In recent years, we have seen a lot of innovation in the payment space. It’s not just cash, credit card or cheques anymore. You pay for your coffee with your contactless card or mobile app. You do some cross-channel shopping; standing in a shop looking at a product and then using your phone to buy it online and get it delivered. You might pay hands free at your favourite fashion shop or take a cab ride without even needing your wallet. Or you send some money to a friend via GMail.
Most of the new brands and payment methods we have seen focus on the way payments are made by the consumer or how merchants can accept new forms of payments. And most of them are or were to be the next big thing in the payment industry. But are they really?
While the way we shop and pay has changed, in the background things seem to still work the same way. Most of these new forms of payment will require you to create an account and – surprise, surprise - register with your credit card details. Then you will either load some money onto your account, or the money spent on the account will at some stage be charged to your card. Sometimes you can also choose a domestic form of payment for this, for example the Lastschriftverfahren in Germany with PayPal. So while the front end, the POS, is addressed with very creative and good solutions, the nitty-gritty of the actual transferring of money is not. We still rely on good old credit cards.
Simply put, what is electronic payment at the end of the day? It is transferring money from account A to account B. This is easy if you know which account to transfer to and if you are in an authenticated environment (e-banking). But as we all know, looking at this from a POS or consumer’s perspective, this is one of the major issues in payment. A vast number of consumer banks and a vast number of merchant banks need to be connected in some way. This issue was addressed elegantly by the card schemes. Their network connects all these entities which keeps them alive and makes them part of these new payment methods.
Now, if you have ever spent more than a few months living in different countries, you will know that banking is something very domestic (except if you have a lot of money, then you might have a different experience). You cannot open a bank account if you do not live in the same country as the branch where the bank is located. And if you move abroad for a longer time, the bank might charge you a lot because you live abroad. The same applies for merchant banks. Most likely a merchant can only open a bank account in the country where it is located.
So, returning to my original topic of new forms of payment, I have not yet seen a payment method that solved this problem. Either they are domestic, or they use the rails of the card schemes to solve this problem. Even worse, many of the new payment methods work only in the country they were first launched (e.g. Gmail Send Money only works in the U.S.).
There are several reasons for this. Rules and regulations that differ in different regions and countries, proprietary bank interfaces and the cost of integrating them, banks not willing to support a payment method they do not benefit from and so forth. This is the big value of the card schemes and funnily enough is also one of the original problems they wanted to solve.
I am very excited about many new methods of payment, and from a consumer perspective the points I made above are not that important. However, for the payment industry the big innovation would be to overcome this dependency on the card schemes. A payment method that will truly replace credit cards will have to work all over the world.
I think we have only seen the first steps in this changing world of payments. How difficult will it be to overcome dependencies on the card schemes?
Please share your thoughts on this, we appreciate it.