- Time for the payments industry to tackle the stalemate over the cost of low value payments
Austerity hurts, there’s no question. Greece is feeling the pain, but it’s certainly not alone – countries across Europe are reeling from the banking crisis and austerity measures. And people are angry as they struggle to pay their bills. Politicians in Greece are so unpopular that they cannot manage to form a government, in France voters have opted for a new anti-austerity president, while in the UK the Cameron-Clegg alliance is feeling the pain at the polls.
One of the symptoms of this crippling and spreading economic condition is the return of the dangerous and damaging cash culture. We all know that this could be a terminal disease for the payments industry, and no less so for the economic health of countries.
The pressure away from austerity is mounting and the noise in favour of growth is getting markedly stronger – one of its most fervent proponents being France’s newly elected President Hollande.
In the payments industry there are various opportunities for growth. In fact, Chancellor Merkel and her partners recognise the importance of retail banking and retail payments in generating revenue for banks. According to Daniella Russo of the European Central Bank retail payment revenues account for up to a quarter of total bank revenues. It’s a reliable and stable stream of income and it’s well documented that banks perform better in countries with more developed retail payment services.
One of the most promising opportunities for growth for the banking sector as well as merchants and other parties in the payment transaction chain comes in the form of low value payments. Consumers in the EU are making an estimated 170 billion cash retail purchases below €20 annually at an average value per transaction of €5.
Access to this market for banks, processors, payment schemes, mobile operators and merchants has thus far been elusive due to a payment system architecture designed way back in the 1970s for larger value items.
The last decade has seen phenomenal developments in the world of payment and there is much for the consumer to like about the ground-breaking moves towards contactless and, most recently, mobile NFC payment. We are able to pay securely, conveniently and quickly when we want and with whichever device we want…, except for things costing less than €20. There is a barrier – existing systems including the new developments are not suitable for low value payments simply because of the high cost of processing individual transactions.
Let’s move our attention for a moment to another important party in the payments ‘theatre’, namely the merchants. They are finding it increasingly difficult in this climate of austerity, and their focus on costs – always strong – is now even more concentrated than ever. Their scalpels slice deeply into anything that could eat away at their profit margins. No surprise then that they would choose to accept cash over what they see as a ‘heavily taxed’ electronic transaction for something as simple as a loaf of bread, the newspaper or a takeaway sandwich.
So, on the surface at least, the interests of banks, consumers and merchants appear to be at odds. This leads to a stalemate within the system as no-one wants to lose out on revenue. What is needed is a solution that benefits all parties – a solution that doesn’t require major changes to existing systems and infrastructures and ultimately encourages merchants and consumers to reduce their dependency on ‘hard cash’ for small value items.
Naturally, we believe our aggregation solution that allows a debit card to include the equivalent of the part of the leather wallet that holds cash today is the answer. This spendable balance is managed through withdrawals (e.g. €50) automatically initiated and loaded onto the chip while making a payment at the point of sale. This enables the consumer to then spend that money in small increments at multiple merchants. As a result, a low value payment transaction carries only a portion of the processing cost of the original withdrawal transaction unlocking the benefits for all the parties. Whatever our own views are, the important thing is for the payments industry to get together and work out ways of encouraging the move away from cash for everyone’s benefit.
The technology is there, as is the know-how. It’s time for us to join the politicians and the central banks in the theatre and introduce the instruments to carry out the surgery required to nurse this sick patient that is Europe back to health.
Nebo Djurdjevic is the chief executive of Cardis International, a technology firm dedicated to improving the economics of low value electronic payments within the broader trend of moving toward a cashless society.