Payments Instruments – Physical and Virtual

Payments Instruments: Since the year 1980, we have witnessed the rapid transformation of payment methods and instruments. From cash papers and coins to bank checks and mobile money, The form of money has also transformed big time from paper to bits and bytes, i.e., electronic. Monet went from being tangible items to binary numbers. This article explores the different modes of payment, the advantages of using each of the methods, and some exciting news in the payment space.

Speed is The King

The most important key point in the Payments Revolution is “Speed is the King”. Online, mobile payments to top EUR 3 trillion by 2020 (thepaypers). Apple is a great brand, and so the whole world was talking about Apple Pay for a little while.

But the noise has calmed down, and so it  will for Samsung Pay and Google Pay, and all the banks are launching their own versions. Then there is MasterPass and Visa Checkout. Mobile payments will be a 64 billion USD market (as my reading goes on Google) by 2019, as the world is running to get their bite of the payment cake, including Apple, Microsoft, Facebook, and many other big players, and of course, millions of small ones.

Should I call it the World Payments War,” where everyone has only one motive: to capture as much as possible and become the best pie part of this hot cake. Who will get how much? I am highly excited and super worried about what will happen to mobile payments.

Imagine you have touchable screens (like below in the picture) on every corner of the street where you shop and pay with the Mobile Payments option, and goods are delivered to your home. In a virtual grocery store in Korea, shelves are lined with LCD screens, shoppers tap the items they want, and the goods are processed, packed, and ready for collection after payments. This can be seen as the Internet of Things, or IoT. Other applications that come to mind are ATMs and information kiosks in bank branches that may use sensing technology to monitor and take action on the consumers’ behalf (we will discuss IoT marriage with financial services in an article to be published on April 26, 2015).

The over-busy pace of change in payment systems (paper, online, plastic, mobile, eWallets, NFC stickers and smartwatches, Facebook, Google Wallet, Microsoft, and many more) means that all businesses need to remain alert to the latest trends and developments. They and their customers will almost certainly start paying for goods and services in new ways now and in the future. Innovations will continue, and new ways will continue to change and proliferate as time goes on. Payment is the transfer of an item of value from one party (such as a person or company) to another in exchange for the provision of goods, services, or both, or to fulfill a legal obligation.

Payments are a daily and routine activity carried out by people in most parts of the world. These payments cover daily human requirements for transportation, food, and communication. Some people transact 2–5 times in a day, while others transact more than 20 times, making them heavy users of payment systems. More than a billion people in emerging and developing markets have cellphones but no bank accounts, yet they don’t stop their contribution to payment industries; they still do their contribution each day, and many low-income people store and transfer money using informal networks, but these have high transaction costs and are prone to theft.

Mobile money is beginning to fill this gap by offering financial services over mobile phones, from simple person-to-person transfers to more complex banking services. To date, there have been more than 100 mobile-money deployments in emerging markets; at least 84 of them originated in the past three years.

The recharge service is the most common type of payment system where one exchanges monetary value in return for the ability to make voice, SMS, or data calls. In one way or another, today’s mobile money transfer service originated from Airtime, where one can do a P2P transfer of Airtime that can’t be encashed but is used for one of the telecommunications purposes, i.e., voice, SMS, or data calls.

Some exciting news on Payments (Source nextboillion.net)

