The future of money: New payment processes go well beyond cash, checks, credit cards

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Posted: Tuesday, April 29, 2014 12:00 am

Here's the thing about Taka Torimoto: He's more likely to remember his smartphone than his billfold. And that spells opportunity for a whole raft of new players in the lucrative payments industry.

A 41-year-old technical consultant with an engineering degree from Georgia Institute of Technology, Torimoto has paid for fast food with the tap of his phone and sent money just as you would attachments in emails. His father digitally sends the grandkids cash for Christmas. No more checks.

Torimoto's voice rises with excitement as he talks about the new possibilities. “Payments is one area that is going in so many different directions.”

For the first time since the advent of credit cards, there are new ways to pay that don't involve cash, check or plastic. Most are built on top of the existing payments system, but — courtesy of that handheld computer in our pockets and purses — offer new vistas for consumers and tech entrepreneurs.

“It's clear that the mobile phone is the device that people are going to be using in the future to pay,” said David S. Evans, chairman of the Global Economics Group.

By 2017, Forrester Research estimates, Americans will spend roughly $90 billion using a smartphone or other handheld device, a more than sevenfold increase from the amount spent in 2012. The firm's figures include mobile remote commerce; mobile peer-to-peer payments and remittances; and mobile proximity payments.

Even if its estimate is too optimistic, the pace at which startups are emerging is already head-spinning: Stripe, PayNearMe and WePay, among more than a thousand others, fueled by billions of dollars in venture capital.

For consumers, mobile payments mean greater convenience and better security. For merchants and banks, they present new opportunities to track you and target sales pitches and rewards to you. And they give tech entrepreneurs a low-cost entry point into the multibillion-dollar payments pipeline.

So why aren't we already living in a post-plastic world?

In part, because everyone involved in the chain — merchants, card issuers, traditional processors, tech innovators and consumers — is looking to maximize how much money they keep at the end of the day. Sometimes, the interests of two or more players align, but often they don't.

Sorting it out, via market forces and regulation, is likely to make for a period that's exciting, bewildering, messy and frustrating. And right now, we're at an inflection point, where a handful of novelties is becoming a new way of doing business.

That's evident in the changes the incumbents are making. Banks, payment networks such as Visa, MasterCard, Discover and American Express, and the tech companies that serve them, such as FIS and Fiserv, are scrambling to keep up.

“In 2014, you'll see larger payments entities scramble to accelerate the pace of their innovation to catch up to these smaller and more nimble competitors,” PayPal President David Marcus said in a blog post. “Meanwhile, smaller players will scramble to achieve the scale and experience needed to compete in a global business. As a result, billions of dollars will be at play in the payment industry, and 2014 will be a year of game-changing disruption.”

Last year, PayPal launched 58 new products, partly because of new threats, according to a New York Times report.

And earlier this year the e-commerce arm of eBay announced PayPal Beacon, a Bluetooth device that reads payment information from a smartphone. With that device, someone like a restaurant server would no longer have to take your card away from the table to complete a transaction.

That's in addition to a partnership with Discover, which lets folks use PayPal in the checkout line at some of the nation's largest merchants. PayPal has also recently acquired progressive payment processor Braintree, which has regulatory approval to move money nationwide.

It's marketing its services to mobile-based innovators such as Uber, Airbnb and TaskRabbit, which facilitate transactions between individual sellers and buyers of, respectively, rides, lodging and doers of household errands and other tasks.

And we haven't talked yet about Bitcoin and other cryptocurrencies, which operate in a parallel payments universe outside the existing system.

To be sure, some of the innovations won't stick.

“Innovation and disruption is an inherently inefficient and lofty process,” said Matt Harris, managing director at Bain Capital Ventures. He harkens back to the first wave of dot-coms, with its rash of failures.

“We are at that now, at least in consumer financial services,” he said.

But some of the experiments will succeed, and at least a few will change the landscape.

Effectively, anything can be a form of payment as long as it is widely distributed, safe, accepted by both buyer and seller, and regulated by a system of rules. Over time, forms of payment have included cattle, wampum, notes issued by individual banks (which were IOUs for gold and silver held in their vaults), and currency backed by the “full faith and credit” of the United States.

The current system, in which we carry plastic cards that identify us and vouchsafe our ability to pay the debts we incur to the people who accept them as payment, evolved in the 1950s and '60s.

To understand who all is in the chain, first you have to get hold of the process. Here's how it works:

You swipe your card, say, at your favorite deli counter. Several different things happen almost simultaneously.

First, a card reader, the black box in front of the cashier, scans the magnetic stripe on the back of your card. That information is transmitted through an acquiring processor, such as First Data or Total System Services (TSYS), which sends your personal details to the payment network whose logo is on the card — say, Visa or MasterCard.

That company forwards the information to the issuer, such as your bank, which makes sure you have enough money. If you do, the issuer sends an authorization code back down the food chain to the merchant in milliseconds.

The money doesn't move quite as fast; it's transmitted to the merchant in a settlement process overnight.

For performing its role, each intermediary receives a cut.

Last year, issuers, which tend to receive the largest cut, earned an estimated $230 billion in transaction-specific revenue globally, according to the Boston Consulting Group.

As a part of that, merchants pay 2 percent to 3 percent of the sales price to accept a credit card, and 21 cents plus 0.05 percent of the transaction value to accept debit cards, a rate that's gone down because of action by Congress.

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