Barely a day goes by without hearing another story about how the latest innovation will transform the way consumers pay for goods and services. We hear about industry disruptors such as Square, we hear about how the rise of mobile point of sale devices will enable every micro-business to accept card payments. We hear about how the combination of contactless technologies and mobile phones will mean that everyone will pay for the smallest purchase with a wave of their smartphone. And we hear about how Apple is about to revolutionise payments with iPhone 6 and iWatch. All of these innovations continue to digitise payments.
It is clear that the technology industries want to digitise payments, but what about banks and governments? The New York Times reported in December that U.S. retail businesses lose $40 billion per annum because of the theft of cash alone, the 2013 Cost of Cash report from Tufts University placed the total cost of cash in the USA at $200 billion per annum. With costs of this magnitude it is little wonder that a “war on cash” is being waged across the world, although it would be more accurate to describe it as a “war on non-electronic forms of payment”.
According to the Nilson Report in 2012 there were over 7.3 billion payment cards across the globe and they generated 177 billion transactions. While these numbers are not surprising what is that it is also growing quite quickly; in fact it increased by 9.3% over 2011. And when mobile payments truly get going – when people use their phone instead of their credit card to make everyday payments, the number of transactions will escalate further. Or will they? As with all new technologies, consumers will decide when and if they will adopt it. They will use a combination of utility, ease of use, security and cost to make their decisions. At the moment relatively few of the 177 billion transactions are mobile, but once the hardware is in place and some trailblazer creates a compelling value proposition mobile’s share of the overall number of payment transactions will increase. Some of the transactions will be substitutes for other digital transactions – for example as consumers pay for groceries with their phone instead of using a debit card, but others will replace situations where cash is usually used. This will happen, as long as the convenience, security, cost and awareness issues are addressed.
But what happens when this wave of transactions hits the payments infrastructure. The sheer volume will cause problems, but the issue is more serious than that, because the payments infrastructure was designed for a different era, an era before many of today’s payment methods and channels existed. As the new methods and channels were developed the payments infrastructure was patched, fixes to specific problems were implemented, one at a time. Think of the analogy of a major road system – as traffic increases, new lanes are added, but what happens at junctions? First traffic-light systems are tweaked and amended, then maybe they are replaced with roundabouts and then they are replaced with major interchanges. Eventually the point is reached where major change is required because the road system simply cannot take the volume – perhaps restrictions are imposed on who can use the road and when they can use it, perhaps tolls are added.
Our payments infrastructures are a little like this, there are major highways, there are regional roads, there are good points and there are points of weakness. In the movies when a failure happens – for example an electricity blackout – it is usually shown as a slow moving, gradual failure, but the reality is that failures tend to happen quickly. One minute everything is working and the next minute it isn’t. In payments, one minute the ATM is working and the next it isn’t.
In the past, when the world was less connected this was a problem that could be contained. Now it can’t. In a recent, real-life example, when a major payments failure happened at a large financial institution, the IT department diagnosed and fixed the problem within 1 hour. This was excellent work, especially given the myriad of systems used. However, 12 seconds after the failure first happened the news of the problem was already on Twitter, 3 minutes later it was the top trending post on Twitter and 19 minutes later the CEO of the bank got a phone call from the editor of a national newspaper.
With the advent of social media, problems can cause major reputational damage very quickly, so it is vitally important that payments failures affecting customers are avoided. In addition to example referred to above there have been high profile failures across the world from the UK to Australia. In fact, it seems that the failure rate is increasing. This is not surprising – the number of transactions is going up, the number of payment methods is increasing and the systems are getting older and older. They simply cannot cope with the new demands being placed on them.
The obvious answer is also the most difficult – some would say it is impossible. The obvious answer is to totally replace the payments infrastructure – using the analogy above the answer is to build a completely new road using the latest technologies. For some organizations this is possible, but for many, especially the largest ones, it simply isn’t practical. Totally replacing the payments infrastructure in a single step just can’t be done. It is connected to too many systems and the pain caused by any failures would be too great. So for larger organizations the answer is a step-wise, phased replacement process – where specific pain points or specific business challenges are targeted one at a time. But this needs to be done differently from the past, it needs to be done with an encompassing vision of the longer term goal. The goal of course is to deliver a payments infrastructure that can handle the unexpected, a payments infrastructure that can cope with large increases in volumes and a payments infrastructure that can meet new customer demands. In short a payments infrastructure that enables business ambitions rather than limiting them.
The IT solutions exist today and there are companies that know how to deliver the short term goals alongside the longer term vision. Many companies claim to be able to do it, but few can back up their claims. The digitisation of payments will continue, it will continue to put pressure on legacy systems, it will continue to turn creaking legacy systems into cracked and broken systems unless you act now.
By Daragh O’Byrne, Chief Marketing Officer, BPC Banking Technologies