Ways we Pay — A Primer on Modern Payment Solutions

Payments mechanisms for individuals — for payments to merchants and between individuals — are evolving fast worldwide. Solutions are often difficult to differentiate in their execution, so it’s useful to compare their features from time to time. This article provides a basic primer on more common modern payment mechanisms and recent developments. Future articles may focus on specific solutions or market participants.

One way of categorizing payment mechanisms may be as follows:

1. Physical card presentation solutions that involve presenting plastic including swipe, chip and pin, tap and go. Authorization and clearing / settlement follow traditional routes from the acquring merchant bank to the card association to the issuing bank using a variety of networks (or more directly in the case of AMEX).

2. E-wallets that allow for presenting a representation of the card from a mobile phone where the card is securely encrypted in the wallet (or a token of the card is in the wallet) and the transaction is executed against the card or token. Presentation to a POS device may be via NFC — or the merchant may use a QR code that is recognized by the App.

3. Stored value e-wallets where the wallet solution has a balance (topped up or accrued in various ways — often via a card transaction) that is used to make the payment. Some e-wallets may allow for both secure card presentation and stored value use. Stored value e-wallets may also provide peer-to-peer payment mechanisms.

4. eCommerce solutions for online payment using actual card details or approaches that leverage the above wallets. Often with features and reach to support international issuers and sometimes wallets or accounts.

5. Foreign currency stored value wallets that may allow for competitively priced forex purchases and virtual or physical debit cards linked to the currency.

6. Account-to-account payment solutions where the payment is made direct from a bank account to the recipient bank account. Increasingly, regional and national schemes offer instant account-to-account payments schemes.

Some recent notable developments in each of these solution areas are discussed below.

Physical Card Presentation

In the past decade many markets have seen significant uptake of low-cost physical terminals for small merchants to facilitate transactions without committing to a long term contract. Solutions may have been encouraged by the likes of Mastercard’s Mobile Point of Sale (MPOS) program. Most work in conjunction with an app or choice of app. Apps may provide basic payment acceptance functionality or may extend to providing richer POS functionality — for example digital receipts or features for a specific market like the restaurant trade or appointment-based services. Prices typically range from $40 and up for a terminal but some offer free deals. Merchant onboarding is often digital and simplified, but — depending on regulation in the market concerned — fees are usually higher than traditional fixed systems. Fees may be tiered by volume with fees in the 1.5% to 3%+ range not being uncommon. A handful of examples from the many around the world include:

a. Square in the US who were an earlier pioneer of the model.

b. Izettle and Elavon operating in a number of European markets. Miura hardware is popular in some of the solutions in Europe.

c. Many in emerging markets — for example, Yoco operating in South Africa and understood to be using Mercantile as the acquirer and Payworks Pulse for device / app solutions.
Many more can be identified by looking at providers participating and certifying in the Mastercard MPOS program or equivalents.
More recent developments include merchant lending (based on historical transaction profiles). This business model is similar in nature to those whereby Amazon and Paypal target loans to merchants after reviewing transaction histories.

d. The PayPay ‘Here’ program.

E-wallet based card presentation

Apple Pay and Google Pay are probably the most globally noteworthy examples of secure card presentation solutions. Despite widespread POS support in the US uptake has, however, been slow with quoted usage rates in the low teens for at least one use and in low single digits for use on a consumer’s most recent shopping trip.
The fraud track record for these solutions isn’t easy to identify but it would be useful to know if the tokenization and secure presentation technology implemented in a solution like Apple Pay has had a meaningful impact.

Alongside the above are solutions in many markets that have introduced card-based e-wallets (not necessarily with as sophisticated tokenization strategies as an Apple Pay) coupled with merchant onboarding programs in which the merchant uses a QR code that is scanned by the user app to accept payment. Quick onboarding at a low fee with merchant transaction fees in the 1.5% to 3% range seems common. Variations include displaying the QR code on a physical restaurant bill or in an emailed bill.

QR code based acceptance is also being promoted by the card networks — for example as part of VISA’s ‘Scan to Pay’ and Mastercard’s Masterpass QR (the latter being focused on emerging markets for now and operating in a slightly different way). More on QR codes in a separate post.

