Square has become a retail and payments phenomenon. Across the USA it has provided hundreds of thousands of small and medium-sized retailers with an alternative to purchasing or renting traditional point of sale card acceptance equipment. Instead it offers a ‘free’ dongle to plug into the merchant’s iPhone/Android phone or iPad which can then be used to accept electronic payments.
Others are now rushing to catch up. iZettle in Europe and PayPal Here in several markets have both unveiled systems which also use hardware plug-ins for some mobile phones and tablets.
It is clear that these systems are meeting a need. Many smaller merchants can’t justify the costs of buying or renting card acceptance equipment from their banks and want a portable solution that is easy to use and simple to understand.
These systems represent a significant, positive change for the payments industry, enabling many more merchants to take electronic payments. However, there’s a second issue that needs to be addressed in order to extend this success story into low value payments – the largest growth opportunity for electronic payments.
Over 70% of cash retail purchases are low value payments. In this segment, the barrier to moving away from cash is the transaction processing cost. Current debit/credit card payments infrastructures follow the same flow and financial accounting steps that were designed in the 1950s for the first credit card systems. While effective for higher value transactions that require individual transaction reconciliation, with fraud and credit risk management checks and provision for extensive chargeback and dispute processing, the current model is not suitable for low value transactions due to its cost structure. Smartphone readers and apps on their own cannot address this barrier because debit/credit card transaction processing costs remain their underlying costs.
Electronic payment methods, although increasingly favoured by consumers, are expensive to operate. As a result, the fees levied on merchants can have a considerable effect, particularly in already low-margin businesses or on those selling mainly low-value items. Currently merchants have little incentive to encourage their customers to turn away from cash and embrace electronic payments. Regulators, merchant groups and politicians are all beginning to look at this issue in more detail, and are putting more pressure on the payments industry to find a way to make electronic payments more affordable and, hence, more widely used.
Contactless payments, mobile NFC technology, prepaid cards, e-purses – around the world it seems everyone is looking for a solution to the low value payment challenge. But such a solution often appears elusive.
The cost of processing for all types of electronic payments needs to be addressed. It is the true ‘elephant in the room’ for the payments industry in 2012. Previous attempts to address this issue have generally involved simply moving the cost burden around the payments value chain.
This approach creates friction between parties and will continue to do so as long as there is an imbalance between who wins and who loses the battle over transaction costs. If cost is the issue, then cost should be the answer. The industry has to look at a solution that reduces the cost of processing these low value transactions. The challenge is whether this can be done.
We can compare the low value transaction to the delivery of items to a shop. Just as making a special trip to deliver a single item is inefficient and costly, the same can be said for processing a small value item. The sensible and cost-effective thing to do would be to pack a large number of items into the same lorry so as to spread the cost of delivery across the various items. Similarly, by bundling up an aggregation of low value payments into a single digital delivery would mean that the issuer and the acquirer would each process one larger transaction instead of a number of smaller transactions.
Modern payments cards and mobile smartphones have the capacity to facilitate such digitally aggregated payments, and their increasing ubiquity means more and more consumers already have the necessary technology without the need for further investment in infrastructure.
The key issue facing the payments industry is the need to reduce end-to-end transaction costs, enabling all those involved in the payments system to benefit from the resulting savings – creating a solution which is commercially viable and fair for all.
- Nebo Djurdjevic, CEO, Cardis International
About the Author:
Nebo Djurdjevic is CEO of Cardis International, a technology firm dedicated to improving the economics of low value electronic payments within the broader trend towards becoming a cashless society.