Raise your hand if you’re flying in a spaceship or beaming information to others via your mind powers.
When you look at past predictions of what our lives would be like in the 21st century, it can be aggravating to realize that while we’ve outpaced predictions in some areas, we’ve hardly started in others.
Which brings us to the subject of money and payments.
Look at the plastic cards in your purse or wallet. Why is your entire 16 digit account number – plus your full name – printed on the front? How do the signatures you scribbled on the back of those cards – if they’ve even legible – assure someone that you are who you say you are? How do archaic, physical cards correspond to a virtual world, where many of your favorite merchants reside?
During the recent holidays, I read the Autobiography of Ben Franklin (highly recommended), and ran across this section from when he was a young man in Philadelphia:
ABOUT this time there was a cry among the people for more paper money, only fifteen thousand pounds being extant in the province, and that soon to be sunk. The wealthy inhabitants oppos’d any addition, being against all paper currency, from an apprehension that it would depreciate, as it had done in New England, to the prejudice of all creditors. We had discuss’d this point in our Junto, where I was on the side of an addition, being persuaded that the first small sum struck in 1723 had done much good by increasing the trade, employment, and number of inhabitants in the province, since I now saw all the old houses inhabited, and many new ones building….
Our debates possess’d me so fully of the subject, that I wrote and printed an anonymous pamphlet on it, entitled “The Nature and Necessity of a Paper Currency.” It was well receiv’d by the common people in general; but the rich men dislik’d it, for it increas’d and strengthen’d the clamor for more money, and they happening to have no writers among them that were able to answer it, their opposition slacken’d, and the point was carried by a majority in the House….
The utility of this currency became by time and experience so evident as never afterwards to be much disputed; so that it grew soon to fifty-five thousand pounds, and in 1739 to eighty thousand pounds, since which it arose during war to upwards of three hundred and fifty thousand pounds, trade, building, and inhabitants all the while increasing, tho’ I now think there are limits beyond which the quantity may be hurtful.
As I read this, I thought about the recently announced data breach at Target, where forty million debit and credit card numbers were exposed. Monetary and payment challenges are part of any society, and as Franklin pointed out, solving them can have “much good increasing the trade (and) employment”.
Why have we made so little progress in payment innovation? Is it because for too long we’ve been too comfortable with a “good enough” payment infrastructure? Is it because the many-layered payment ecosystem is weighted down by too much defensive thinking and self-interest?
There are some alternatives at play, but all is not what it seems.
Many who have traveled outside of the US are familiar with EMV, or “chip and PIN”, where an account holder inputs their PIN on a Point Of Sale (POS) device. There is a cry for EMV in some quarters of the US, since it embodies the principles of two-factor authentication: something you have (the card) and something you know (your PIN). Since there’s a chip embedded in the card, it has an extra layer of security that your PIN-based debit card does not have today.
There also are those excited about variations of Near Field Communications (NFC), where the combination of your mobile phone and a Secure Element (SE) will communicate with POS devices, thus enabling you to “wave” your phone at the check-out and have your current payment credentials used to complete payment. There are many who argue that the process of a consumer waving their phone (with unknown response times) is not that much of an improvement over the same customer swiping a card (with known response times), and therefore is not worth the bother.
Here are a couple of challenges in front of the payment world as I see them:
1. Know where the problem lies. Replacing the form-factor of a card swipe has zero to do with the underlying security challenges inherent in your account info making several “hops” between the POS and final settlement. The Target data breach was a hack of their POS system – so EMV (or NFC, or whatever) wouldn’t have prevented that breach. Since we know that there has to be a “doorway” for physical or virtual payment transactions, we need to secure those doorways and the resultant hops.
2. Leapfrog like Latin America. Latin America had more mobile subscribers than landlines many years ago for the simple reason that their existing land-line infrastructure was so poor. In many ways, our current payment system is so unsuited for the ecommerce/identity theft world we live in that we have the opportunity to leapfrog to something (dramatically) better. “Innovations” that don’t require change to the underlying infrastructure might save merchants the cost of replacing their POS platform, but often are like putting lipstick on a pig.
3. Mobile has great advantages to all participants. My mobile phone knows where I am. It has layers of authentication. I know within minutes when it goes missing. I can remotely shut it down. It can provide me with alerts. It has a camera. I think the excitement about magically waving a mobile device over an NFC-equipped POS device is great for style points, but does little to solve our underlying payment challenges. Use mobile for what it is good for, which is more than a fancy storage device for plastic cards.
In 2014, I expect we’ll see new ways to improve upon the Kabuki-theatre process of “signing” for our transactions with an illegible scrawl on a small POS screen. I expect companies will innovate around new ways to assure identity, and insurgents (good and bad) will create new value-transfer methods to challenge the supremacy of a bank-led scheme.
When Franklin was suggesting his paper-based money system, he was doing so in part because of the rise of unhealthy value-transfer arrangements – namely bartering. In 2014, Bitcoin is a rough equivalent, as it is an unregulated currency of choice for criminals and game riggers (fun fact: the Target data breach was discovered by a major US bank that “bought” some of it’s own cards from the black market, thus sniffing out the Target breach. What currency did the bank have to use to buy back their own customers’ card data from the criminals? Bitcoin).
Everyone has a role to play.
Banks: You were disintermediated by PayPal, and can be further disintermediated by other stored-value challengers. The cable companies were relegated to being the “dumb pipes” of billions of dollars of internet value creation in the past two decades. You can be turned into a dumb pot of money for the commerce of tomorrow. Don’t sleep on your lead.
Merchants: Congratulations on driving down the cost of interchange in the Durbin amendment. Consumers don’t care. However, here’s what consumers do care about: not having you leak their private financial information to outside parties. You need to bury the hatchet with the banks and come up with a realistic way to replace your POS infrastructure so that there is more security.
Uncle Sam: There’s a point where compliance and regulation stop protecting consumers, and start stifling innovation. You’ve probably passed that point. The payment landscape is like the interstate highway system, or the electrical grid. You need to have a seat at the table as a partner, rather than just an enforcer.
I expect the next five years will have more innovation in this space than we saw in the previous twenty years, and we will see this for one reason: we have no choice.