Simplifying Merchant Payments P2P leading to P2M

Transcription

1 A Point of View Simplifying Merchant Payments P2P leading to P2M Abstract The global payments landscape is getting revolutionized by the emergence of agile non-banking players as well as alternative and innovative payment methods. The merchant community is moving away from traditional payment methods to save costs and shorten settlement cycles, resulting in revenue erosion for banks. To ensure a profitable sustenance and retain market position, banks will need to swiftly respond to these changes, and launch innovative payment products that offer a compelling value proposition to consumers as well as merchants. This paper discusses the current trends and examines the emerging innovations in the payments space, and suggests an alternative payment mechanism P2M (Person to Merchant) with the capability to initiate real-time payments in a retail environment. P2M is fast, convenient, and secure, and has the potential to create new revenue streams for banks. We also analyze the enablers and challenges inherent to introducing this disruptive payment method, while highlighting its numerous advantages for the banks, merchants, and consumers. Evolution of the Payments Landscape The ubiquity of mobile devices and the advanced communication networks prevalent today, have led to the introduction of mobile money services to transform the financial sector. The convenience of anytime, anywhere access has considerably changed consumer behavior and demands. Most banks have responded to this trend by offering mobile enabled financial services that allow consumers to remotely access their bank accounts to conduct a host of transactions. Consumers can now check account balances, make bill payments, execute domestic and international remittances, and buy and sell goods and services, all at the click of a button. Consumers have traditionally used a combination of cash, cheques, and debit and credit cards to pay for their purchases, but owing to the convenience of plastic payment methods, use of paper money gradually declined. Now, with advances in technology, payment services via mobile devices are gaining center stage. The last couple of years have witnessed the emergence of a range of mobile payment technologies that can be leveraged to introduce innovative payment methods. The use of mobile payment services, however, has been largely limited to peer-to-peer (P2P) transactions involving transfer of funds among friends and family, bill payments, mobile remote deposit capture (mrdc), and mobile point of sale (mpos) transactions. Though various players have launched their own versions of mobile wallets across different geographies for PoS transactions, the use of plastic cards still dominates the retail industry. This may partly be due to the lack of an optimized and consistent buying experience in terms of speed and security of transactions, and the multiplicity of technologies in the context of mobile payments that often makes it difficult for banks and consumers to zero in on one. More importantly, consumers are comfortable with plastic card transactions and reluctant to switch to newer methods; the mobile payment solutions will therefore need to offer a compelling value proposition to inspire widespread adoption. Despite these limitations, the use of mobile devices to initiate merchant payments holds tremendous potential, especially in regions that don't have PoS terminals but have high mobile phone penetration rates. In these cases, mobile payments can be used as a means to convert low value cash transactions with small and on-the-go merchants or service providers. Current Industry Challenges From a merchant's perspective, the credit card payment system is ridden with challenges such as high interchange fees and lengthy settlement cycles. Therefore, merchants often encourage consumers to use debit cards instead, which involve shorter settlement cycles and lower costs, leading to a loss of interchange revenue for banks. Additionally, merchants and bill payment service providers with an online presence encourage electronic funds transfer from their bank accounts. The penetration of credit cards is limited to urban areas in developing countries; small merchants and service providers in remote areas lack the resources to install conventional card processing terminals. This forces merchants as well as consumers to transact in cash, which the risk of theft and robbery. Additionally, on-the-go professionals and trade service providers are reluctant to invest in mpos devices and prefer to deal in cash, with adverse implications on tax collections.