• Bitcoin + M-Pesa = Cheaper Remittances in Kenya –> In Kenya, an Australia-based bitcoin exchange called “I got” recently acquired the local company TagPesa, intending to target the country’s remittance market
• A Bitcoin Mobile Wallet in India –> Meanwhile, in India, tech firm Zebpay recently announced the launch of a Bitcoin mobile wallet, an Android app that will help users buy, sell and transact in the popular digital currency. Though the Reserve Bank of India has warned against dealing in virtual currencies due to security and money-laundering risks.
• Facebook Gets into Payments & Microsoft has already indicated –> Bitcoin isn’t the only tech solution targeting cheaper remittances. Last week, Facebook announced a new feature in its messaging app that will allow users to send and receive money between friends
• Alibaba Smile to Pay Selfie –> Security is a major challenge for all mobile payments providers. For instance, the “Touch ID” fingerprint sensor that Apple Pay uses to authenticate transactions is one of its prime selling points – and biggest “wow” factors. But Alibaba upped the ante this week when the Chinese e-commerce giant’s CEO Jack Ma unveiled its new “Smile to Pay” technology during an exhibition on Alipay, the company’s mobile payments service
• Xiamomi, Tempting 3% on money transfer –> Chinese company also made an intriguing mobile money-related announcement this week. Xiamomi, the world’s third-largest smartphone maker, revealed on Tuesday that it will be offering its customers in China an interest rate of over 3% on the money they transfer from their bank accounts to their mobile wallets
• New Wine in old bottle –-> M-Shwari, a mobile banking product run as a joint partnership between the Commercial Bank of Africa and Safaricom, signed up its 10 millionth customer earlier this month – just days before a new competitor entered the field Safaricom’s new partner, the Kenya Commercial Bank, hopes to tap some of this demand with a similar feature phone-based product called the KCB-M-Pesa Account. Along with a savings account, KCB will reportedly offer loans from Kshs 50 (around USD $0.54) to Kshs 1 million (almost USD $11,000), with payment terms of between one and six months at interest rates that start at 2%.
• IMPS-Immediate Payment Service (IMPS)– [Source NCPI.ORG.IN] Currently the majority of interbank mobile fund transfer transactions are channelised through NEFT mechanism. Under NEFT, the transactions are processed and settled in batches, hence are not real time. Also, the transactions can be done only during the working hours of the RTGS system. With the above context in mind, NPCI conducted a pilot study on the mobile payment system with the banks like SBI, BOI, UBI and ICICI in August 2010. Also, the banks like Yes Bank, Axis and HDFC bank joined this league in the month of September, October and November 2010 respectively. Immediate Payment Service (IMPS) public launch happened on 22nd November 2010 by Smt. Shyamala Gopinath, DG RBI at Mumbai and this service is now available to the Indian public. Now focus on payment methods

Cash Payments

The oldest, easiest, most commonly utilized, a most preferred and acceptable method of payment across the globe. This method does not require the exchange of any details, as it is a widely accepted method. However, due to the worldwide cash crisis, security concerns and inflation, most economies are moving away from cash payments and towards a cashless society. Cash gave the consumer a buying and negotiation power. In most domestic business transactions, a cash payment will typically be made in the currency of the country where the transaction takes place, either in paper currency, in coins or in an appropriate combination.

Electronic/Internet Payments

Commonly used for remittance services (International & Domestic). This is a very common instrument for corporate customers, people with internet access and highly educated and those who are tech-savvy. It does not need any more explanation as it is a self-explanatory product. Most organizations in the Travel, Hotel, Event industries and government sectors use this method of payment.

• Since the customer is usually required to enter personal details, the entire communication of ‘Submit Order’ page (i.e. customer – payment gateway) is often carried out through HTTPS protocol.
• To validate the request of the payment page result, signed request is often used – which is the result of the hash function in which the parameters of an application are confirmed by a «secret word», known only to the merchant and payment gateway.
• To validate the request of the payment page result, sometimes the IP of the requesting server has to be verified.

Plastic Cards (Debit, Credit, real-time value & Stored Value)

Plastic cards are in use mostly in USA & Europe while less usage is noted in developing markets. Mobile Money or Mobile Payments will struggle to take off in countries where cards have already been established as the principal payment method and where cash can be hard to obtain. There’s a good chance for mobile payments to (possibly) take off in such economies but in the US and Europe, there are literally billions of cards already. In the US in particular, most of their acquiring infrastructure is non-EVM compliant therefore opening up for security breaches? As on date, mobile payments do not offer something superior, or any incentive for consumers to switch from plastic payments to mobile payments. Handing over a card is normal & obvious behaviour while mobile payments are not.

