Why the “middleman” is critical to the future of payments

By Chris Davies | 28 May 2014

The rapid and unprecedented advancement of personal technology has changed our lives in many ways. One impact of this has been to provide individuals with the tools they need to accomplish tasks for which they may have once needed a third party. This has been especially apparent in financial services.

Take peer-to-peer lending for example. Historically, a bank has always taken deposits and in turn lent it out. Now, using online tools, those with money to invest can circumvent the bank and lend directly to fledgling companies through sites such as Zopa and Funding Circle.

This trend is now increasingly spreading to the payments world. Peer-to-peer methods of money transfer are growing in popularity, which typically mean using smartphones to transfer funds directly to a company or individual in a matter of seconds.

Starbucks in the US now operates its own payments system, which is known as a closed-loop network. This means customers can pay Starbucks directly for their coffee using a mobile app, without the need to introduce another financial intermediary, such as a card network, into the process. More retailers are now considering establishing these systems as a way of improving customer loyalty and convenience as the technology becomes more accessible.

Indeed, while many digital wallet services store card details, those such as Skrill can link directly and securely to bank accounts. Barclays Pingit, for example, just needs a mobile phone number to transfer money directly to an individual or a tradesperson without the need for cards. Recently, it was revealed that Facebook has registered to provide financial services – namely in money transfer. This could represent an extension of its social media offering which is potentially highly disruptive to the rest of the market. Twinned with the entry of other agile, digital-only service providers to the sector, such as Amazon, Google and Twitter, where will traditional providers such as payment card processors and card networks fit into this new landscape?

The reality is that many of the services these traditional providers offer are “invisible” but vital to the healthy functioning of a payments market. There is undoubtedly significant change coming for the financial services world and the payments sector in particular, so it will be incumbent upon card schemes and processors to show the value that they are adding to the end consumer, in addition to the essential infrastructure that they provide. However, they will also need to be agile and flexible to adapt to the changing environment as well as ensuring that they leverage new technology for the customers’ benefit.

Processors are needed to support the huge infrastructure which is critical to quick and effective payment processing. Operating a closed loop system is only a feasible option to the largest retailers, who need to have the ability, volume and strategic plan in place to support the technology and terminal estate required, alongside educating their customers on its use.

By contrast, card networks and processors have the robust infrastructure in place required to process large volumes of payments securely ticking along in the background 24/7, along with a commercial and competitive incentive to invest heavily in its ongoing improvement. Networks and processors also have the scale and good reason to maintain an active and productive partnership with technology providers in the payments space, such as start-ups designing new apps, and terminal manufacturers. This keeps resource flowing into development of new terminals and other payment products, bringing a pipeline of alternative payment methods into the space.

Of course, there are innovative start-ups which bring exciting new launches to the market, but they often need to team up with a processor to get both financial backing and scale behind their product. Many of these start-ups are also reliant on plugging in to the existing infrastructure. Intuit Pay and iZettle for example, which allow individuals and small businesses to accept card payments using smartphones, need the card schemes in place to take payments. Many people would not feel confident giving their bank account details directly to unfamiliar parties on this technology.

Security is another fundamental element of traditional provider service. Processors invest millions every year into protecting their customers’ details as cyber criminals become ever more sophisticated. As the amount of shopping transacted online increases, this becomes even more imperative. In fact, the consumer protection framework in place around distance selling and online shopping is entirely dependent upon the payment processor network. The chargeback system, for example, could not function on a peer to peer basis.

Rather than viewing it as a competitive threat, traditional players need to think about how they can work with entrants to help them bring new solutions to market, using their expertise and resource to inject innovation into the sector. In reality, the advent of new technology in this space presents an opportunity for both new and established participants to deposition cash rather than each other. The explosion of ways to pay tradespeople for example, has the potential to reduce the volume of cash significantly in areas where it has had a stronghold.  This will create a bigger electronic payments market that will accommodate a larger number of providers, both old and new.


By Chris Davies, Managing Director, UK, Global Payments 

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