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May 21, 2014

In Search of New Payment Methods

Posted by Ravi Kumar S. (View Profile | View All Posts) at 11:07 AM

Next Generation of Mobile Payments [Source: http://www.youtube.com/watch?v=qnFQ5sQ9H0g]

Ibn Battuta, the famous explorer from the Middle Ages, was amazed at how someone could write him a check in North Africa and then he could cash it when he was thousands of miles away in, say, Persia or India. The Asian trade routes of the 14th century sustained financial systems (including check-cashing) that are surprisingly similar to what we all use today. It's a testament to how advanced Asian economies were eight centuries ago. But it doesn't say much for those of us who still carry checkbooks around even today. I saw a study that estimates it costs $1.21 to make a payment by check in a grocery store versus 78 cents for a debit card. Moving to mobile payments has the potential to reduce transaction costs even more signficantly.

I have followed Bitcoin for the past year or so with a lot of fascination, largely because it looks to be the first of many digital ways to revolutionize how the world's consumers move value. Not everyone's a fan of Bitcoin, but at least its creators are attempting to address the fact that the global economic system could benefit from payment methods that aren't 800 years old.

Cash registers, at retail outlets, spit strips of paper out by the billions each day and people bring them home, often in their shopping bags. What can stores do to take receipts digital or even to use the pieces of paper more effectively? True, the long paper receipts from places like fast food restaurants have coupons on them, but I've never heard of anyone ever using those paper coupons. There have to be better ways of utilizing a blank canvas like a paper receipt. Of course, another aspect of paper receipts that makes consumers roll their eyes is affixing your signature to one at the point of purchase. My hunch is that the days of signing your signature in ink on a paper receipt are numbered - as well they should be.

And if paper weren't antiquated enough, what about wallets filled with hard plastic credit cards? I imagine it's time for retailers or banks or perhaps the likes of Google to really transform customer experience. The high-end coffee retailer Starbucks has been using mobile wallet technology with some degree of success. It would be great to see large retail chains embrace it as well. In fact, after the recent security meltdown at a prominent U.S retailer, there is a widespread move to revamp point of sale systems. With that, they might as well make it Near Field Communication-capable and therefore mobile wallet friendly.

Security is rightfully a concern and breaches don't come cheap, so it's all the more reason for retailers to adopt radical innovations in security such as "blockchain cryptography." An interesting report on two-chain cryptography incudes a quotation from an executive at Ripple, an innovative open payments system. "If you are making a payment, you would personally access your private key, but the merchant never does, so it takes the merchant out of the equation as a potential vulnerability," he told the press.

What interests me the most about the antiquated nature of our payments methods is how we still tolerate clearing systems that can take 24 hours to settle a transaction. Clearinghouses are centuries old. Our digital marketplace still waits for payments to settle after the banks of customers clear them. There are billions of people, across the globe, who are either unbanked or under-banked and need efficient payment options. That's a sign that there's a lot that can happen in the payments space.

Payment methods clearly need to catch up to the speed and technological prowess of the digital consumer and the stores she frequents. In the digital age, is there a reason why banks still need to be batch-driven and take 24 hours or more to clear payments or why a customer has to take out a black-ink pen to affix her signature? These are all holdovers from a different era and, clearly, digital consumers want to move on. Those players who lead the way will win, and the rest are likely to be left behind...


Very interesting perspectives Ravi. The rendering of the article with the historical perspective and the current days context interspersed with each other is quite fascinating!!!

In India, we are still struggling for Financial inclusion to cover the rural population under the umbrella of the conventional banking system. But the world is moving forward. I feel, there is a need for "Digital Financial Inclusion", which can be currently targeted to urban population. I still see the acceptance or I shall say the awareness is still low, even in urban population towards the radical ways of financial payments. People are still skeptical using mobile to make payments, or they are "laggards" in technology acceptance. I feel, marketing can be the solution, to make people move a step forward from 'Laggards' to the 'adopters' a successful "Digital Financial Inclusion."

Nice article. As mentioned Mobile banking is the way forward, still there are millions of people who don't have bank accounts and transact in cash, but they do have mobile phones, there is a greater need to integrate the Mobile service provider with the banking system so that via simple mobile apps or sms, the transactions can be carried out, but again embracing new technology is always full of risk and full of rewards.

Good set of perspectives Ravi!! Its fair to say that the disruptive potential in this space is yet to be fully realized and its very interesting to see the traditional biggies compete with the upstarts!

Totally agree with you Ravi in that the payment methods should be more innovative but at the same time the basic problem of a payment method being a multi sided platform, it needs to capture the imagination of both consumer and the merchants.
Starbuck has been a recent success but if you look at other mobile wallet offering, most of them are still in infancy waiting for market traction and some of them are already giving up on the chase as in example of Mastercard ditching its "Mobile Wallet" offering in favour of developing a more comprehensive service.
It will be exciting to watch how NFC plays out (it has been touted as next big thing for quite some time now) and how the boundaries between traditional players and telecom companies blur to offer an integrated platform.

Summary of bill can be sent as SMS with URL of detailed bill.
A common smart card with CHIP can be given to individual which will have all credit card/debit card info. While swiping he may select which account to debit and put in his/her PIN.

Great Point of View and very well articulated. Thanks a lot for sharing Ravi.

This is interesting.
As per World Bank, Outward remittances worth >$20.3 Billion emanated from UAE alone in 2013 that hosts national from Indian Subcontinent, South East Asia and Arab Nations. Similarly, for a small country like Bulgaria with a population of 7.3 Million, outward remittances from Bulgarians staying in other countries, totaled $1.6 Billion in 2013. Customer sentiments drove digitalization & innovation resulting in enhanced experience and thereby volume. Payment channels, mechanisms and disposal are still evolving and I feel that best is yet to come.

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