Mobile Payments

Proximity Payments/Contactless Payments: Proximity payment generally refers to contactless payments in which the payment credential is stored in the mobile device and is exchanged over the air, based on NFC technology, with a dedicated and compatible payment terminal. In other words, the mobile device acts as a contactless payment card, thus becoming a new payment form factor. Contactless payment also could be used remotely; for example, to make an online purchase by swiping the mobile device over a contactless NFC reader plugged into a personal computer (PC).

Among other things, Apple’s Second Coming of the Mobile Payment Solution was meant to fix our credit card security system. Only, according to (unconfirmed) reports, it’s doing exactly the opposite. Facebook launched money transfer services, which yet another second but we need to wait for our comments

The Drop Labs blog has a good (if technical) post on how Apple Pay security does and doesn’t work. In essence, the hardcore tech stuff for Apple Pay works just fine: no one is breaking TouchID, stealing iPhones to pay for stuff, or hacking the NFC transmission protocol. Rather, the flaw lies in the credit cards themselves.

According to Drop Labs, people are buying credit card numbers online, then loading those same numbers into Apple Pay, in essence making themselves a handy fake credit card without going to the trouble of making a physical fake. And it’s not a small problem: Drop Labs claims that for some issuers, fraud levels are as high as 6% (meaning $6 of every $100 spent is fraudulent). That’s bad even when compared to regular credit cards, whose fraud rate averages out at less than 1%.

Remote Payment/Contact-full Payments: Remote payment covers payments that take place either via a mobile web browser or a resident smartphone application, in which the mobilephone is used as a device to authenticate personal information stored remotely. SMS, STK, USSD, MPOS & POS, ATM, URL Email, are also under this umbrellas Remote payment solutions also can be used for transactions such as face-to-face and vending machine transactions.

Mobile devices have changed business, everyday life, and the way financial transactions of all types are made. A newer opportunity is emerging for service providers and merchants: the use of a mobile phone as a mobile wallet. Considering the success of mobile content services such as ringtones, games, and other applications, it is becoming obvious that consumers are willing to utilize mobile phones for payment purposes. Mobile phones are providing an unprecedented opportunity for the expansion of financial activity in developing countries where the number of phone users can exceed the number of those having bank accounts, especially in Africa and some Asian countries.

Mobile Payment Ecosystem

The mobile payment ecosystem involves the following types of stakeholders:

• Consumers
• Financial service providers
• Payment service providers
• In-service providers (merchants), including content providers
• Network service providers or Mobile Financial Service Provider
• Device manufacturers
(Mobile, MPOS, POS & Other Infrastructure)
• Regulators (Telecom regulator and central banks)
• Standardization and industry bodies
• Trusted service managers
• Small-medium enterprises
• Agent Networks
• Application developers

Advantages (Consumers) of Mobile Payments vs Plastic Cards.

Convenience: Mobile payment methods are more convenient than traditional payment methods in terms of portability. It eliminates the inconvenience of carrying multiple plastic cards in a physical wallet by enabling consumers to link m-Wallet to those accounts. These accounts could include credit, debit, and prepaid cards from banks as well as merchant cards that entitle the user to rewards or discounts. Finally, mobile wallets can be used for small-dollar transactions; they will eliminate the inconvenience to consumers of carrying coins and currency.

Flexibility: M-Wallet can carry other payment methods and pay directly from a bank account through ACH. By loading their wallet, consumers can choose a payment instrument that best fits their type of payment. Many consumers may want to fund their M-Wallet from a debit card account, directly from a bank account for every-day  small-dollar purchases, or from a credit card account for occasional large-dollar purchases. To maximize their rewards, some consumers may also want the option of paying with a merchant card. M-Wallet can make it easier for consumers to choose among these options at the point of sale.

