Here’s a simple nice review of 4 countries that have implemented a fast payment technology for retail. The differences seem small but the implications as to the possibilities are not.
Delayed systems like Poland’s where payment is made immediately but settlement a day later is a good approximation. Then there is SPEI in Mexico where settlement is processed in 30 seconds in average (almost immediate but not quite). Finally, there is Sweden’s Swish which can do settlement through a mobile payments app in 15 secs. It’s a race against time. The bar is already set. They are competing against the authorization times of credit cards. If they can match the response time of 1-3 seconds, then we will be looking at the biggest paradigm shift in retail payments in 40 years.
Credit cards started off as credit and not debit because of the limitations of technology. There was a risk in securing the funds a day or 3 after the delivery of the good or service. So credit cards took on this risk to provide payment to the merchant in t+1 or 3 while taking the risk of getting payment from the card holder in t+30 or 45. But if you can transfer the funds to the merchant in seconds, you don’t really need a provider of consumer credit to secure payment. Your only concern is the line up behind you at the counter. The merchant can’t afford to delay the line up because of payment authorization (imagine the pressure at a fast food restaurant!).
So the faster this kind of applications can confirm payment to the merchant (transferring liquid funds from the customer from a secure account), the easier to substitute credit or debit card payments. The trick is to entice the merchant to swap to this payment alternative. They key then is cost incentives. The only way to lower interchange costs to the merchant is to enable alternative providers to compete with the current card providers. And this can only be achieved by fostering new non-bank providers (telco, technology or from other industries) to issue new payment instruments through mobile apps (both tho the consumer and to the merchant). Banks do not want to get rid of their debit card business yet so they don’t have an incentive to do it. Non-banks issuers have all the incentives but cannot access clearing and settlement systems directly. They have restrictions to access financial infrastructures. If they could just be authorized as non-banks…. But since this is not an option yet, another way around it is to become a bank (but a more treacherous route though). That’s why some telcos are applying for Bank licenses in some countries (like Rogers in Canada). When this happens we will begin to see real competition in the retail market place.
This is the new challenge to regulatory reforms around the world.