2 Emerging Payment Mechanisms The payments ecosystem is witnessing the emergence of a variety of payment options including P2P, mpos, mrdc, and mobile wallets. P2P payments have been fairly successful owing to the fact that consumers need not remember the actual bank account information of the payee, and can initiate a money transfer either by typing the mobile number, the id, or even the social media id. However, P2P in its current form is mostly being used for low value payments among friends, colleagues, and relatives. mpos solutions are being offered by multiple financial institutions, acquirers, and payment processors in the market, to capture a larger share of the card network transactions by enabling merchants to accept card payments in a much more convenient and cheaper way. The mrdc feature has been adopted by most large banks across the globe. It enables customers to deposit their cheques with ease anytime, anywhere and ensures faster clearing process while reducing the processing costs for the bank. Mobile wallets facilitate quick and easy transactions and eliminate the need for the buyer to share the bank account or credit card information with the merchant by leveraging tokenization technologies. However, their main drawback is the dependence on sophisticated contactless technologies such as near field communication (NFC), which requires considerable investment, and low energy Bluetooth, which is not considered secure for payments. Moreover, the reliance on such advanced technologies limits the adoption of mobile wallets to areas with notable smartphone penetration. In addition, mobile wallets require multi-layer security necessitating initiatives to educate users about security aspects. Limited merchant acceptance and cautious consumer adoption have thus hindered the process of this option being adopted universally. Clearly, a mobile payments mechanism that is simple, user-friendly, and does not depend on sophisticated technology, but leverages the existing infrastructure and network will be a game changer for the payments industry. While a mobile application based payment process would be suitable for large supermarkets and interoperable payment scenarios, an SMS based process would be more apt for small-scale proprietary transactions in a closed loop ecosystem. While some markets consider real-time payments a limited proposition restricted to the P2P segment, the huge volumes in the business-to-consumer (B2C) and the consumer-to-business (C2B) segments represent a big source of revenue. This translates into a significant opportunity for players in the financial services industry to offer a compelling value proposition to consumers as well as merchants through an integrated platform. In the following sections, we will delve deeper into P2M and discuss the potential and viability of this as a payment option. Person-to-Merchant (P2M) Transactions The concept of P2P mobile payments can be extended to the retail environment to allow consumers to directly transfer funds to merchants' bank accounts. Customers can use the person-to-merchant (P2M) mechanism for both in-person in-store transactions at PoS terminals, as well as for online payments in ecommerce and mcommerce scenarios. However, success of any new payment mechanism would depend on how open it is adopted by any consumer and merchant for initiating and accepting a payment. Implications of Extending P2P to P2M With the advent of mobile banking, underserved and unbanked populations in developing markets have gained access to banking services. A P2M mechanism is particularly relevant for developing markets characterized by inadequate PoS infrastructure and high penetration of low end phones. As P2M payments can be initiated on low end feature phones, an opportunity exists to bring untapped segments into the fold and leverage new revenue opportunities by transforming small ticket cash deals into mobile transactions. Banks can thus drive a shift from plastic card payments to mobile enabled payments. This will also, in effect, help banks to significantly grow transaction volumes within their own or partner banks' ecosystem. Direct P2M payments require a high degree of maturity on many dimensions. It would require a bank or a service provider to step in as a trusted intermediary and provide a mobile application to facilitate payments, often using application programing interfaces (APIs) and software development kits (SDKs) that can be leveraged by merchants, acquirers, or processors. These APIs and SDKs can be customized to some extent by merchants and acquirers to offer standard payment functionalities, within their applications, to end users. Introducing P2M payment mechanisms is fraught with challenges due to the absence of standardized regulations. However, with NACHA, The Electronics Payment Association, introducing a new standard entry class (SEC) code, WEB Credit (initiated via the Internet) can now be leveraged to enable P2P payments through the clearing house. Financial institutions should consider the possibility of leveraging the NACHA rules applicable to P2P payments for P2M payments in the absence of specific guidelines. A P2P entry that utilizes the NACHA WEB credit is defined as a credit entry initiated by or on behalf of a holder of a consumer account that is intended for a consumer account of a receiver. 2

