The Challenges of Real Time, Any to Any Payments

Transcript

1 THOUGHT LEADERSHIP REAL-TIME, ANY-TO-ANY PAYMENTS: IMAGINATION REALIZED, COMMERCE E VO LVE D 1

2 TABLE OF CONTENTS THE PROBLEM WITH PAYMENTS TODAY ... 3 CURRENT PAYMENT OPTIONS CONSIDERED ... 4 POWERS ANY-TO-ANY PAYMENTS ... 5 Black White OVERCOMING THE CHALLENGES OF REAL-TIME, ANY-TO-ANY PAYMENTS ... 5 THE BENEFITS OF REAL-TIME, ANY-TO-ANY PAYMENTS ... 6 THE HEART OF REAL-TIME, ANY-TO-ANY PAYMENTS ... 7 ... 7 SUMMARY REAL-TIME, ANY-TO-ANY PAYMENTS: IMAGINATION REALIZED, COMMERCE EVOLVED 2

3 DRIVES HIGHER White Black PROFITS FROM PAYMENTS Imagine a world in which consumers have control over their money and are connected directly to their payments mechanism of choice no matter where they are. In this world, shoppers pay anyone directly from their current/ checking accounts, banks reclaim a direct relationship with consumers and retailers drive store spending. Payment stakeholders collectively benefit by driving out inefficiencies in the payments ecosystem, thereby reducing costs and protecting margins in the face of relentless change and regulation. Most importantly, consumers have the ultimate control over their money and are able to instantly access it to pay others, no matter where either party is on the globe. The world of real-time payments is becoming a reality and along with it, the enablement of cheap, quick, universal and secure electronic payments. complex. What appears to consumers THE PROBLEM WITH THE COMPLEXITY OF OUR CURRENT as a simple debit and credit process PAYM E NTS TODAY PAYMENTS SYSTEM involves a global interconnected Consumers and businesses have network with multiple players filling Many consumers errantly believe multiple electronic options when it different roles. In general, open-loop payments are currently processed comes to paying for goods or services card networks operate by connecting in real time. Most do not understand rendered. They can pay by credit, debit two separate value chains (the issuing the complexity of what occurs after or prepaid card; ACH transaction or and acquiring processes) at the point they swipe their credit or debit cards alternative networks. While the current infrastructure works effectively today, of sale, as follows: or authorize online, card-not-present it was built during an age when paper transactions. The current ACH and reigned, in which the mass-market MERCHANT > CARD ACQUIRING BANK > card network systems, while optimized Internet and smartphones did not exist. CARD NETWORK > ISSUING BANK > and convenient, are also incredibly Current payment systems were built complex and inefficient. CARDHOLDER for a world where electronic networks either didn’t exist or were too slow to Broadly, in an ACH system, originators Within the above process, a card be used for business. Technology has deliver transactions to banks. Each network interchange functions to shifted that landscape and paper-based bank in the system chooses an establish fees that retailers and payment systems have fallen behind by operator who forwards and sorts not leveraging the limitless bandwidth, banks must pay for the upkeep and consumer protections and ubiquitous transactions to receiving banks and convenience of the system. After a 1 access to online information that other operators as follows : consumer swipes a card at one of now enables more efficient payment many types of merchant terminals on alternatives. RECEIVER ORIGINATOR the market, an acquirer must route the RDFI ODFI transaction to the correct payment card network, which then routes to another using a bank app on a This system is further complicated by the transaction to the appropriate smartphone, a non-branded card via constantly evolving payment options issuing bank, which then charges the an ATM or any other bank channel, like card-not-present transactions cardholder’s account. is appealing in its ability to increase and decoupled debit cards that use efficiency to current payment systems. the ACH rails to create new ways for When contrasted with the complexity payments to occur. of our current card and ACH networks, the simplicity and revenue potential Like the ACH system, the credit card of a real-time payments system that network is equally convenient and makes a transfer from one account 3

