Thoughts on the Future of Payments

Notes from a lecture given to a great group of people and the future of our industry at the University of Ghent in Belgium  – www.capitant.be.

“Like most things in life, payments are about giving and receiving…”

There are four types of payments but all have similarities. In essence, I have some money. I need to let you have the money – either in exchange for goods or services, or to settle a societal debt (such as dependence), as such I am the payer and you are the payee. Here we can define the first two types of payment – push and pull. Push means ‘I give you money’ – this is a traditional cash payment or ‘credit transfer’. Pull means ‘you take the money’ – this is a traditional debit payment. Push payments have implied consent and Pull payments require some form of consent to be registered, such as a direct debit mandate.

The third type of payment is a Mutual or Third Party transaction – this is where the transaction takes place with both a Push and Pull. In a Mutual transaction, the payer uses a method to give the money to a third party (usually with a notification to the payee) and the payee uses this push transaction notification to take the money from the third party. A common example of Mutual payments is a card transaction, whereby the payer uses their third party credentials (card) to push money to the payee (merchant) and the merchant pulls the money from the card scheme, who subsequently pull the money from the payer. This method also applies to cheque payments.

Finally, we have Deported or Complex payments. As the name suggests these are a combination of the other three payment methods to create a new payment type. Deported indicates that this payment method uses a secondary tier of transactions to create link between other disparate accounts – i.e. effectively from card to bank account or card to card but via intermediary accounts. One of the most famous examples of a Deported payment method is PayPal. In order to make a payment with PayPal, the payer needs to fund an account – this can be done through a Push payment prior to transaction, or through a Pull payment at the moment of transaction. PayPal then allows a payer to ‘send money’ e.g. make a Push transaction, or to ‘get money’ e.g. make a Pull transaction. At the other end, the payee then performs a Pull transaction to move money from PayPal into an accessible format. Other examples of Deported payments can be when video-on-demand is added to your digital TV invoice, or using a Prepaid credit/debit card.

“The payments revolution has always begun in Belgium”

  • First full implementation of Smart Cards
  • First standardisation of Credit Transfer
  • First with full market Mobile Payments
  • First in Europe to guarantee a bank account to every resident

If you want to see the Future of Payments, then history suggests that you’re in the right place. While the world raves about Apple Pay, we’ve had mobile payments on EVERY handset since 1998 thanks to the co-operation between Bancontact and the three mobile companies. While the UK took until 2003 to get Chip and PIN, Belgium was past celebrating its 10th anniversary at that point, today, as the US finally migrates, it’s over 25 years here. Belgium was first to mass issue electronic purse on every bank card through the Proton scheme. But most importantly, Belgian legislation guarantees a bank account is available to every resident of the country – with the exception of the 608 people barred due to incapacity or financial mis-management crimes. Even the bankrupt are guaranteed a basic payment account as this is laid down in law – only today is the European Commission considering such legislation for across the Union.

Belgium is also home to the European headquarters of MasterCard, Headquarters of SWIFT, and of course Clear2Pay, the payments technology business of the world’s largest fintech provider, FIS.

“However, before we get carried away…”

Belgians have the highest per capita current and savings account balances in Europe

  • EUR 67100 average in accounts (double that of Germany)
  • EUR 42bn sitting dormant in current accounts
  • EUR 770bn in savings accounts

Today 80% of payment volume is still cash

  • New legislation prevents cash payments of more than EUR 3.000 but the impact is minimal
  • Belgian debit transactions are the cheapest in Europe
  • Yet in Sweden cash payment volume is down to now 52% as cash is getting more expensive

En zo, heeft elke Belg een baksteen of een goud stukje in zijn maag?

This is from an old Belgian saying – every Belgian wants to own their own home, and so has a ‘brick (baksteen) in their belly (maag)’ – but I ask is it a brick or a gold piece?

“Why are we still in love with cash?” 

