Originally published on PaymentsJournal
By Matthew Leavenworth
Payments and Fintech have never been hotter – but their true potential is still to be unlocked.
“Asking The Right Question is half the answer.” Aristotle (384-322 BC)
Payments have a problem. They are generally overly siloed and non-interoperable. But we have seen this problem in the past. Before the internet transformed global communications, they were siloed and controlled by separate industries and technologies which were regulated independently and differently. Sound familiar?
IBM “owned” computing and the related elements of communication; AT&T “owned” voice (by the way, I mean the monopoly version of the company. If you are too young to remember “Ma Bell” you should look it up); NBC, CBS, ABC “owned” video on a display. These were vastly different business with different business models and (most importantly) they did not work well together. The world wide web, based on an architecture which allowed for the interoperability of dissimilar systems, changed all of that. The balkanized state of communications was solved by finding the right answer to the right question – namely: “How can the world easily communicate and share our vast amount of knowledge with each other?”
Similar to the global communications problem, the last 50 years of payments industry growth has generally relied on closed networks, siloed systems, and walled gardens. The inherent challenges in moving data between these closed system models was seen as an acceptable trade-off for the other benefits that companies, networks, and financial institutions received. As new ideas and solutions arrived in the industry, they followed the established models because it was easier to build a stand-alone system than attempt to connect dissimilar closed systems.
That approach has now generated enough friction to significantly constrain the payments industry. Growth and innovation are being sidelined or blocked completely because new systems have a hard time connecting to old, established systems. Systems that would benefit from sharing data and working together run into significant barriers to do just that.
People outside payments are now in the age of “Open” and they have no patience for the friction of closed systems. They expect payments to work seamlessly and in real time, even if they are from different manufacturers, companies, or systems.
A Unique View of the Problem
My career has allowed me to see the siloed, dissimilar systems and the accumulation of systems to system friction from just about every payment actor’s perspective in the industry.
I was in the leadership organization of the Washington Mutual Debit card team when we had the largest debit card portfolio of any bank in the US. The hardest part of the work with debit cards was (and still is) making customers understand why their debit card needs TWO different ways to route money, and when and how a signature was better or worse than a PIN. To any customer it was just something that they had to “learn and accept” without truly seeing any value in it. The answer was, of course, simply that the banks could not easily make two different debit networks interoperate to provide one consistent experience to their customers. So instead of choosing one – they used both.
I was at Amazon when the payments team invented the pinless ecommerce transaction and began its explosive growth from just a handful of people. That experience showed me how rules written for over the phone Sears catalog purchases 40 years earlier (a virtually anonymous way to purchase) were being applied to online retail simply because in an online purchase the physical card and consumer were “not present” (and they therefore met the definition of a card not present merchant). Treating an online purchase at Amazon as anonymous ignored the fact that a purchase at a major online retailer today is anything BUT anonymous because of the advances in online fraud management (online retailers have anywhere from 50-400 data points to verify consumers than their offline challengers), and an online retailers ability to withhold shipment until satisfied that the purchase was not likely fraudulent. So today, a forty year old model continues to be applied to online merchants like Amazon because the card network systems cannot interoperate and share data with the fraud management systems of a sophisticated fraud deterer like Amazon.
I was at Bank of America on the consumer side responsible for generating ideas to deal with the impacts of the Durbin amendment and mobile payments. In that role I saw just how reliant the whole industry had been on one payment model, and how hard it was to reinvent consumer offerings that consumers really wanted to adopt until PayPal (and others) began to show us how. Most recently, I was on the the commercial side of the bank as part of Bank of America Merrill Lynch leading our strategy and innovation globally. In this most recent role I saw payment issues on a global scale and as a global problem. Global payments were too slow, too expensive, and lacked transparency. The culprit? You guessed it: they were massively siloed and full of friction everytime you tried to move from one system to another.
The Right Question
As Aristotle said, “Asking the right question is half of the answer.” And the right question to ask about our payments industry problem is: “How can we help the industry unblock unnecessary friction points and release the massive opportunities in payments?” I don’t believe (and the current industry results are reinforcing it) that inventing one more wallet or payment endpoint is the answer.
What siloed payment systems need is to find a way to enable interoperability of dissimilar systems, and then have the industry innovate from there. Finding an answer to this is both humble in purpose and massive in scale.
Interoperability as a capability has been the fundamental technology shift that has transformed our lives in the last ten years. It has accelerated the speed of innovation in many industries. We see the transformation in things like the growth of the Internet, email, cloud-based services, and in the tremendous growth (and potential) of IoT. Instead of building end-to-end solutions, innovators can create enhancements or connect new functionality to existing technology, thereby leveraging systems they did not invent or control but when working together can produce something new and better.
Shouldn’t we do the same for the payments industry? I think so. Great ideas are hindered by the friction between payment systems, and the best way to truly unlock the sidelined value in payments is to have a plan for interoperability of dissimilar systems.
The Future
It is clear to me that the payments industry is limiting its potential to grow and innovate by holding on to closed models that don’t allow the industry to easily work together. A perfect example of this general friction can be seen in the intersection of global low value (meaning small dollar amounts) disbursements from bank accounts (also called Payouts) and the incredible global growth of consumer adopted digital wallets. Just try to send a payment from your bank in the US to a M-Pesa account, or an Alipay wallet, or a Paytm account. It is not easy, and in most cases just not possible. These types of wallets are only getting more popular (and useful) with consumers globally. Their lack of direct and easy interoperability with existing bank account and money movement systems will only hold back their growth as well as the opportunity for existing players in the banking world to provide an innovative Payout option to their customers.
Solutions that address the problem of siloed systems and friction-full transactions between dissimilar systems head-on are starting to come into the marketplace. With some hard work (and a little bit of luck) one or many of these solutions will succeed and get market traction.
When that happens, we will all get to experience true interoperability in payments and FinTech which will do no less than reduce the friction around current payment technologies as well as bring amazing and innovative ideas off the sidelines and into our lives. What that means for the future of payments, and the future of commerce in general, is astronomical.
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