Tuesday, November 11, 2014

Will Payment Cards go the way of the Dodo

The evidence is clear and the trend shows payment cards slowly leaving the retail payment infrastructure. Large retailers that issued their own private label cards sold their stock and processing to professional payment services firms. Telephone operators and Internet service firms assume the role previously occupied by issuers and acquirers. Retailers create their own payment initiation protocol to preempt hostile acquiring agents from increasing their fees. Something must give or retailers’ slim margins will force consumer payments back to riskier payment methods such as cash or paper check.

On the horizon sits a new form of payment architecture, cheaper, safer, and faster than anything card technologies offer. Clearing, settlement, and notification to the parties of transactions take place at the speed of light without middlemen pocketing fees from lack of a physical token at a payment acceptance device or a chargeback for dubious causes. The only question remaining is will the change occur quickly once a small value real time payment system becomes ubiquitous or will the old guard fight back with discounts and incentives.  Will a payment system that works equally well regardless if the payee is a retailer, a charity, or a government, trump a system loaded down with fees and designed only for retailer payees?

Consider Diagram 30 that contains a portrayal of a small value real time payment system.

Diagram 30: Small Value Real Time Payment System

The payer financial institution (FI) retrieves the payee data from a common data store and acts on the instructions from the payer and notifies the payee and payer in real time about the results of the transaction and then moves the value of the payment to the payee’s FI. This is a valuable service and warrant fees (including a reasonable profit).  If the infrastructure exists (and it seems that plans are under way for its completion; see positive movements in that direction http://paymentnetworks.blogspot.com/2014/10/movement-to-small-value-gross-real-time.html ) then the funds for the infrastructure and the processing environment must come from somewhere. The operators need to charge a fee similar to what the Fed charges for use of Fed Wire, namely whatever is necessary to cover the cost of running and maintaining the system, however without profit. FIs also can charge whatever fees they want as long as they do not collude with each other to set one illegal fee. Payers and Payees negotiate with each other to determine the payer of the bank fees.

So what will a few bits of data cost to transport from one point to another. That is a question of conjecture but logically it will cost a lot less than what payers and payees pay for the archaic structure currently run by huge monopolies.

Next Blog: The new entrepreneurs selling a push system to an eager public

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