It takes more than two to tango in the new world of payments

It now seems likely, following some very strongly encouraging words by Reserve Bank of Australia governor Glenn Stevens in a recent speech, that enough major payments-industry participants have signed up to make a start on Australia’s long-expected real time payments platform.

Stevens was blunt: “let me also say, very clearly, how important the Bank sees it that the industry deliver on its collective commitment to deliver real-time, accessible payments to the community”.

"There will always be a regulator chaperone making sure the activities on the dance floor don’t become too risqué."
Andrew Cornell, Managing Editor, BlueNotes

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And just in case: “We have to deliver, one way or another, the architecture and products that (our citizens) will need into the future.

“If (the industry does not) provide Australian end users with the services they want, surely others will seek to do so. Alternatively, the Reserve Bank would be duty bound to consider a regulatory approach.”

The industry got the message and announcements loom.

Yet it was the less-directly threatening part of Stevens’ warning which the incumbents in the payment system have taken to heart, the 'others'.

I was on a panel at the recent PaymentsNZ annual conference in Auckland and the hot topic was how much of the payments industry Apple would grab. The feeling in the room was a lot. However, that’s not necessarily a global view as I discussed in a recent column.

That column focussed on Apple’s own challenges like its relatively small share of the smartphone market in Asia.

But equally it’s easy to overlook the power of incumbency, all too often left in the shade when the newest, brightest technologies hit the hypersphere, like Apple Pay.

The empire however does strike back. For example, the two behemoths of global payments, MasterCard and Visa – both formerly associations of banks and still strongly linked to the industry – are working together to create a new authentication standard for online payments.

The project aims to replace existing, often complex but also less-secure processes and take advantage of new developments like biometrics.

“MasterCard’s approach is to utilise richer cardholder data, which will result in far fewer password interruptions at the point of sale,” MasterCard said. “In the event that an authentication challenge is needed, cardholders will be able to identify themselves with the likes of one-time passwords, or fingerprint biometrics, rather than committing static passwords to memory.”

This is not something which will squeeze banks out of the value chain rather, in making existing processes (and their associated revenue streams) more seamless, it will shield against new competition.

Google, meanwhile, oft touted as one of the big, new non-bank threats has quietly withdrawn from one front in the payments battle, all but closing down its electronic wallet, Google Wallet.

It was just three years old but Google has conceded others are better placed in digital payments – including some other new competitors. In a telling warning to Apple, Google Wallet was never really successful outside the US.

Google hasn’t really announced what it is doing but a page on its Help section says "the industry has matured a lot since [Google Wallet launched], providing a number of alternative payment solutions to choose from".

From March 2, 2015 the Google Wallet for digital goods API will no longer be available but Google has left it up to merchants and developers to work out what to do. “Google Wallet buyers will not be proactively notified. Keep in mind that if you do not remove your integration before March 2, 2015, your buyers will get 404 errors upon checking out with Google Wallet for digital goods API.”

Just why some technologies succeed and others fail is rich fodder for MBA students. One of the most famous was the videotape wars in the 80s when VHS ended up triumphing over the technically superior but less well-marketed Beta Max. (Both of course are now equally obsolete.)

Apple Pay, for example, doesn’t do anything differently to existing mobile payments but it has certainly been well marketed.

Who wins in payments however is likely to go beyond technology and marketing. There is also the critical element of trust. One wonders if the banking industry would get away with closing down a product in the manner Google given the potential for damaging trust.

Bank of Canada senior deputy governor Carolyn Wilkins gave a fascinating recent speech analysing what is crucial in payments, looking not just at systems but 'cryptocurrencies' like Bitcoin.

She noted money must do three things: serve as a medium of exchange; as a store of value; and a unit of account – that is, something that allows you to compare the value of different products.

When it comes to electronic money – e-money – she drew a distinction between the cryptocurrencies and those that ultimately link back to traditional, national money.

Wilkins pointed out the safety of e-money linked to existing currencies depended “on the credibility of a trusted third party. This is because you’re trusting Visa or PayPal to safeguard your balance and to validate and authenticate your transactions”.

Cryptocurrencies though don’t refer back via a trusted intermediary to a national currency.

That’s a big issue according to some behavioural research the Bank of Canada has done. Whether a currency becomes popular depends on buyers and sellers agreeing to 'tango'.

“It turns out that it’s the seller’s side that leads the dance; if there is a large enough fraction of sellers accepting new payment methods, more and more buyers are prompted to use them, eventually leading to complete adoption on both sides,” Wilkins said.

“In the case of Bitcoin, not many people want to dance. This is because it has serious flaws when it comes to satisfying the three main characteristics of money. While a number of merchants may be accepting Bitcoin, there is still a big risk that if you acquire bitcoins you won’t be able to find someone to accept them later when you want to spend them. There’s also no getting around the fact that cryptocurrencies are very volatile and therefore unreliable as a store of value.”

Wilkins touched on other concerns with cryptocurrencies such as the potential erosion of the power of monetary policy if non-national currencies became widespread. Central banks also actually earn money – seigniorage – from issuing currency. National states are also worried about money laundering and terrorist financing and so are watching electronic payments closely.

And this is where she touches upon a critical force in the payments arena which means it is not like videotape. Who wins in payments will be steered by central banks and by regulation.

The force may be almost invisible if payments evolve in a fashion with which regulators and governments are comfortable – that is consumers have protection, illicit activity can be monitored and threats to a government’s ability to direct its economy are contained.

But in fact, in payments it takes three to tango. There will always be a regulator chaperone making sure the activities on the dance floor don’t become too risqué. Just think Glenn Stevens.

Photo: Bloomberg / Contributor.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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