Friday, June 13, 2014

The Payment Initiation Boom makes Cards, POS, and EMV Obsolete

Immediate, safe, and cheap access to money is a primary indicator of a healthy retail payment system. Personal Electronic Devices (PED) provide the immediate and cheap access parts; intelligent payment system architecture provides the safe part.

Referring back to the first diagram posted on this blog (Diagram 1: Operational SVGRTP) I wish to focus again on the dynamic junction of PED and the point of presence (POP) as shown in diagram 9.

Diagram 9: POP and PED Dynamic

A standard protocol for communication between payment applications and POPs does not exist. Instead we have a patchwork of protocols based loosely on VISA 1 and VISA II and a bunch of roll-your-own protocols to add diversity to the zoo. ISO 20022 is a protocol for a Payment Vs Demand system used primarily to settle financial market trades. Its key feature is the use of HTML tags. Issuing banks got together in the 1980s to build a standard protocol between acquirers and authorizers called ISO 8583. The primary expense of retail payment systems today is passing transactions back and forth between the VISA I/II protocol and the ISO 8583 protocol. Replacing these archaic structures by one protocol based on HTML tags such as ISO 20022 will cut costs dramatically.

Acquirers and issuers see such a standard as a threat to their business model. The internet allows a PED to connect directly to an issuer, so why do we need acquirers at all? That question prevents a common standard from being developed. Once the standard exists, however, the consumer demand to use it will drive the payment system industry to use it.

So who will pay to build a standard to bypass the middlemen? The natural payers in my view are the wireless communication providers around the world, large and small. The mobile communication providers know how to create standards and one worldwide payment standard will increase the demand for all of their services. Yet these companies are feisty and competitive; joining hands for a payment system Kumbaya is not on the horizon.  

The standard (call it ISO 201501) will have an impetus if and only if the current archaic structures fail from its cost or from lack of trust (trust is the critical ingredient in all payment systems).  There is a lot of noise about successful attacks on the current retail payment system in the United States, however monetary losses as a percentage of aggregate value of yearly transactions are miniscule.  Where we do see some prickly skins is payment system costs, and the proof is the Durbin amendment capping interchange fees, and law suits from retailers against the brand name payment networks.

If the wireless providers see the griping as a sign that they can take over the payment system infrastructure and provide the secure data movement at significant reduction in the current cost and at significantly higher margins than normal wireless communication sessions, then the gig is up as long as a small value gross real time payment system comes into existence.

Next Blog: Cutting out the Middle Man, Part III

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