Tuesday, November 4, 2014

Is the Diversity of Payment Origination a Symptom of Struggling Middlemen

Points of sale are one of the few places where it is known people exchange money for goods or services. In the Halcyon days before payment cards, a merchant accepted cash or checks and consumers carried those payment methods with them. Now central banks want to eliminate the paper check and no one carries cash with them unless to buy illegal goods or services. In some cases underground outlets accept plastic. Yet for the many diversified ways to pay, the fees for payment keep increasing to the point that merchants make ridiculous attempts to avoid them (see http://paymentnetworks.blogspot.com/2014/10/why-retailers-cant-build-payment-systems.html for my discussion on CurrentC) and charlatans create fatally flawed crypto currencies such as Bitcoin (see http://paymentnetworks.blogspot.com/2014/06/an-analysis-of-bit-coins.html ) to prevent middlemen from picking retailer pockets.

Now point of sale (POS) equipment manufactures recognize that consumers will originate payment from continually changing technologies and so build machines to accept all of them (see http://www.paymenteye.com/2014/10/30/former-head-of-google-wallet-debuts-alternative-payments-terminal/ ). Is it not time to ask if the diversity is unwanted and used not for efficiency, security, or cost advantage, but because retailers must offer all the choices foisted on the consumers by all those eager souls desiring to sit just between the wallet and the till.

A retailer that does not accept a method of payment that a consumer uses will lose a sale, which is the main reason they bow to the ridiculous requirement of a chip card when their current POS devices effectively do the same thing with PIN entry and derived unique key per transaction (DUKPT). The card service industry sells consumers a pack of lies on a routine basis by insinuating consumer laws do not protect their accounts or that theft of card data necessarily means a successful attack against consumer accounts. How many parrots out there clamor incessantly about the growing threat of cyber attacks against payment systems when actual details of the percentage of successful attacks compiled by the Fed in the US and many other European and other countries show successful attacks against brick and mortar retailers pale in comparison to the value successfully cleared and settled. When a PIN accompanies a purchase request, there are few claims of a successful intercept of payment data and subsequent attack (See Federal Reserve System; The 2013 Federal Reserve Payments Study Recent and Long-Term Payment Trends in the United States: 2003 – 2012 Summary Report and Initial Data Release; (December 2013); p.32 and ff http://www.frbservices.org/files/communications/pdf/research/2013_payments_study_summary.pdf ).

The retailers are not helping their own cause, because they keep insisting that consumer payments originate from retailer payment requests to the consumer financial institutions. The complaints about payment service monopolies, interchange fees, and charge backs occur because of the firm but unsubstantiated belief that knowledge of customer payment data increases marketing and future sales opportunities. The CurrentC architecture uses the current payment system architecture with “pull” logic. The only difference is knocking out Apple Pay and all other Near Field Communication (NFC) origination technology but unless a retailer issues the payment card or routes the card correctly to the authorizer, transaction costs remain virtually the same, regardless of promises of huge discounts.

There is the possibility that consumers do not care how they pay for their goods and services as long as a payment does not result in a successful and uncompensated attack on their account and the initiation method is not overly awkward or time consuming. If the origination method also means a discount over another method, then cost conscience consumers use the least expensive method. So why do financial institutions (FI) issue debit cards and let their consumers use them over credit card networks? The interchange fee seems like the most logical answer. So how do retailers get money from consumer FIs without astronomical fees? They ask consumers to push money to retailer accounts and let them do it for less than a percentage plus a fixed fee and both sides of a transaction split the middleman’s money.

Next Blog: New Musings

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