4 THE COMPLEXITY OF TODAY’S PAYMENTS WORLD THE ECONOMIC IMPACT OF BANK ALTERNATIVE NETWORKS CUSTOMER’S BANK APPROVES TRANSACTION AND RETURNS PAYMENT TO RETAILER To appreciate the potential negative PERSON BANK impact associated with payments executed large scale through BILLER SUBMITS PAYMENT TO CUSTOMER’S alternative networks, consider an BANK, BANK AUTHORIZES AND ONLINE BRANCH SENDS BACK TO BILLER example involving three people (Persons A, B and C) who make transactions with each other around ATM a table. Person A owes Person B $50. BANK Person B owes Person C $100. Person C owes Person A $75. Person A puts $50 BANK BILLER on the table. Person B puts down $100 and Person C puts down $75. PERSON MOBILE WALKUP In the middle of the table lies a fee of 3 percent plus the aggregate transaction CHECK amount of $225, totaling $231.75. All three parties execute their payments at RETAILER the same time: Person A ends up with BANK $75, Person B receives $50 and Person MOBILE POS C gets $100. The money on the table RETAILER’S BANK SUBMITS TRANSACTION TO THE has moved around within the system CUSTOMER’S BANK ONLINE and $6.75 has been taken out of the economy to pay for the maintenance of the system. Parties cannot access their funds for three days and $225 goes three days to actualize, at which point CURRENT PAYMENT out of the economic system, losing the payers may not have sufficient funds OPTIONS CONSIDERED multiplier effect. In actuality, lost funds in their accounts to cover payments. due to maintenance and transaction Additionally, payers can dispute ACH Built over the past 40 years, the fees is a problem for every payment transactions months after they occur, card infrastructure is resilient, quick system: Merchants pay a substantial fee driving the need for businesses to and, despite recent data breaches, to offer the convenience of cards as a maintain a capital cushion to mitigate generally secure. However, paying payment option to customers, ACH fees are leveraged in multiple countries and, the risk of disputed payments. by card is expensive. Governments finally, receivers of ACH transactions across the world agree and have been must wait a few days after the process Alternative networks like PayPal, Skrill regulating away interchange revenues. begins to receive their money. and Payzal offer a faster alternative While such actions delight retailers to traditional payment mechanisms. and billers (such as consumer finance, These networks typically require a insurance, utility and other billers), the underwriting ability of payers’ bank account to deposit and withdraw they often hurt financial institutions issuing banks to mitigate the risk of funds, are simple to use and offer that have to increasingly alter their insufficient funds in payers’ accounts built-in security capabilities like funds business models to continue making and enabling instant payments by verification. However, they can be a profit from their card operations. linking transactions to payers’ bank expensive and are not open loop or Despite the reduction in interchange, accounts. Accounts can be funded accepted everywhere. They speed up retailers and billers continue to cite by a card payment or through ACH the payment process by leveraging interchange as a significant pain point. ACH payments are direct debits, POSITIVE FUNDS LOW-COST FAST PAYMENT TYPE VERIFICATION card-based transactions or bulk CARD- payments. While inexpensive and BASED scalable, ACH networks do not YES offer the real-time fraud detection BULK/ BATCH NO that the card infrastructure does. Payment recipients (which are often ALTERNATE retailers and municipalities) assume an increased risk of non-payment IMAGINE WITH SM since settlements can take up to 4

5 THE SIMPLICITY OF REAL-TIME, ANY-TO-ANY PAYMENTS OVERCOMING THE CHALLENGES OF REAL-TIME, REAL-TIME DEBIT OR AUTHORIZATION ANY-TO-ANY PAYMENTS CARD CREDIT CARD PAYMENT BANK NETWORK Current payment systems are entrenched into consumer behavior. Consumers will therefore have to be incented to adopt real-time payments BATCH RETAILER CHECK if the large-scale acceptance BANK ACH OR BILLER required for its success is to be achieved. Ubiquity sounds like an insurmountable task, but the benefits CARD OR for consumers and stakeholders make CARDLESS this challenge smaller than it first BANK appears. Despite these challenges, there are significant reasons for moving away from the existing Payment stakeholders can make both networks, so although it is a third payments infrastructure. Current a direct connection to each other and option, alternative networks rely on payment systems are entrenched in offer a benefit to their customers by the two original payment networks expensive legacy systems that are enabling person-to-person (P2P), to operate. Because these networks difficult and costly for banks, billers person-to-business and business-to require pools of funding, which cannot and retailers to replace. Industry be easily accessed or made readily business payments. experts state that flexible payment available, they are difficult to regulate technology can have maintenance and are worrisome to governments costs of 21 percent of an IT budget, worldwide. POWERS ANY-TO-ANY THE CHANGING FACE OF P2P PAYM E NTS PAYME NTS markets, real-time payments on mobile Real-time, any-to-any payments make REAL-TIME PAYMENTS: AN devices require only a phone number P2P payments faster and easier than EVOLUTIONARY ALTERNATIVE or email address to complete and are current payment methods. People living Real-time payments using a an intuitive, safe, quick and convenient in the same city can currently avail variety of channels and devices way for people to pay each other. P2P themselves of cash, check, card and like smartphones, non-branded technology is enabling anyone to pay online payment methods like Amazon cards, mobile phones, laptops and anyone else for any number of common WebPay, Obopay and others. Recent activities; friends can pay each other for computers to deliver instant, secure Mercator Advisory Group research a shared cab ride or dinner bill, while suggests that American consumers and inexpensive payments directly parents can pay their babysitters by are becoming very comfortable using between two parties anywhere in the transferring money from their accounts electronic means to make payments world offer an evolutionary alternative to the sitters’ straight from their device to others. Nearly 50 percent of survey to current payment options. of choice. An April 2013 report by respondents transferred money to 3 2 Consumer Action News indicates that others electronically . It’s worth noting A NEW WAY OF PAYING: consumers are very receptive to the that of those payments, 39 percent were CONSUMER ANY-TO-ANY idea of electronic P2P payments with 77 initiated online and 15 percent were The term “any-to-any” is used to percent of those surveyed saying they’d initiated by mobile phone. Mercator describe the connection from one recommend using P2P payments and expects the use of mobile and tablet party to any other party and can 51 percent of those who hadn’t used a devices to initiate P2P payments to P2P payment service saying it was only include payments involving unbanked increase over time. because they didn’t know the option individuals with access to prepaid existed. In many cases, free services People wishing to complete a BASE24-eps® as cards. With Black White offered by financial institutions like transaction in separate cities assume the enabling technology, real-time Barclays PingIt and ABSA CashSend risk by sending cash, experience time payments facilitate quick, secure, further reduce the risk and cost of P2P delays with checks and pay more to use cheap and regulated transactions payments in a real-time, any-to-any alternative payment networks than the between consumers and retailers, payments environment. transaction seems worth. As is currently financial institutions and billers. being borne out in emerging 5

