CHICAGO – The “Pays” of the world – Apple, Android, Samsung and others – get a lot of attention for changing the face of the payments industry, but will have little or nothing to do with actually reframing the next generation of payments, experts say.
The same can be said of the dramatic changes at the point of sale, with payments being taken through mobile devices or tablets. Even if some consumers are no longer paying with plastic, this trend doesn't establish the fundamental changes that have to take place for payments to enter a new era.
“Apple Pay and the others are nothing more than a battle of the brands,” said Rene Pelegero, president and managing director of Retail Payments Global. “A new generation of payments cannot evolve from this framework.”
Instead, a move into real change will more likely occur with an open infrastructure, similar to what the Payment Services Directive 2 is seeking in Europe to eliminate intermediaries and provide new regulations and standards for access to consumer bank accounts, Pelegero said Oct. 12 during the annual Chicago Payments Symposium. In the wake of PSD2 in the coming months, European banks are quickly trying to adapt systems through new APIs.
This activity sets the stage for the payments and financial services industries to think outside of the box, Pelegero added. This type of thinking has started to occur with the Federal Reserve Bank's faster payments initiative, alongside the move to same-day ACH and an increase in companies like Ripple that provide multi-party, multi-currency payments globally.
However, the big catalyst for changes to payments infrastructure has always been need, not technology, said Margaret Morgan Weichert, national lead for payments at EY Advisory.
Even though there isn't currently a "silver bullet" that can change the payments ecosystem, a “distributed infrastructure” would move the industry in the right direction, Weichert said.
Such an infrastructure would improve ways to electronically identify an initiator of a transaction, prove transactions took place at a particular time, and execute transactions automatically — all key factors in any future payments ecosystem, Weichert added.
A proponent of blockchain, the distributed ledger system commonly associated with bitcoin, Weichert said the technology would help develop a single version of data, provide visibility into transaction history and would be rapidly scalable because clients can be added so quickly.
About two years ago, banks began to actively pursue use cases for blockchain technology, intrigued by its tamper-proof data structure and shared public ledger. Essentially, the use of special hardware constructs a chain of cryptographic data that is nearly impossible to duplicate. In addition, the way blockchain is used for bitcoin payments, all transactions must be signed using a private key and are confirmed by the network within 10 minutes, a process handled by bitcoin “miners.”
“Venture capitalists are putting blockchain technology into their portfolios,” Weichert said. “They learned the lesson from bitcoin that currency is not the key in this space, and they have been able to separate blockchain from currency.”
If blockchain or a similar technology was operating as the standard foundation for a payments network, it could be used to aggregate transaction orders, Weichert said. This would lead to more innovation in mobile and Internet of Things payments in the future, she added.
“I like the Amazon Dash buttons, and I like pushing the button, even when I am on the road; it means I did my 'mom' thing for that day," Weichert said. "But it won’t be long before our appliances are thinking for themselves and ordering things we need, and we need a system to keep track of those transactions so something like my refrigerator isn’t ordering a bunch of things while I am gone.”
Every pain point in payments has a solution, but the industry approach has been akin to acupuncture in sticking in remedies; no single approach addresses all facets of the ecosystem, said Gene Nayer, global payments product manager and senior vice president of Fundtech.
“Technology is good everywhere, but the question is how do we deploy it, and what will it mean for the overall ecosystem," Nayer said. "We notice that none of these providers has made a specific proposal that takes something like cards or checks away."
That means the financial services industry has to accept that most of the current payment forms will remain part of the system for years to come, Nayer added.
"Checks in particular will be with us forever," Nayer said. "By U.S. law, we have to honor checks forever, so they aren’t going anywhere. If you find a check from Grandpa from 1932 and you present it, they have to cash that check."
Any meaningful transformation of payments technology must also serve the unbanked consumer, Nayer added. Supporters of blockchain say the system can easily fuel financial inclusion through a global person-to-person payment network.
"We also need a basic bank account for the unbanked, for those who fear the fees," Nayer said. "For example, Europe has many unbanked consumers and many regional differences."
In many parts of the world, cash will remain the preferred payment method until a new system becomes commonplace, Nayer said.