Thu, 15 November 2018
Payment Innovation Moves to the Core
When we conduct our Glenbrook Payments Boot Camp, our first graphic illustrates the three essential steps in every transaction - initiation, funding, and completion. When looked at through the lens of of the past decade most innovation has been in initiation. Consider: Apple Pay, Google Pay, Venmo, QR codes. The list is long of ways to kick off a transaction.
Funding is all about where the money comes from. Usually a bank account, often a wallet holding money. Some innovation there but not a great deal. There are only so many ways to store funds.
Completion, the last step, is the most important to many participants as it’s when the transaction completes with the final movement of money.
Five years ago, in those boot camps, I said that completion, also called settlement, is the innovation-resistant phase of a transaction. Today, everything has changed.
In the U.S., we have new services such as Zelle and Venmo that appear to the end parties to deliver instant settlement. They may use card rails or bank rails like ACH to complete the transaction.
Two Forms of Settlement
In this discussion with Glenbrook’s Carol Coye Benson, we look at two forms of settlement: end party settlement - for example, an employer paying an employee - and then Carol focuses on the nuanced world of interbank settlement.
If you’ve heard the terms net settlement, gross settlement, or RTGS and wondered what they mean, take a listen.
Faster Payments and Settlement
We also talk about the phenomenon of faster payments and the settlement techniques these systems employ. 40 countries around the world are in one stage or another of deploying faster payment systems that push money from bank account to bank account. It's already in the US via the Real Time Payments Network from The Clearing House and, perhaps, a competing service from the Federal Reserve. (To get an update on the Real Time Payment Network, listen to Episode 81 of Payments on Fire).
These faster payment systems vary in their capabilities. Speed and data carrying capacity are just two variables. But we have seen that when a new payment system enters a market innovative offerings can flourish, provided access to that system is encouraged by rule, regulation, or both. However, that level of openness is not guaranteed. As Glenbrook have seen in our work around the world, some systems are essentially closed by market power or operating rules. These constraints limit the network effect's benefits of ubiquity, convenience and, often, cost.
This is an ongoing challenge. In this age of fintech, banks are under pressure to innovate. As owners or participants in new systems, some may choose to limit access to their fancy new rails in an attempt to forestall competitive market entrants. Others will be “encouraged” by regulators to open up. Of course, end party choices will play a big role, provided there’s a choice available.
The New Game
Settlement has traditionally been led by major commercial banks or the central bank of each country. That model still holds. In some markets, including the U.S., we expect a push and pull for control between those two entities. Christine Lagarde, Managing Director of the International Monetary Fund, suggests such tensions may justify the issuance by a nation's central bank of a fiat digital currency as a counterweight to the alternative control over payments by a concentrated set of banks and processors.
Settlement innovation has created a competitive environment that did not exist before. It will be the interplay of rules, regulations, technical capabilities, end party value proposition, and market power that will determine the evolution of each country's settlement platform. In some, regulators will shape the outcome. In others, system access for fintechs and the "open banking" model will be a determinant. For all, cost effective access for end parties is critical.
So much for thoughts of a static payments ecosystem.
If you think of yourself as a payments geek or just want to get under the hood of how money really moves, Carol is a terrific guide.
Tue, 13 November 2018
Restaurant payments is a complex area especially for those companies serving the mid-sized and large restaurant operator. They have different needs that extend well beyond payment acceptance but even that is a highly variable concern.
Ever notice that we pay differently depending upon the type of restaurant we’re in? It’s always been walk up and pay the central server at McDonalds. Applebees uses Presto table top devices to speed table turns, upset desserts (“that lava cake sure looks good”) and take payments. At most sit-down establishments, especially those in the fine dining segment, we still hand over our cards and the server walks away to authorize the transaction (later that night, the manual tip adjustment process determine the final clearing amount.)
For certain segments, order ahead is a priority. Order ahead dominates how pizza shop operate. Initially, that capability took market share from mom and pop pizza shops because only the largest operators in the “Big Pizza” segment could afford the necessary IT expertise. Now, mom and pop have multiple order ahead services to choose from.
But consider the complexities of integrating the order into the kitchen or at the barista’s station. Business process automation is a differentiator.
This podcast with Tim McKenna, VP of Sales, at Heartland Payment Systems, is both a deep dive into restaurant operator concerns and a revealing look into how a major payments provider has shifted its business model to serve mid-tier and larger restaurant operators.
Like Square, Heartland has realized the revenue benefits of expanded commerce services above and beyond the traditional payments revenue stream. By cross selling multiple services, Heartland expects to see 60% of its revenues coming from payments coupled with value-added services that automate the business of their customers.
If you’re interested in how the payments industry is evolving to market demands or how larger restaurant operators think about payments, Tim’s observations are well worth your time. Take a listen.