6 STAKEHOLDERS REAL-TIME PAYMENT BENEFITS CONSUMERS • Real-time access to funds • Secure access to trusted funding source • Intuitive, easy to use • Brand is front and center in the consumer’s mind FINANCIAL INSTITUTIONS • New revenue streams • Efficient payment process • Less risk • Bank account becomes the center of the payments experience RETAILERS • Lower costs • Less payment risk • Faster funds availability • Platform that can be leveraged BILLERS • Lower costs • Settled funds in real time • Deeper customer relationships GOVERNMENTS • Less payments friction • Consumer choice • Less risk from new money pools real-time rewards offered by real- as opposed to 36 percent for legacy Financial institutions get to create applications. Additionally, the ROI time payments. This type of network new business models where they would prove intuitive, easy to use are price makers, rather than price for flexible technology is over 300 percent for a five-year period and 860 takers. They can create value for the and would enable consumers to pay 4 financial system and start charging . percent+ over a 10-year time frame for charitable gifts, groceries, fuel, clothes, utility bills, association dues for the value rather than assuming an and almost anything imaginable from arbitrary price. Additionally, financial THE BENEFITS OF REAL- institutions can put the consumer their smartphones. Consumers benefit TIME, ANY-T0-ANY from value-added paid services like at the center of the payments world PAYM E NTS and the consumer will reciprocate P2P payments, fraud protection and by placing the brand of the financial liquidity management as well as The benefits of real-time, any-to-any institution at the front and center of freebies like real-time reward offers payments abound for consumers, their mind. and check replacement. financial institutions, retailers and governments. If these benefits are RETAILERS AND BILLERS FINANCIAL INSTITUTIONS clearly and consistently communicated Retailers and billers benefit from Financial institutions benefit from to all stakeholders and consumers, this significantly reduced costs as they the inexpensive, conservative, communication can drive consumer are unhinged from the existing efficient nature of real-time, any- adoption of real-time payments as a to-any payments. While it’s true networks. Additionally, retailers will dominant payment option. that financial institutions would reduce their exposure to card data breaches, enabling them to better lose money from interchange fees, CONSUMERS conservative estimates project over protect their brands. Real-time, Real-time payments return consumers $5.5B annually in new revenue derived any-to-any payments give them to the center of the payments world from consumption fees on services more insight and control into what with security and speed. Whether that consumers are demanding, such consumers buy, which ultimately leads they’re paying each other, small to increased sales revenue. By storing as P2P payments and increased fraud businesses, large retailers or billers, purchasing data within the servers protection, as well as more effective consumers control their money with connected to apps on consumers’ cross-selling and merchant funded real-time payments. Consumers would rewards. Furthermore there is an smartphones and other devices, appreciate the lower cost, instant retailers and billers can leverage estimated $5B in savings from lowered performance and accompanying loyalty program rewards and big attrition and saved acquisition costs. 6

