RETAIL PAYMENTS: Digital Cash and Digital Devils

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RETAIL PAYMENTS: Digital Cash and Digital Devils

Retailers, Regulators, Bankers, and Consumers
Navigate New Retail Payments Realities

Think about how many times you have heard about the demise of cash or checks over the years, and you have a good idea of the pace of change in the payments business.

The way people pay has a multitude of new realities today, especially in retail, as attendees learned at the Federal Reserve Bank of Chicago’s 11th Annual Payments Conference, held May 19-20. One speaker and long-time attendee, Tim Willi, managing director and senior analyst at Wells Fargo, put it like this: “I’ve never been more confused by the payments landscape. It’s insanely dynamic.”

Indeed, there are payments product announcements daily, many concerning mobile payments. Here’s one coming over my Facebook page from TechCruch as I write: “Square’s Disruptive New iPad Payments Service Will Replace Cash Registers.”

Square, as it happens, provided an example of the fast pace of change in the retail payments market. Last year, mainstream payments players criticized Square CEO Jack Dorsey for the company’s approach to allowing consumers to swipe credit cards on their smart phones. “Today his biggest problem is shipping enough product,” noted Richard Oliver, executive vice president at the Federal Reserve Bank of Atlanta.

In his May 19 keynote address, “Paradigms Lost,” Oliver likened the industry today to Milton’s classic, Paradise Lost (with apologies). “There are many candidates for Satan,” he observed. “It depends on where you sit and who you are.” For details, see Oliver’s comparison of yesterday’s payments paradise with today’s payments paradise lost.

The End of ‘Everything Is Free’
Merchants want lower fees. Banks want to make a profit for shareholders. Consumers want to make payments quickly, easily, and securely easily on their mobile devices. Consumer advocates want to make sure that the emerging technology does not leave behind the working poor who don’t have bank accounts or older people who prefer traditional methods for making payments (the unbanked and underbanked).

Everyone wants coordination and cooperation on mobile banking schemes. Nobody wants regulation to stifle innovation.

Consumer payment preferences are shifting from checks and cash to PIN debit card payments, reported merchants and Federal Reserve researchers. “The debit card and the prepaid card are the only things growing explosively,” Oliver noted.

At the same time, most speakers agreed that consumers are likely to pay more for both banking and payment services. When the Senate issues final rules to govern the Durbin Amendment, bank fees for consumers will go up. But consumers may see those fees offset elsewhere. The Durban amendment will save merchants money, and they may pass those savings on to their customers, which should slow the rate of consumer cost increases for products and services.

The reform could end up costing consumers less in the long run, and it will probably be fairly easy for savvy consumers to avoid paying bank fees. Competition among banks will help. Which bank, after all, wants to be the first on the neighborhood to announce to its customers that they are now going to start paying more for writing checks and using their ATM machines?

“We are guilty because we established an everything-is-free model , with revenue based on penalties,” said Bank of America global card executive Andy Rowe. “Now that penalties going away, we have to say to our customers, ‘Well there is value, and you have to pay.'”

In a bid to avoid losing customers and to leave behind the standard practice of supporting services based on late and overdraft fees, Bank of America is piloting a tiered service and pricing scheme. “All customers must pay a fair price for value, and the cost structure and revenue matches customer preferences.”

Just to show how history loops, this consumer development is similar to corporate treasury management in the mid 1980s. At the time, banks gave away cash and treasury management services in exchange for the interest they earned on account balances. Interest rates fell. Companies borrowed from one another in the commercial paper markets, further limiting interest-based income, and banks started charging fees for all the once-free corporate services.

Could it be that the more things change the more they stay the same? “I don’t see in our immediate future any massive change coming about,” Oliver said. “No payments technology in this country has ever been taken away.”

The ‘Wild Lunatic Fringe’ Yet these turns of events are not the banking and consumer nightmares they may seem, just as they weren’t in the late 80s and 90s. In a validation of my previous article on The Durbin Amendment, John Drechny, senior director of payments at WalMart Stores said, “You say Durbin is not going to create innovation. I hate to tell you, but it already has.”

As with any new service, especially those deriving from internet and mobile devices, consumer choice and convenience will rule, noted Tim Murphy, chief product officer at MasterCard Worldwide. MasterCard is working to integrate payments with internet search and social networks, asking the question, “How do you get the payments more integrated with consumer research preferences?”

Erin McCune, presenting the “wild lunatic fringe of payments,” showed some of the seemingly unlikely possibilities of innovation: addictive Facebook games like FarmVille and CityVille, with their virtual currencies purchased using very real credit cards. “If grandma is already on Facebook to look at her grandkids’ photos, why not let her send the $100 for the gift and not just the digital cake?” asked McCune, a partner at the payments consultancy Glenbrook Partners, San Francisco. You never know the sources of innovation. “Look at PayPal 10 years ago,” she said.

Look at PayPal, indeed, for strange turns in the payments marketplace. PayPal’s Laura Chambers reminded the audience that the company started as a way to beam payments between two Palm Pilots (See “PayPal Puts Dough in Your Palm,”Wired, July 27, 1999.)

The company, with its reputation for telling consumers and businesses how payments work, gained more than virtual points from me for the consumer-oriented approach to mobile payments presented by Chambers, senior director of PayPal Mobile. “People ­ have incredible systems in ordering their funding sources and in how they order their wallets,” she said. “Payment is very personal to people.”

Not Comfortable but Very Resourceful
Consumers are not comfortable yet with mobile payments made through apps, just as they weren’t initially comfortable with payments made over the internet through web browsers. For a discussion of the current mobile payments ecosystem in the U.S., see “Mobile Payments in the United States: Mapping Out the Road Ahead,” a recent report provided by the Atlanta and Boston Federal Reserve Banks.

“Consumers are more resourceful on how to pay,” says MasterCard’s Murphy. With the growth of Groupon, couponing and local offers are more prevalent and ripe for integrating with mobile devices. “Driven by a deep perspective from consumers that they will spend but have to get a deal,” Murphy said.

Regulators are concerned. Prepaid cards make them nervous because nonbank providers issuing cards could, in effect, be seen as taking deposits. That didn’t stop the U.S. Department of the Treasury in introducing its Direct Express card for delivering benefits to unbanked individuals, nor WalMart as a way of providing payroll to its employees.

In assessing a paper he co-authored 10 years ago, Emery Kobor,a strategic policy director at the U.S. Department of the Treasury, noted, “We didn’t anticipate potential for nonbanks to have a customer-facing relationship and be more than a service provider for the bank. Today that model is being flipped around.”

“There is certainly as much potential for a nonbank to maintain a customer relationship and a transaction account for a customer as there is for a bank,” Kobor continued. “The bank may not appear at all except as a back-end service provider for settlement, and the customer may not know at all.”

To see how innovation in payments has evolved, read “Why Invest in Payment Innovations?” by Sujit Chakravorti (now Chief Economist at The Clearing House) and Emery Kobor (now assistant director for strategic policy in the Office of Terrorist Financing and Financial Crimes at the U.S. Department of the Treasury), published in 2003 when both authors worked at the Federal Reserve Bank of Chicago.