3 A customer initiated entry (CIE) is defined as a credit entry initiated by or on behalf of the holder of a consumer account to the non consumer account of a receiver.¹ NACHA permits the use of WEB credit to make payments to businesses: A bill payment from a consumer to a business should use the CIE SEC code, and a P2P payment from one consumer to another consumer should use the WEB credit SEC code.1 Fraud risk, data security risk, and relationship risk are as much applicable to P2M payments, as are to P2P. Building a Business Case A scalable mobile P2M solution that provides a convenient and secure method of transferring funds will be a boon for consumers and could be a viable alternative to card payments. It is possible that an effective P2M solution may work without the involvement of payment card networks, thereby eliminating interchange fee costs for merchants, while delivering payments in real-time. Furthermore, SMS or application based P2M payments do not require infrastructural investments for PoS terminals, advanced technologies, or even high end smart phones, thereby reducing the average cost of Innovative payment mechanisms transactions. Such a payment method has the potential to broaden the customer base of like P2M address the needs of the banks, as well as enhance revenue growth by capturing a bigger slice of customer spends. financially excluded, thereby With capabilities to bring underserved and unbanked segments into the fold, the P2M driving financial inclusion in payment mechanism will help developing countries achieve financial inclusion targets. developing economies. Innovative payment mechanisms like P2M address the needs of the financially excluded, thereby driving financial inclusion in developing economies. Increased penetration of mobile phones and rising consumer adoption of emerging technologies coupled with the demand for cheaper and alternative payment solutions, attract non-banking players to the payments space. These players can develop multichannel solutions to enable payments through varied mediums, potentially eating into the market share of banks. This underscores the need for banks to implement a device agnostic mobile payments mechanism based on open platforms, with the capability to integrate with multiple applications, to retain their supremacy in the payments space. Also, a payment mechanism for developing markets, which lacks the necessary infrastructure to process card payments, will witness widespread uptake by all stakeholders. Various stakeholders across the value chain can realize a host of benefits from the P2M payment mechanism. Merchants can benefit from real-time guaranteed payments at relatively lower costs due to the absence of interchange fees and no investment in advanced technologies or PoS terminals. They can also reach out to a wider customer base and offer competitive pricing. Merchants also stand to gain via instant store credit through tie-ups with banks. The system being automated doesn't run the risk of chargebacks and reversals. Consumers on the other hand can enjoy a simple, easy, and flexible payment option that is device agnostic and can be availed using low end feature phones. They can also benefit from competitive pricing options, and exercise more control over their spending activities. In addition, widespread adoption of P2M will introduce transparency making on-the-go and small merchants accountable to the federal tax authority resulting in significant accounting impact and increased tax revenue for governments. Adoption Enablers The last couple of years has seen the introduction of faster or immediate payment schemes across various geographies. Real-time payments has the potential to significantly impact the banking and financial services industry and facilitate new business ecosystems. Faster payments enable real-time linking of bank accounts, real-time clearing, and settlement between payer and payee accounts, as well as self-service payments through a variety of online and mobile channels such as , mobile, online, and social. With mobility transforming the consumer interaction paradigm, P2M will allow instant transfer of funds, easily and securely. Emerging technologies such as social media and cloud computing are enabling consumers to collaborate and network with friends and peers. A P2M solution has the capability to enable financial transactions through the social media network and digital payment accounts stored securely on the financial organization's cloud. New age wearable devices such as smart watches, have the potential to facilitate P2M payments initiated and accepted through gestures and biometric authentication. The Ripple Protocol In the context of enabling P2M transactions, it is apt to mention an emerging payment innovation, the Ripple protocol (RTXP). Ripple enables bidirectional communication among computing devices connected to the internet. Since Ripple is an open source protocol intended for transfer of value, its widespread adoption as a standard protocol for money transfer will make payments instant, relatively inexpensive, and convenient. Also, Ripple supports transfer of value in any currency irrespective of the currency in which the user holds his or her account. [1] NACHA, Person to Person Payments via ACH, accessed Nov 2014, 3

4 The Road Ahead Banks need to develop a strategic and holistic framework for P2M payment enablement based on an assessment of their existing systems and processes. While P2M adoption does not require significant investment in infrastructure, banks will need to spend on creating a reasonable partner ecosystem to onboard both consumers and merchants. A holistic framework to enable P2M payments should leverage the bank's internal systems and allow funds transfer from the consumer's mobile device to the merchant's mobile device for in-store purchase of goods and services. The framework should have the capability to extend the P2M mechanism to e-commerce and m-commerce scenarios as well. Introducing a P2M or person to business (P2B) payment mechanism demands the establishment of a faster payments scheme that allows direct real-time funds transfer. Most of the existing payment systems have faced issues in delivering instant payments. With protection of consumer interest a top regulatory priority, regulators across multiple geographies have forced the deployment of real-time payment systems. Banks in countries that are planning to offer faster payment services with shorter settlement times will have to introduce strong customer authentication processes for web, mobile, and phone banking applications. Before introducing faster payments, banks should assess the ability of their resources and processes to support a round-the-clock service proposition. In addition, they should deploy enhanced fraud detection applications and payment interdiction processes in the back-office. Round-the-clock availability of a P2M solution is particularly significant for small and medium-sized businesses (SMBs) that are not prepared to install a PoS system. Banks can position the new solution as a way to reduce costs (by eliminating the interchange fee charged by card networks) and promote their account services, notably reconciliation and cash management services. Proposed Approaches for P2M Adoption How should banks ideally approach the deployment of a P2M payment mechanism? We highlight three possible approaches that banks can consider for P2M adoption: n n n Proprietary platform: Banks could consider introducing P2M on a proprietary platform wherein consumers as well as merchants and service providers maintain accounts with the same or partner bank enabling direct, real-time transfer of funds. Such a P2M payment mechanism would however require merchants and service providers to maintain accounts with several leading banks to cater to a wide segment of consumers. This approach may only be relevant and useful to regional banks and community banks with a local presence, where most consumers and merchants in the region maintain accounts. Closed-loop platform: A few leading banks may collaborate to launch an enhanced closed loop platform between member banks, along the lines of the clearxchange network rolled out by US financial institutions. Such a system would essentially bypass the clearing house and the payment networks to enable real-time funds transfer. Third party service provider: Banks could also consider the option of setting up a third party entity to develop the ecosystem for a group of collaborating banks. While the entry of a third party service provider will involve additional costs, it would possibly be lower than the prevailing card interchange fee. Additionally, a third party entity would ensure the delivery of uniform services across banks and help regulate the process. However, widespread adoption of the P2M payment mechanism across banks will depend on their ability to enable instant payments in a retail environment, and to on-the-go merchants. Adoption and Sustainability of P2M Payment Mechanism The opportunities offered by P2M are not limited to growing transactional revenue especially bearing in mind the potential impact on interchange revenue by using credit transfer systems as compared to card networks. It primarily helps banks to work with new customer segments 'prosumers' and SMBs. Online bank-enabled payment (OBEP) systems are payment solutions that rely on the online banking authorization processes, following origination via a merchant website. In an OBEP system, transactions are authenticated and authorized via banks' online banking services, based on a prefilled, non-changeable payment. The funds are transferred directly from the consumer's account to the merchant's account with real-time notification to the merchant. Real-time authentication using banks' online infrastructure and real-time confirmation of receipt of funds has made the system extremely popular resulting in widespread adoption. Such systems tend to be managed as schemes, with a dedicated governance model guiding the organization, and a pricing model for a network of financial institutions and merchants or billers. The P2M mobile payments framework would be very similar to OBEP systems in the sense that both are bank authorized direct fund transfer systems with minimal intermediaries. However, the P2M framework will face some typical challenges during its evolution including displacing established payment methods such as cash and cards, agreeing on a pricing model for banks and merchants, building merchant acceptance, and convincing consumers to switch to the new method. 4