7 data generated through their direct REAL-TIME PAYMENTS ENABLE connection with consumers’ accounts. CROSS-SELLING OPPORTUNITIES They will benefit from a faster receipt FOR RETAILERS of funds for non-card transactions, offers to generate increased sales A strong value proposition of dramatically driving down the time and revenue. Additionally, by working implementing a real-time payments for collection, delinquencies and the closely with their banking counterparts, system is the cross-selling cost of operating capital. The cost they can start to offer merchant- opportunities it enables for merchants, savings could be significant with a 100 particularly retailers. With access to the funded rewards. This will optimize their purchasing data on customers’ mobile marketing spend by ensuring their cost percent adoption resulting in savings devices, retailers can crosscheck that is contingent upon a sale. Industry data of $6B globally for retailers and $5B data against a customer relationship shows that effective merchant-funded for billers. reward programs can lead to increased management (CRM) system for cross- selling opportunities. Retailers can then revenue from increased conversion GOVERNMENTS rates, larger average and acquisition of leverage those opportunities and Alternative networks cause concern combine them with loyalty reward new customers. for governments by removing payments from the economy and banking system and hindering Sources cited credit cards to alternative—but regulation efforts. Real-time, any-to- 1. Benson, C. C., Loftesness, S. Payments equally convenient—payment habits. any payments benefit governments Glenbrook Press, Systems in the U.S. Consumers are used to selecting from by creating less payments friction, Menlo Park, CA, 2010 multiple cards to make payments. less risk from new money pools 2. Mazursky, R. G. P2P Payments: Retailers are used to providing the and increased economic velocity. Financial Institution vs. Third-Party equipment and participation in the The faster settlement of payments, Mercator Advisory Digital Solutions. back-end processing to make card particularly ACH payments, will Group Research Note, February, 2014 payments possible. For real-time generate a daily economic boost by 3. Susswein, R. Survey Finds Satisfaction payments to work, consumers will freeing money tied up in the current Among P2P Payments Users. have to be incented with loyalty payment networks. With more money Consumer Action News, May 2013, p. rewards, discounts, convenience and a in the system recipients in possession 1, 4. Accessed online via pdf on 2-14-14 strong communications campaign to of that money instantaneously, at: http://www.consumer-action.org/ develop new payment habits. Retailers an acceleration effect can lead to downloads/english/CA_News-P2P- can be incented with lower fees, faster increased economic velocity. payments.pdf receipt of payments and direct access 4. CEBTower Group Commercial Banking, to a lot of consumer purchasing data, CBBO Implementing a Flexible which they can use to expand and THE HEART OF REAL-TIME, Technology Infrastructure, 2013 target their customer bases. ANY-TO-ANY PAYMENTS The success of real-time payments SUMMARY taking off as a widely accepted payments mechanism depends largely In seeking to replace the complex on the network effect. With social card payment systems currently in media networks Twitter and Facebook, place, real-time, any-to-any payments the value and success of the real- must gain the participation of large time payments network depends on retailers and banks to create a network the number of users connected to it. effect capable of propelling the The payoff for successfully getting new system forward. With effective consumers to change their payments communications and marketing of behavior is huge. If large retailers with the advantages of real-time, any-to- thousands of locations and large banks any payments (i.e., speed, efficiency, join the real-time payments network, lower cost, regulation and increased all parties involved will benefit. economic velocity) as well as fraud prevention and loyalty components Cards (credit, debit, prepaid, etc.) in place, the potential real-time, any- dominate the current payments to-any payments network is poised culture. Consumers and retailers are to introduce the next step in the going to have to be incented to shift evolution of payments. their payment habits from swiping 7

8 OTHER THOUGHT LEADERSHIP TOPICS DISCUSSED BY ACI ABOUT ACI WORLDWIDE WHAT A PRO FIT- G EN ER ATI N G RETAIL PAYMENTS ENGINE LOOKS LIKE ACI Worldwide, the Universal Payments company, powers electronic BRINGING MERCHANT ACQUIRERS payments and banking for more than INTO THE 21ST CENTURY 5,000 financial institutions, retailers, billers and processors around the IS YOUR ISSUING SYSTEM HOLDING world. Through our comprehensive YOU BACK? suite of software products and THE RISING PROBLEM OF DISPUTES hosted services, we deliver solutions addressing consumer payments, OVUM DECISION MATRIX: SELECTING payments hubs, transaction banking, AN ELECTRONIC PAYMENT SWITCH consumer omni-channel, payments PLATFORM risk management, retailer payments and biller payments. To learn more about ACI, please visit www. aciworldwide.com. You can also find us on Twitter @ACI_Worldwide. © Copyright ACI Worldwide, Inc. 2014. www.aciworldwide.com ACI, ACI Payment Systems, the ACI logo and all ACI product names are trademarks or registered trademarks of ACI Worldwide, Inc., or one of its subsidiaries, in the United States, other countries or both. Other parties’ trademarks Americas +1 402 390 7600 referenced are the property of their respective owners. Asia Pacific +65 6334 4843 ATL5250 03-14 Europe, Middle East, Africa +44 (0) 1923 816393 8

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