Sunday, June 15, 2014

Motivation to Eliminate Bank Card Networks

Recapping from the last two blogs, we have in place a standard specification for the transmission of payment data from a personal electronic device (PED), and a secure retailer database. If we could use the infrastructure put in place by central banks then we would be done; however active users of Fedwire and the like do not like penny-ante transactions polluting their pristine flows, so we must build our own.

I think it’s best to start with a small scale model and show scalability for size than it is to propose a world-wide SVGRTP built by the private sector.  Diagram 10 shows the concept of a single SVGRTP contained within a single bank.

Diagram 10: Single SVGRTP

Ideally, maybe in two or three years we won’t have to use this cumbersome message architecture at all. Our PEDs will have entangled quanta with corresponding quanta at our bank, and the device will spin the quanta to corresponding quanta at the bank with message details. No chance of data intercept limits attacker tools. However, in case there are technical issues developing a quanta payment system I will press on with stone knives and bearskins (apologies to Star Trek “City on the Edge of Forever” fans[1]).

Diagram 10 shows a simple “on-us” transaction that corresponds with a retailer and a cardholder having their accounts at the same financial institution. However Diagram 10 shows the transaction with the newly minted SVGRTP.
Banka in the diagram translates the retailer id to an account that exists at Banka and translates the device ID to an account that exists at Banka and moves the payment amount on receipt of the message. The diagram leaves out the notification and security details.

I think it might be possible to select a small town with lots of cell phone users and a few shops and one major bank popular with local retailers.  How might we convince such a bank to go along with this madcap scheme?  If the bank is in the US then Regulation E does not cover the transaction because it does not meet the definition of an electronic fund transfer as defined in the regulation, namely:

Electronic fund transfer (EFT) is a transfer of funds initiated through an electronic terminal, telephone, computer (including online banking) or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit a consumer’s account. EFTs include, but are not limited to, point-of-sale (POS) transfers; automated teller machine (ATM) transfers; direct deposits or withdrawals of funds; transfers initiated by telephone; and transfers resulting from debit card transactions, whether or not initiated through an electronic terminal (12 CFR 1005.3(b)).[2]

The SVGRTP defined earlier does not give instructions to debit or credit a consumer account, the SVGRTP gives instructions to credit or debit a retailer account. I am not a lawyer, and if you accept my interpretation without legal advice then you are quite mad. However, it seems the whole purpose of Regulation E is to prevent a retailer from falsely accessing a consumer account, which is not what happens in the SVGRTP. The PED instructs the consumer bank to credit the retail bank; the retailer does not instruct the bank to debit the consumer account.

So, without Reg E, retailers do not have to worry about charge backs and banks do not have to worry about Reg E claims. By ditching the bank card networks, both retailers and banks drop the most costly aspects of the current system.  

Next Blog: ?, or reply to comments, or the math of payment system architecture

[1] Spock: I am endeavoring, ma'am, to construct a mnemonic memory circuit using stone knives and bearskins. From

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