By Matthew Leavenworth – Originally posted on Payments Journal
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.
Read the full article on Payments Journal.