Why It’s So Darn Hard To Change Payment Infrastructure
Written by Frank HayesOne of the attractions of mobile payments for retailers has been the hope of all-but-eliminating traditional interchange fees. In what might be the perfect illustration of why such a shift is so difficult, the vendor that has most aggressively been pushing an entirely Visa/MasterCard-free infrastructure last week (Oct. 4) announced a deal with card processor Fifth Third—one that in effect means it will be using the very same infrastructure it wanted to replace.
The problem for alternative payments isn’t just doing the things that conventional payment cards do at lower cost. It’s also breaking through the lack of familiarity that customers, banks and even retailers have with new payment approaches. Visa and MasterCard remain in the POS driver’s seat because of their network, but also because they’re a known quantity. And as much as retailers want cheaper alternatives, the Bling Nation/Fifth Third deal illustrates how much of a challenge it is to buck the current infrastructure.
Bling Nation’s original idea was a closed-loop system that started with participating retailers, which in turn handed out NFC stickers to customers. Customers then paid for purchases by tapping their mobile phones with the Bling stickers attached to NFC readers, and retailers were paid directly from the customer’s bank account.
With Fifth Third, the third-largest U.S. payments processor, it works the same way—except that its NFC stickers are linked to customers’ debit cards and payments will go through Fifth Third, not Bling Nation’s own processing system. Neither company said how much more Fifth Third will charge above Bling Nation’s 1.5 percent transaction fee.
Why the change? Bling Nation Co-CEO Meyer Malka says it’s about expanding the business. But in practical terms, it’s capitulation. Consider: In its 18 months in operation, Bling Nation was only able to sign up two banks in Colorado and one in New York. One bank at a time proved too hard, so earlier this year the company went wholesale by linking up with Banker’s Bank of the West, a “correspondent bank” that provides services to 330 community banks. Even that only spread the Bling to three more states.
-Marc
October 15th, 2010 at 2:01 pm
The world of payments has been built on two foundations. Acceptance and a guarantee of payment. To achieve those two aims infrastructure, financial viability and a deep appreciation of risk are essential. Creating an alternate form of payment to serve an already well served face to face environment has been a challenge.
I’ve seen so many come and go. Neat ideas, great technical concepts. Yet how to find Consumer facing organizations (Banks) entice their customers to want to try something new and unproven. And, how do merchant facing organizations convince their customers to invest in the infrastructure and change required to accept this NEW means of payment.
Concepts like Pay-Pal succeeded because they found a channel “the Internet” that was not well served when new sellers wanted to auction off their assets and consumers wanted to be able to purchase said assets. Getting merchant agreements from Acquiring banks facilitated Pay-Pal’s growth. Not because it was cheaper simply because setting up an account to receive payment was without complexity or need to leave funds on deposit. Once they had the base on the two sides of the transaction expanding was easy, critical mass had been achieved.
Recently I was discussing a neat low value payment mechanism “Cardis” that has been around for 12 plus years with no traction. they’ve done the work to establish their business case, yet the issue is the same that Mondex, Proton, Visa Cash and how many other ePurses’ faced. You cannot chase cash replacement till you can totally replace cash. Why load value into an ePurse when to by a hot-dog on the street I still need real cash.
I wish new entrants success, Yet caution them to think about which first the Chicken or the Egg … Consumer or Merchant … Ubiquity or novelty. Neat technology is not the issue. The consumer and merchant proposition are key.