In the beginning, human civilizations bartered for the exchange of goods and services. Goats for barley, sheep for minerals, camels for pottery, and so on and so forth.
This approach lasted for centuries. But societies innovated, adopting the principle of “commodity money” (such as silver, gold or cowrie shells). Then physical coins and paper money moved in, followed by the creation of fiat money backed by government-issued currency, in the form of bankers’ drafts, personal checks and cash.
Early Innovation: Clearing Houses and Credit Cards
With the mass adoption of fiat money, banks became a must-have to store and distribute the government-backed currency and thus enable “payments” between consumers, merchants and government departments. But to do this, the banks themselves had to innovate to enable a safe and dependable way to exchange value between themselves. In 1733, the concept of a “clearing house” emerged in London, which evolved to maintain a central ledger of accounts owned by the banks and support clearing and settlement between these entities. Physical clearing houses sprung up around the world, all with the same purpose.
In the retail space, credit cards were introduced in the 1950s. These were introduced to meet the needs of payers who were looking for convenience when buying goods and services and the ability to pay later. At the same time, payees were looking to increase sales, whilst still getting paid. Credit card innovation emerged and initially plastics were used to imprint details of the payer, which the payee could then use to make a physical request to the payer’s bank to “pull” the funds from the payer’s account.
Electronic Payments Innovation
In the 1970s and 1980s, both clearing houses and cards witnessed the next lead forward in innovation: electronification.
Clearing houses moved their centuries-old ledger-based processes into automated, computerized, centrally administered systems. The ACH, or “Automated Clearing Houses” was born. ACHs evolved to support payments information being presented by the banks on behalf of their customer between computers that were secured over telephone lines, with the ACH enabling clearing and settling between accounts using centrally governed currency.
On the card side of the industry, schemes such as Visa, Diners and what became Mastercard, moved from imprinting information from the plastic card on pieces of paper (with an imprinter or “knuckle buster”) to encoding information into magnetic stripes on the back of a card. These “mag stripes” could be read electronically by computerized systems at the point of sale, able to move data back and forth between the merchant’s bank (the ‘acquirer’), card schemes and the bank that issued the card. Mag stripes could also be used to support “automated teller machine” (ATMs) so that consumers using a debit card attached to their bank account could make deposits and withdraw funds without the need to stand in line inside a bank branch. This massively increased the throughput of payments in and out of an account by broadening reach and increasing ease of access.
These innovations increased the speed of adoption of electronic payments enormously, by driving greater payments convenience. Value was no longer physical; it could be represented by a token and transmitted electronically over vast distances. This meant goods and services could be dispatched immediately, and access to cash was instant.
Happy payers, happy payees, happy banks, happy central banks and governments. This is the industry that ACI played a leading role in for more than 40 years. Innovations have continued to emerge, but none as fundamental as the innovation delivered through electronification. Until quite recently.
Real-Time Innovation
In the U.K., Faster Payments (FPS) was launched in 2008. Seen as a modern replacement to the existing ACH, FPS was put in place to enable faster movement of funds from account to account. FPS has been touted around the world as the poster child for real-time payments, a market that adopted it for sound reasons with solid growth. Other markets followed, often adopting a similar model. The graphic below summarizes the key needs of each player in the ecosystem driving this movement.
The card digitization approach is solid and grounded in ecosystem principles that evolved over 50-plus years to ensure payments are safe and convenient. But cards digitization is not fully meeting the objectives of the ecosystem players, as summarized in the diagram. Safety is a constant struggle, as the payment method is fundamentally about the payer giving the payee the right to dip into the payer’s bank account and “pull” the funds. The cost of cards is also seen as a burden to corporates and merchants that pay for the transactions. The customer experience of cards is also still somewhat clunky when not being used for the two primary use cases that electronic card payments were developed to support; physical point of sale and ATMs.
The industry in general has been looking at ways to streamline retail payments, remove cost, increase security and improve the customer experience. But these approaches inevitably introduce more players into the ecosystem, or lower cost and risk on one side (e.g. the merchant) whilst increasing cost and risk on the other (e.g. the bank).
Cards may still be a dominant force globally, but a bigger trend than simply real-time is changing everything—Digitization. Driven by the need to have instant access and instant gratification, with the control in the palm of your hand, digitization is taking every industry by storm, and payments is no exception.
Discover the exponential growth of real-time payments in your market and consider the impact on fraud prevention. Download the “Prime Time for Real-Time” report.
Dean has been in the solution space for over 20 years. Initially starting out at IBM as an IT architect consulting to cross-industry blue chip clients, it was at IBM where, as lead integration architect on an ePOS chip & PIN replacement programme for a leading UK retailer, Dean caught the cards and payments bug. Following IBM, Dean moved 100 percent into cards and payments solution consulting and product management leadership within TSYS, and later with Vocalink. At Vocalink Dean was head of product for what is now known as Pay By Bank App, combining faster payments with mobile payments to replace plastic cards to buy goods (a precursor to PSD2). At ACI Worldwide, Dean has held various product leadership roles covering consumer and merchant management, clearing & settlement, reconciliation, dispute management, mobile payments and now immediate payments and hub solutions. With this latest addition Dean is working with global partners to support the transformation of payments into a digitally-native, real-time industry, supporting any payment, every possibility.