I’ll start with an assumption that everyone in this room is a human being, which means that we typically interact with the world through our five, well-documented, senses. This is the main reason that cash remains so pervasive in society. You can feel cash, you can smell it, hear it (crinkle of the notes, chink of coins, ka-ching of a cash register), if you really want to, you can taste it – but most of all you can see it. A cash movement is visible and instant, a true real-time exchange of value.

But, cash has an important and fundamental flaw – it is non-repudable – you can’t take it back once you’ve given it unless you go to court or have a really, really big stick.

“We need to bridge the gap between people and payments”

According to a 2010 Microsoft report, Being Human, the bottom line is that technologies are not neutral – they are laden with human, cultural and social values. Which in reality means that in order for an innovation to be taken to heart, it must feel natural to the user. This was a game changer for new interface development – and after all, payment methods are just an interface to your value store

This means that although we already know what the immediate future holds, we need to do something different to keep regulated electronic payments growing in the longer term. According to Microsoft, this will include a fundamental change in the product development process – the addition of a fifth step, beyond what will work, to understanding why something works and how it gels with the way that human beings naturally interface with electronic systems – the job that our piece of plastic, online banking or QR code do today.

“Why did the card format work?”

  • ISO Standard Size and Shape
  • Easy to Carry, Issue and use
  • Simple and Reliable

An American, Frank McNamara, is ‘credited’ with being the father of the modern credit card business. In February 1950, he used his business card to have an invoice from a restaurant sent to his office rather than pay from his own wallet – this idea he then turned into a formal agreement with a number of restaurants and the concept of ‘the Diner’s Club’ was created. Other store cards and tabs had been in place before this, but his was the first card to be accepted at multiple locations – and can today be used in around 38 million locations worldwide.

“But the world has changed since Frank’s day”

As retail evolves, the credit card format is struggling to remain relevant. It will remain part of our future for a good while yet, but next generation payment tokens will take up the mantel as we move forwards.

“Mobile is soooooo last season”

As the core of any payments system is the back end infrastructure – the bit that moves the money that only payment geeks care about – a lot of focus is being put on the front end. Since I started in this industry way back in the year 2000, we’ve been collectively trying to get payments onto mobiles. Why? Because if you can afford a mobile, you’ve usually got some disposable funds that you’d like to spend.

Hands up anyone that has a smart phone [90%]. And now hands up any of you with the mobile Bancontact app [40%]. Anyone here with SEQR or Sixdots? [2% including me]

So today, I stand here 15 years after first writing a book on the topic looking at a world where mobile is still not a reality. The reasons for this are many complex and mostly political but fundamentally boil down to the fact that a mobile payment costs more to perform in an era where regulators are driving down the fees that can be charged. For this reason we are unlikely to see cards-based systems like ApplePay in Belgium in the near future but we will see more and more use of banking tokens available in other devices – let me explain why.

“The payments innovation box”

An innovation box is the incumbent factors that create the space in which innovation can happen (the ‘box’ which people attempt to think out of). It realistically defines the considerations that will allow development of a successful solution to payments transformation. Currently there is considerable focus on the Policy Makers and Technology sides as these are the primary drivers of transformation – forcing the Participants (traditionally banks) to change faster than their evolutionary tendencies would prefer.

“Finally, the future

PayPal is already experimenting with technology that authenticates people through their heartbeats – Jonathan LeBlanc, Head of Global Developer Advocacy, PayPal

We’re already seeing that wearable tech is the next wave in personal technology – and payments will likely take advantage with watches, bracelets, and Tolkien’s lesser-known one-ring-to-pay-them-all,

Are the devices dumb or active? – it depends on the model… in the first instance we will likely replace existing tokens, or versions of them, using dumb technology but all of these devices allow us to forget about signatures and PINs, and will likely even allow greater use of geolocation. However, if a device identifies you more solidly and confirms your location, will this tend electronic payments towards the flaw of cash, non-repudiation?