5 Conclusion Mobility is a disruptive force that is transforming the global payments landscape and driving the rise of agile start-ups with the capability to offer faster, cheaper, and secure payment products. To retain market supremacy, banks must explore emerging innovations and introduce payment products that ensure cost optimization and quick settlement for merchants, meet evolving consumer needs, and drive growth through new revenue streams. P2P has gained high consumer uptake among various markets and this needs to be extended for making purchase payments to merchants as P2M since it is a seamless and faster alternative. Banks will need to start thinking about creating new ecosystems by bringing in both consumers and merchants, and enabling payment transactions through mobile enabled applications linked to bank accounts. About the Author Debasis Thakur Debasis Thakur is a senior payments consultant with the Cards and Payments group within the Banking and Financial Services (BFS) business unit at Tata Consultancy Services (TCS). He has over 17 years of industry experience in banking cards and payments. Deb has anchored several transformational projects for TCS customers, and is currently focusing on innovations in the payments space, to help global financial institutions reimagine their payment processes in light of the emerging digital technologies.. 5

6 About TCS' Banking and Financial Services Business Unit With over four decades of experience working with the world's leading banks and financial institutions, TCS offers a comprehensive portfolio of domain-focused processes, frameworks, and solutions that empower organizations to respond to market changes quickly, manage customer relationships profitably, and stay ahead of competition. Our offerings combine customizable solution accelerators with expertise gained from engaging with global banks, regulatory and development institutions, and diversified and specialty financial institutions. TCS helps leading organizations achieve key operational and strategic objectives across retail and corporate banking, capital markets, market infrastructure, cards, risk management, and treasury. TCS has been ranked #2 in the 2014 FinTech Rankings Top 100 of global technology providers to the financial services industry, by both - FinTech Forward (a collaboration of American Banker and BAI) and IDC Financial Insights. TCS has also been recognized as a 'Leader' and a 'Star Performer' in Everest Group's 2014 PEAK Matrix reports for Banking and Capital Markets Application Outsourcing (AO). Contact For more information about TCS Banking and Financial Services Unit, visit: bfs.marketing@tcs.com About Tata Consultancy Services Ltd (TCS) Tata Consultancy Services is an IT services, consulting and business solutions organization that delivers real results to global business, ensuring a level of certainty no other firm can match. TCS offers a consulting-led, integrated portfolio of IT and IT-enabled infrastructure, engineering and assurance services. This is delivered through its unique Global Network Delivery ModelTM, recognized as the benchmark of excellence in software development. A part of the Tata Group, India s largest industrial conglomerate, TCS has a global footprint and is listed on the National Stock Exchange and Bombay Stock Exchange in India. IT Services Business Solutions Consulting All content / information present here is the exclusive property of Tata Consultancy Services Limited (TCS). The content / information contained here is correct at the time of publishing. No material from here may be copied, modified, reproduced, republished, uploaded, transmitted, posted or distributed in any form without prior written permission from TCS. Unauthorized use of the content / information appearing here may violate copyright, trademark and other applicable laws, and could result in criminal or civil penalties. Copyright 2015 Tata Consultancy Services Limited TCS Design Services I M I 01 I 15 For more information, visit us at