[Dave Birch] I said yesterday that there is pressure from US retailers for change in the retail payments world and noted that one particular route through the technology, business and social roadmaps might be toward the “something present” (SP) transaction. Michael Misasi from Mercator Advisory Group put forward the retailer case for a particular implementation of the SP transaction, which is our old friend decoupled debit.

Like private label credit, decoupled debit programs have the ability to generate incremental sales through increased loyalty and also reduce payment-acceptance costs. Decoupled debit programs don’t produce interest income, but they also don’t include the risk of credit losses. This is a trade-off many retailers should be willing to make. Several of them sold their credit portfolios during the financial crisis, acknowledging that consumer lending exposed them to too much risk given that it is not central to the retail business.

[From Rethinking Private Label: Can Decoupled Debit Relieve Retailers’ Interchange Pain? – PaymentsJournal]

There’s another aspect to this though. A retailer-centric SP solution doesn’t need the same kind of interoperability as a debit card. My Starbucks wallet works in Starbucks, my Carrefour wallet works in Carrefour and my Exxon wallet works in Exxon. They don’t need to work with each other – each wallet could use a different mechanism for communicating and executing – even though they may all use the same “something” (i.e., the mobile phone) and the same payment back end. This, for many reasons, points away from “conventional” 4-party schemes as the natural evolution.

In my view, Amex is at least 5 years ahead of any other issuer/network. Of course they have the benefit of operating as a 3 party network and regulated bank… This same dynamic is why Discover is the “dance partner” of choice for anyone working to do something unique at the POS. It is also why I see a 3 party network as the winner of MCX (?a NEW 3 party network?).

[From American Express: Innovation Leader | Finventures]

Is Tom right? Why would a decoupled SP route through the debit network when, in the age of the interweb, it can go direct to the bank? Is the future configuration of choice the 3-party scheme? I suspect it probably is. I’ve written before about the use of larger number of multiple 3-party schemes in hyper wallets rather than a smaller number of four-party schemes, and I think the broad analysis remains valid for the time being. If the 3-party scheme is (for example) MCX connecting via ACH direct to bank accounts, as many suspect, then I can see that banks and retailers might come to a new equilibrium that keeps them both happy at the expense of legacy infrastructure.

How long might this take? If this analysis is correct, then over the next generation we will see the steady erosion of that 4-party volume.

Thirty years ago, some thought debit cards would quickly eclipse credit cards – because if the customer qualifies for a credit card, he has plenty of money in the bank. Likewise, up-and-coming executives competed to gain responsibility for expanding their banks’ ATM networks. That was how we were going to cut branch costs and improve profits. 

[From Mobile Banking: A Bonanza (or Bust) for Banks? – Bank Think Article – American Banker]

Well, debit cards did eclipse credit cards. In the UK, debit volumes overtook credit volumes a few years ago and now account for four in five UK card transactions. So just as charge cards took a few years to get volume, and credit cards took a few years to get volume, and debit cards took a few years to get volume, it seems reasonable to assume that even with (for example) the muscle of MCX behind it, a next-generation retailer-centric scheme would still take a few years to get volume.

One reason is that consumer transaction volume growth through new payment mechanisms is glacially slow, almost always much slower than projected.

[From Mobile Banking: A Bonanza (or Bust) for Banks? – Bank Think Article – American Banker]

So if the evidence seems to be that this kind of change is generational, then a generation from now, four in five retail transactions will probably be… what? In the UK, I might hazard a guess that it will be some form of pushed e-billing direct to a transactional account. I think the success of FPS in the UK points toward a more distributed, push, solution (apart from anything else, there’s no authorisation loop since the push won’t take place without funds). In other countries there may be other solutions based on direct-to-bank (e.g., MyBank in Europe).

This opens up a vision of the retail POS that is based on APIs and authentication,

[From Retail and the long game]

Quite. So I think the implication for our clients in the coming year is to develop strategies towards retail payments that are wallet-centric but that are more sophisticated than storing card data for CNP or card-on-file or even CP/NFC. API services for retailer wallets, common authentication schemes using new technology and simplified local communications (non-EMV NFC and barcodes) should be in their skunkworks already. 

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers

1 comment

  1. Good analysis and recommendation. The ability of the retailer to acquire data (regardless of the provider … customer, card issuer, or merchant processor) and use it to generate incremental sales (hopefully profitable) by “marrying” it to other information will win the day. If you can do that without paying an outside party additional, then it is an even bigger win as it allows for manipulating the acceptable profit margin you will take to create that sale. In that respect, IMHO, three-party systems will more often than not trump the four-party systems unless major changes are made in how they work toward a common goal.

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