Squaring the Circle in Payment Processing Opportunities for emerging and distressed economies to achieve significant fiscal leverage from Central Clearing Capability 1
A walk through the ages..1980 s and beyond Credit cards authorized using zip zap machines against local floor limits Dial up telephones to verify card number against negative file list Payment guaranteed by issuer in exchange for fee (interchange) Very high merchant discount rates (5%+ commonplace) 2
The move to Debit Cards Debit cards launched along same processing train tracks, but different commercial model Per transaction fees, linked to buyer s bank account for real time debit 3
A period of barriers to entry... Bank membership card schemes Bank owned / controlled domestic schemes Issuing / Acquiring only by domestic Banks within their own markets Service chain tightly controlled by traditional players Only non face-to-face were moto transactions (mail order telephone order) Global and alternative players not even on radar 4
The birth of e-commerce In 1979 Englishman Michael Aldrich invented online shopping to enable commerce between consumers and businesses, or between one business and another, later to become known as e-commerce 5
Other early landmarks 1981: Thomson Holidays, UK is first B2B online shopping [citation unavailable] 1984: Gateshead SIS/Tesco is first B2C online shopping and Mrs Snowball, 72, is the first online home shopper [citation unavailable] 1990: Tim Berners-Lee writes the first web browser, WorldWideWeb, using a NeXT computer. 1995: UK s first national online shopping service secure transaction involving WH Smith, Tesco, Virgin/Our Price, Great Universal Stores/GUS, Interflora, Dixons Retail, Past Times, PC World (retailer) and Innovations 1995: Jeff Bezos launches Amazon.com and ebay is founded by computer programmer Pierre Omidyar as AuctionWeb 2002: ebay acquires PayPal for $1.5 billion 2003: Amazon.com posts first yearly profit. 6
The Emergence of m-commerce Mobile Commerce, also known as m- commerce, is the ability to conduct commerce using a mobile device, such as a mobile phone, a Personal Digital Assistant (PDA), a smartphone, or other emerging mobile equipment such as dashtop mobile devices. "Mobile Commerce is any transaction, involving the transfer of ownership or rights to use goods and services, which is initiated and/or completed by using mobile access to computer-mediated networks with the help of an electronic device." 7
Some m-commerce landmarks 1997: First two mobile-phone enabled Coca Cola vending machines were installed in Helsinki, Finland. Accepted payment via SMS text messages 1997: First mobile phone-based banking service by Merita Bank of Finland, also using SMS 1998: First sales of digital content as downloads to mobile phones with the first commercial downloadable ringtones from Radiolinja (now part of Elisa Oyj) in Finland 2000: Norway launches mobile parking payments. Austria offers train ticketing via mobile device. Japan offers mobile purchases of airline tickets. 2007: Launch of the iphone; mobile commerce moves away from SMS systems and into actual applications. 8
Convergence... e- Commerce Traditional card processing m- Commerce Central Interoperable Hub 9
Core Processing Hub needs to be Payment type agnostic accept and process any data string Channel agnostic take any data string from any source (input channel) and send relevant value to any designated end-point (output channel) Geography/Market agnostic be able to take any payment from any seller to any buyer in any market according to the rules set within either the buyer or seller market Rules/Parameter driven support any rules stipulated by any regulatory authority and/or any payment scheme/ payment operator, regulated within the defined market(s) 10
Core processing hub needs to be Secure supporting SSL communications, PCI, data encryption, 2 factor authentication, intrusion detection and application firewalls, at a minimum... Fraud Resistant Seeing every transaction enables interrogation and audit, with option to flag or stop payment, build up data base for neural network anlaysis Portable easily ported/replicated in any domestic market Redundant dual data centres, operating on Active/Active basis 11
The New Environment... Increasing wealth in the developing world bringing in very many new stakeholders (est.5 billion mobile phone users vs 2 billion bank account holders) Electronic communication over the web and by mobile creates connectivity and data Data Is Knowledge! Banking systems are developing, but many new players are entering (MNOs, online payments providers etc.) Technology evolution has created cost-effective solutions 12
Fraud New applications and new technologies create greater risk Money laundering is on the increase New payment providers may not be covered by banking regulations (KYC, AML etc.) The scale of online fraud worldwide ($380 billion) now approaching that of reported organized crime ($440 billion) Constant arms race between fraudsters and fraud protection 13
Opportunities for governments Risk sharing and PPP approach helps to keep costs down Collecting, analysing and storing data centrally and in real time enables efficiency and auditability Encouraging cash-lite society reduces costs, decreases fraud and increases efficiency Tax collection and benefits payments can be routed through the central hub Anti-fraud and anti-money laundering measures centralized and immediate 14
Parallel silos of financial activity... Wage Earner / Buyer Employer/ Seller Saver / Pensioner Government All are Stakeholders in the Payments Industry 15
Wage Earner / Buyer Silo Wage Earner / Buyer Receives income as initial financial transaction Taxes collected automatically Net amount paid into electronic account Bank, stored value card, electronic wallet, mobile phone account etc. Regular payments for pensions, health care, utilities etc. Savings Spending electronic or cash? 16
Employer/Seller Silo Employer/ Seller Can pay gross payments to central hub for deductions to be calculated Taxes collected automatically Transaction fees deducted Administrative savings Online access to audit trail makes accounting simpler Accountable and verifiable data on all transactions 17
Saver / Pensioner Silo Saver / Pensioner Deduction from gross salary for national / private pension schemes Protection of accumulated pension funds Government / Central Bank guarantees on security Access to savings / pension through electronic transactions 18
Government Silo Government Collection of Income Tax on wages Collection of VAT / Sales Tax on purchases Payment of benefits and microfinance National pensions investments interest Auditability and fraud resistance Reductions in administrative costs, increases in efficiency and income 19
The Central Hub Model ITPS 20
The Central Hub Model PAYER ITPS Licensed ETPs Licensed ETPs Banks Credit Card Associations Local card issuers Mobile operators Nontraditional Online PS Calculation of taxes and benefits. Calculation of fees and deductions. Automated payment of taxes and benefits. Payment for purchases. Payroll Payment Fraud scrub Banks Credit Card Associations Local card issuers Mobile operators Access to account information / bookkeeping Government accounts Nontraditional Online PS Firewall 21 Firewall RECIPIENT
Summary The credit card industry has established strong control and processing capability Learning from and matching this is important for all innovative new payments Interoperability is essential for competition, data availability and consumer choice By 2016 there will be 1 bn smartphones and one third of spend in the tech economy will be via mobile, a total of $1.3 trillion (Forrester Research) Moving from cash to any electronic format has multiple value-adds for governments It is essential to manage this evolving landscape securely, and in a controlled centralized fraud-resistant environment 22