Security: Mobile payments have the potential to significantly reduce the likelihood of fraudulent POS or MPOS transactions. One way is by facilitating dynamic authentication of the transaction at the point of sale.

For card payments in the United States, authentication has traditionally relied on static data, such as a card account number, expiration date, PIN, or signature. M-Wallet payments reduce the likelihood of fraudulent transactions through the password protection of the mobile phone and the mobile payment application on the phone. Such password protection provides an extra layer of security that does not exist when consumers use plastic cards to make payments. Advances in mobile technology will also enable new forms of authentication, such as facial recognition.

Self-Profiling: M-Wallet has several advantages over traditional payment methods in managing finances and controlling spending. Mobile Wallet enables consumers to check their account balances prior to making payments.

Because many different payment instruments can be loaded on the mobile wallet, consumers can choose the payment instrument with the most favorable financial impact, for example, the instrument with the lowest fee, highest reward, or, in the case of credit cards, the most favorable terms for repayment. M-wallet helps consumers by enabling them to set thresholds for different categories of spending. A consumer would be alerted when a threshold was reached, regardless of which payment instrument was being used.

(Image source from Google and modified with Mobile Financial Services Column)

Advantages for the merchants

Customer behaviour or Credit trending: A common struggle for small businesses is tracking inventory and customer behaviour. But with mobile payment services, you can automate these processes and better serve your customers. “Small businesses using mobile payments can now track what product and services they are selling to understand customer demands. Not only can they now capture payment information, but they can learn about their customers and use that information to improve service. For example, a business can use the purchasing data to learn that they sell a lot between 25th to 5th i.e. salary period and make sure that they have enough stock in the store. The business also knows the ways and type of instruments used for this shopping.

Fees: Mobile payment charge less per transaction than plastic cards, which equates to direct savings & easy reconciliations for merchants.

Paper Payments

The oldest and the easiest way in good old times even in current time also it’s still widely used. Security bond/guarantee, Cheques, Bank Draft and vouchers. The four main items on a cheque are

• Drawer, the person or entity who makes the cheque
• The payee, the recipient of the money
• Drawee, bank or other financial institution where the cheque can be presented for payment
• The amount, the currency amount

Social Payment

This is another form of payment that is gaining popularity at a rapid pace. Though initially PayPal brought it into trend and popularized it, Today, Google Wallet, Twitter Buy, Venemo, etc. are all jumping into this space. The use of social payments can be made for person-to-person money transfers or even for business payments. Not only can they now capture payment information, but they can also learn about their customers and use that information to improve service.

Disclaimer & Points to Note

All credit and credits of contributions remain with original authors and I sincerely thanks for their contribution here. Welcome to the future of Payments. In this post, we have discussed the potential merger of social media, AI and its bundle pack i.e. Machine Learning, data science, futuristic technologies and big data analytics. In the next post, we will pick up a specific use case to deliberate on.

Books + Other readings Referred

• Open Internet – NewsPortals, Economic development report papers
• Personal & professional working experience of  @AILabPage members.

Feedback & Further Question

Do you have any questions about Deep Learning or Machine Learning? Leave a comment or ask your question via email. Will try my best to answer it.

Conclusion: Which instrument is more stable, usable, acceptable and cheap?. “All of this is because of the fact that this physical/digital world is converging.” As cheque usage increased during the 19th and 20th centuries additional items were added to increase security or to make processing easier for the bank or financial institution.

A signature of the drawer was required to authorise the cheque and this is the main way to authenticate the cheque. Second, it became customary to write the amount in words as well as in numbers to avoid mistakes and make it harder to fraudulently alter the amount after the cheque had been written. It is not a legal requirement to write down the amount in words, although some banks will refuse to accept cheques that do not have the amount in both numbers and words. AI is getting traction in the FinTech industry will talk about the same in my upcoming posts.

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