[Dave Birch] I’ve been thinking about an insightful question about payments innovation posed on Payments News. Scott points out that while merchants (mainly) are always complaining about the high cost of payments, no low cost alternative has emerged. He puts it succintly: “Where’s the Wal-Mart or Southwest Airlines of payments? Where’s the Dell, the Ikea, even the ING Direct of payments? How about the Intuit of payments – radically changing the economics of payments in the same way that Intuit completely changed the ecosystem of tax preparation?”. Good question.

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Surely one of the main reasons that there is no “payments Walmart”(let’s call it PayMart) is regulation. Payments is a heavily regulated business — which, as in all banking-related businesses — means that the incumbents constantly complain about the regulatory burden but tacitly acknowledge that it is a significant barrier to entry for competitors. Now, if someone was going to put together a low-cost alternative to the existing payment card schemes, these regulatory barriers would be, in essence, a cost floor that they could not go below. This would mean that there isn’t much margin to go around when trying to incentivise the use of the new scheme over the existing schemes. So is it possible that, much as Europe has been experimenting with Electronic Money Institutions (ELMIs) and soon Payment Institutions (PIs) — which would give PayMart a much lighter regulatory load than a bank has — the U.S. regulatory landscape might shift to allow for lighter regulation for “simple” digital money systems? Perhaps.

The Federal Reserve Board recently requested public comment on a proposal to exempt transactions of $15 or less from the “Reg E” requirement that consumers receive paper receipts for all electronic transactions. One might envisage, for example, a system whereby if you pay for something by waving your NFC phone at a terminal, then the receipt is sent back to the phone via NFC with some sort of digital signature. This is pretty trivial to implement (you could simply use EMV cryptograms, for example, in the way that they are used in token authentication schemes such as CAP). For contactless cards, why not e-mail the receipt? I think it is a very good sign that the Fed is prepared to reconsider how instructions such as Regulation E (and presumably Regulation Z as well) should be reconstituted for the e-payments age.

A decade ago, it was assumed that technology-driven alternatives to (primarily) credit card payments would succeed because they were cheaper. But they weren’t cheap enough to overcome the network effects (by which I mainly mean the tens of thousands of merchants who already take Visa, MC, Amex and so on). But if they can be relaunched in a more modern form, in a new regulatory environment, maybe the balance could shift. Personally, I always use a credit card to buy everything (as I’ve said before, I simply don’t understand why anyone ever uses a debit card). I don’t care that it costs the merchant 2% or whatever. But if Amazon gave me frequent flier miles for using a pre-paid product with no chargeback rights, it might change my habits. Apart from anything else, I’ve have spent literally thousands of pounds with Amazon over the years and never had the slightest problem with them so the protections that I value have much less weight in that environment.

My opinions are my own (I think) and are presented solely in my capacity as an interested member of the general public. [posted with ecto]

4 comments

  1. Great blog!…I’ve subscribed for several months. Several of your recent topics have been very interesting from a retailer perspective.
    Regarding “PayMart”…Debitman might be considered an alternative…also regarding “email” receipts, there’s some concern about putting sales/pricing information in an electronic format such that it could be easily aggregated (via customer forwarding) to establish competitive pricing sites/models, e.g. “send us your monthly receipts from XYZ store and we’ll show you how much you could have saved with us”..just a concern I’ve heard mentioned…

  2. Great blog!…I’ve subscribed for several months. Several of your recent topics have been very interesting from a retailer perspective.
    Regarding “PayMart”…Debitman might be considered an alternative…also regarding “email” receipts, there’s some concern about putting sales/pricing information in an electronic format such that it could be easily aggregated (via customer forwarding) to establish competitive pricing sites/models, e.g. “send us your monthly receipts from XYZ store and we’ll show you how much you could have saved with us”..just a concern I’ve heard mentioned…

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