20% on 2015!
I have an iPhone and an Apple watch and I have even bothered to register a card to Apple Pay. Yet I still only use Apple Pay for about 20% of my spending.
While it is whizzy and occasionally easier to use my watch to pay, especially if my hands are full, I don’t really have much faith that the transaction will work and I can’t use it for transactions over £30 unless the merchant has signed up to Apple Pay. That means I can’t leave my cards at home. So, instead of my life getting easier and having to carry around less stuff I now need to carry more stuff (if I want to use Apple Pay). How is that progress?
Clearly, then, in order to make a mobile-based payments system interesting it needs to offer something new. Some added value to the user. “Whizzy” isn’t enough and security isn’t enough either (since the banks and the merchants take the responsibility for any losses). So what would do it?
The answer, of course, is not to try and follow the rails set down by the card schemes but to use the new system to replace both cards and cash. My life is fundamentally improved only if I can confidently leave my wallet at home. Not only is cash grubby and constantly running out but I don’t have enough pockets for keys, phone and wallet.
It’s a tall order though. Cards have been trying to replace cash for decades and have only just gone over 50% in the last year or so.
Obviously the answer is to make it easy to sign up, easy to use, requiring no special hardware for a new merchant and then invest in some decent mass-media marketing to tell everyone about it. There is already quite a lot of pressure on small merchants to accept cards but it’s just too expensive and too hard to sign up. The POS rental and transaction fees make it uneconomic and the time to open an account and get the terminal delivered puts it all in the “future, never-never” on the to-do list.
To make this fly it must be possible for both the merchant and the customer to sign up, get an account and make the first transaction in less time than it takes for the customer to walk across the street to the ATM and back.
That raises some KYC/AML issues that need to be dealt with:
- The merchant needs to be told that they can do the transaction but they will not be able to draw the funds until after KYC has been completed. Money cannot be said to have been laundered until it’s in the control of the launderer.
- The customer will, in the first instance, need to load their account using a credit/debit card. This means they have a bank account and have passed KYC with someone already. Also, their account will be limited to, for example, £100 per month and only in physical shops until they have completed KYC. This is no different than walking to an ATM and then paying in cash so there is no additional money laundering risk.
The objective is to get people signed up and getting value from the system before requesting long forms to be filled in and evidence of ID to be produced. Once they see the value, they will use it. Especially once they see the added value provided by the network: instant, low cost international transfers; simple, fast online payments; itemised receipt with transaction and which is accessible directly from their statement (if provided by the merchant). Parents will be happy too since transactions can be marked with a minimum age for restricted products (eg cigarettes and alcohol) making genuine child-friendly programmes a reality.
The next point is that it must work on any hardware, anywhere in the world and make the best use of the handsets’ capabilities. It should use NFC if it can but seamlessly fall back to QR codes if they will work or even all the way back to SMS if that’s all that’s available. All transactions must be authorised in some way but the authorisation requirements should match the significance of the transaction. If the customer is buying an ice-cream on their own £700 iPhone, that may be authorisation enough. If however they want to buy a new car it might be worth checking their biometrics and their PIN.
As you can see, this is all about using the hardware that’s all around us and making use of the richness of the data that can be made available if you introduce a new network to run it on.
So, if the technology exists, what does it take for merchants to promote this means of payment and the customer to have this as a preferred method of payment? Please let me know in the comments if you think I’ve missed something or you would like further detail on any points.