Retailer pressures for direct-to-account payments

Back in the October edition of “Digital Transactions” there was a nice column by George Warfal from our friends at Edgar Dunn called “The Next Way to Pay” in which he says that “merchants are re-purposing their rewards cards as payment cards using the automated clearing house and gaining per transaction savings”. He goes on to say that this mode of operation presents a challenge to the current card network model, and I’m sure he’s right. In fact, if you take a look at the latest figures from the US ACH, you can see an explosion in the account-to-account (P2P) payments which, I think, is related to growth in mobile app-instructed transfers.

US ACH

As you can see, all categories of ACH transfer are growing, with the exception of the check-replacement volumes that continue to fall (including at POS), as you might expect. I expect this trend to be even more marked in Europe, where the arrival of PSD2 means that retailer direct access to payment accounts will be one of the defining trends of the next era of payment evolution.

Under PSD2 banks and other payment service providers (PSPs) must give so-called payment initiation service providers (PISPs) access to their customers’ accounts so as to facilitate transactions ordered at the customers’ request.

[From Expert predicts innovation in payments market after PSD2 reforms are finalised]

I wrote an article exploring this for the Electronic Payments Law & Policy newsletter, arguing that while banks have been rather nervous about the effects of the access-to-account provisions of PSD2, it is time for them to adopt a more positive strategy, disrupting themselves before others do so. One suggestion, therefore, might well be for the banks to create their own access-to-account payment service, a sort of next generation debit product.

The recent EUR21.2 billion deal agreed between Visa Inc and European banks over the sale of Visa Europe has led to increased calls for the banking industry to put the windfall to use to create a competing product to tackle the duopoly enjoyed by Visa and MasterCard.

[From Finextra: Finextra news: Visa/MasterCard EU dominance adds impetus to calls for bank-backed competitor]

Now, Visa and MasterCard are rather good at what they do, so it would really take something special to be better at it than them. It might, in some observers’ calculation, be better to focus on delivering products into new channels where Visa and MasterCard have to work harder, such as mobile and online. Creating a direct-to-account service, with appropriate security and consumer protection, delivered through the EBA Digital Customer Service Interface (DCSI) as an API for retailers and other service providers to use, could deliver a worthwhile new payment product that (rather crucially) keeps the information relating to the transaction under bank control.

The European Payments Council has released proposals for the design of a pan-European instant credit transfer scheme, with the aim of bringing real-time money transfers across the Sinlge Euro Payments Area (Sepa) by November 2017.

[From Finextra: Finextra news: EPC publishes proposals for pan-European instant payments scheme]

This is pretty interesting. API access to a pan-European instant payments networks would mean a really important new “push platform” for product and service innovation in the payment space. If George is correct about the pressure from retailers to move to direct to account solutions, then I can see that there will be plenty of new opportunities for services in that environment: banks can offer real-time, API-centric, value-added payment services that offer specific functionality for retailers.

Maybe Europe will get a “third network” after all?

Over my tea and toast this morning I saw the same story that everyone else in payments did.

Visa has confirmed that it is in talks about buying back its former subsidiary Visa Europe, with a decision on whether to complete a deal expected by October.

[From Finextra: Finextra news: Visa confirms Visa Europe acquisition talks]

There are reports that Visa Europe will be sold to Visa Inc for something like $15-20 billion and cease to exist as an independent entity. When I was looking at this before in connection with another project we were working on, I took at look at what this might mean (none of which I’ll share here of course!) but I will note that when Seeking Alpha went into the financials of this potential purchase (none of which are any of my business and I am not commentating on them in any way) what caught my eye in the analysis was something else. It was the passing reference to the idea that the European banks that own Visa Europe might be considering launching an alternative payments network once it has been sold. The author says that:

Even more concerning was the 2013 information suggesting the consortium wanted to sell Visa Europe to set up its own payments network.

[From Visa: Puzzling Action On Visa Europe – Visa Inc. (NYSE:V) | Seeking Alpha]

I thought it might make for some fun speculation to look at this idea in more detail. Suppose it were indeed to come to pass that Visa Europe was sold to Visa Inc and the banks that sold it decided to spend some of their gains on setting up their own rival payment network within the EU. What would it look like? Well, I’ve no more idea than anyone else, but I’m pretty sure it wouldn’t look like Visa or MasterCard.

Think about it. In a world of smart phones and biometrics, of the Internet of Things and Wi-Fi, why on earth would they go to the trouble of making plastic cards and sending them to people? Payments are vanishing from the point of sale and disappearing inside apps, so why not design a new product for that market?

When cards were first invented, the idea of ubiquitous networks that would connect all merchants to all banks and to all customers must have seemed fanciful to the point of fantasy. Therefore somebody had to step in and build that network. The card networks did this and made such a good job of it that they have completely changed the way that society uses money.

But we’ve got laser beams and transistors nowadays, so when I pay in Waitrose, the money could simply go from my bank account (set aside for a moment what I mean by “bank account”) to Waitrose’s bank account in the shortest possible time. Anything else would involve processes, systems and costs that don’t really need to be there. Payment would be an instant push from the payer to the payee, decoupled from other financial services products like credit or purchase insurance.

Let’s imagine what this might look like. Forget about bank accounts, let’s imagine that we have SEPA payment accounts (these might be bank accounts, pre-paid wallets, all sorts of things, but crucially they are regulated). And forget about IBANs and whatever. Take a leaf out of Square’s book and allow people to choose a “euroname” for each of their payment accounts. So, for example, Barclays let me choose €dgwbirch and link this to my current account. In the future I can log in and link it to any other payment account.

So how should payments work? Start from the premise that anyone with a euroname should be able to pay anyone else with a euroname instantly and you end up with something rather different to the four party model of today.

I run a shop. The shop has an account with Barclays. I asked Barclays for the euroname €naga they give it to me and link it to my account. You have an account with Lloyds and you come into my shop to buy something. My shop doesn’t have its own app, just a sign where the cash register used to be that says €naga. You buy a couple of things and need to pay me €23.50, so you open your Lloyd’s app, type in €naga and the amount. A few milliseconds later I get notification of the money is in my account. End of.

Of course, if you come into my shop you are from a country outside centre then you can still use a credit card, PayPal, Venmo, Wechat or whatever else to pay through an app on my phone. In fact I did this just the other day when I went to buy some important supplies at the new Dungeons & Dragons accessories shop in Woking. They don’t have a conventional POS terminal at all, just an iPhone and a Bluetooth card reader. When it was time for me to pay I used my PayPal app.

PayPal Here D&D

Like a great many other retailers, this shop does not have a requirement for hundreds of transactions per hour and a million different facilities around thousands of stock items. They just want the money, instantly, and if the banks do indeed decide to set up their own European “third network” then this is what it should give to them.


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