Biometrics are currently taking a huge leap forwards – but how to maintain privacy? Biometrics are likely to remain personal to your device to generate an authentication token such as with Swish cards and Apple’s iPhone6 sensor. After all, would you share your iris pattern with the Government? Your Bank? Google? Snapchat? Alibaba?

“Big changes are coming….”

Upcoming Regulation will heavily skew the innovation box

Regulation is heavily impacting the innovation box – MIF regulation is wiping out fee-based payments and destroying the traditional value stream for existing players and newcomers.

XS2A – more people can trigger payments into the banking system – account security becomes more important, you need more and more tokens

PSD2 will move regulations from covering just Euro transactions to any currency for any transaction starting or ending in the EU (article 2.1b) – this puts a big question mark over crypto-currencies.

Retail is transforming into a multi-channel experience

Retailers are taking the online experience into stores – showrooming, click & collect, spot offers, in-shop reverse auctions – payment needs to respond quickly and be flexible – multi-channel AUGMENTED reality shopping (product in store, order on mobile, collect at end of store). For example, here in Belgium Colruyt Group has a number of new concept stores running across the country – wink, cru, bio planet – and is already experimenting with a single retailer launch of SEQR mobile payments.

The US is finally getting with the program

The US is mid-way through the largest mass market payments transformation ever attempted – moving to smart card technology under the EMV standard we all use here – and in typical US style will enhance and revamp it. Expect new things as they repeat the Starbucks model.

Identity is the new money”

Identity and money are both changing profoundly. Because of technological change the two trends are converging so that all that we need for transacting will be our identities captured in the unique record of our online social contacts. Social networks and mobile phones are the key technologies. They will enable the building of an identity infrastructure that can enhance both privacy and security – there is no trade-off. The long-term consequences of these changes are impossible to predict, partly because how they take shape will depend on how companies take advantage of business opportunities to deliver transaction services. But one prediction made here is that cash will soon be redundant – and a good thing too… – Dave Birch, Consult Hyperion

Payment hero, Dave Birch is a strong proponent of a cash-free society and like me, believes that the way we pay is essentially governed by our ability to prove who we are – and to provide evidence that the recipient will receive their money in the timescales that they require. This leads to a theory that in the future, how we pay will be driven by the specific type of transaction rather than the channel or the specific technology.

“Banks will become stores of value

A Bank has always been a place for securely storing the things that we value – previously in safes, but more often now in secure data storage. We’ve talked to many Banks about them becoming the location for a store of different types of value – whether that be financial value such as cash, stocks, bonds, virtual currency – or non-financial value such as loyalty points or discount vouchers. However, in the new social media world, perhaps my most valuable asset, as Dave suggests, is my identity. A Government can issue me with identity materials, but they seldom want to play in the validation space – whereas Banks are now facing new regulation and greater scrutiny in the KYC space. Why not let my Bank become the trusted holder of my issued identity, and an authority against which it can be checked but not revealed. Many card-based cross-overs with national ID have been tried – there are even good examples of Bank-managed digital signatures such as in Sweden, and in Belgium, the Government’s Fedict department will begin using Bank-issued EMV-CAP readers to generate one-time passcodes using national eID to access government services. Having to already adhere to the mandated KYC regulation gives Banks an advantage over any other market player in this space.

Channel will become irrelevant”

Greater integration of the different channels means that payment needs to stem all. Essentially payment characteristics become more important – immediacy, guarantee, repudiation, value size – and we will have more payment options to allow us to choose more effectively by funding source, ‘currency’ and payment delay.

Choice will drive personalisation, fragmentation and we will no longer rely on banks to supply the front end of our payments, but we will rely on them heavily to continue supplying the robust back end.

E.g. today a major French utility company I worked with takes 30 methods of payment, in 2025, perhaps 50 or more – but essentially only a few systems are needed (do more with less) – the transition to ISO 20022 in all payment systems will facilitate this.

So while I can’t tell the future with any degree of certainty, it’s clear that we’re at a crossroads in the payments space today. What I do know for sure is, that it’s time for a change, and change is coming.

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