Stored Value e-Wallets

Stored value e-wallets permit the user to hold a balance in the wallet — rather than just by debiting a card — although most provide for a card as well. Widely known stored e-value wallets include Alipay, WeChat Wallet and Venmo. These balances are usually held in aggregated form in a selection of commercial banks by the payment scheme operator. While there was a reasonable penetration of debit cards in the Chinese market, merchants were underserved in terms of payment mechanisms. Alipay and others pioneered features like rapid and simple merchant onboarding coupled with QR code use. Merchant acceptance drove customer interest. In other markets individual person-to-person payments have been more of a driver.

In some cases, in these schemes a payment may never leave the payment operator’s systems for processing on industry rails. This has prompted regulatory concerns and suggestions in some markets that large scheme operators might be forced to settle through a separate entity — for example the Wanglian scheme being progressively implemented in China. With regulators having greater insight into the evolution of these schemes it is not clear that it would be easy to for new schemes to start in as lightly regulated way as was possible in the past.

Apple Pay Cash (available in some markets) supports peer-to-peer payments and maintaining a balance within Apple Pay. Under the hood the balance appears to be held as an account or debit card — for example at Green Dot Bank for US users.

eCommerce Solutions for Online Payment

Many online acquirer-like specialized services have evolved for ecommerce services. Stripe is possibly one of the higher profile examples. They mostly work with an acquiring bank (for example, in Stripe’s case the acquirer in the US is Wells Fargo). Most provide rich developer tools to facilitate online transactions, receipts, refunds and reporting. They may provide international transaction features and local currency payment options (something that the card providers also provide as a service). The core focus is on accepting card payments but some also provide direct debit capabilities. Card processing fees are usually in the 1.5%-3.0% range where not regulated lower. Participants simplify merchant onboarding, incorporation of code into ecommerce baskets and solutions and often also bring fraud and risk management capabilities. Other participants include Braintree (from Paypal), Klarna and Ingenico.

Note that services like MasterPass also overlap the eCommerce space. Vendors may render MasterPass QR codes for payment on their ecommerce sites and allow consumers to use MasterPass apps provided by their issuing bank.

Foreign Currency Stored Value Wallets

Foreign currency wallets have become more popular in the past few years — often used as a lead in to other services. Some offer one or more linked physical cards and the option to create virtual cards for greater security when making ecommerce purchases. The value proposition is primarily lower cost forex — compared to conversions available on regular card transactions or bought over the counter.

Account-to-account Online Payments

An interesting dimension for ecommerce acquirers may be the emergence of PSD2 Payment Service Provider payments in Europe — in which a customer is authenticated with their bank to initiate an account-to-account transfer to purchase goods. For low margin high value transactions this may be particularly appealing. IATA has started experimenting with such services for accepting payment for airline tickets in Europe as part of its IATA Pay initiative. The EBA’s Secure Customer Authentication standard for PSD2 payments is applied by the originating bank.

There are more local examples of services that facilitate account-to-account payments in markets where there are instant payments. In some cases, the requirement for instant payments at a a scheme level is even bypassed by the provider holding accounts at all major banks and receiving and verifying payments received immediately within the bank systems.

It’s possible that when a national real-time scheme for account-to-account payments is adopted in a certain market this might provide a boost to banks over stored value wallet peer-to-peer schemes. For example, Zelle in the US has seemingly captured a reasonable amount of the peer-to-peer volume in the market fairly quickly. Where features such as tokenization of account details with email addresses or mobile numbers exist then payments may be easier and overlay services may emerge that further boost usage of these schemes. Australia’s NPP and it’s overlay services is an interesting scheme to watch evolve.

Nevertheless, account-to-account based payment systems need to consider customer protection/recourse, security and access to credit when competing with card-based payment systems.

Conclusion

Payment solutions are an area of intense innovation. Today, apart from in China, traditional card systems and acquiring banks are often not taken out of the loop — but interesting fintechs sometimes front-end some of these services. There may also be a risk for acquirers of future disintermediation due to the loss of direct merchant engagement. The progress of wallets such as Alipay in countries like India (where Alipay have a stake in PayTM) will be interesting.
The emergence of marketplaces, ecosystems and overlay services surrounding payment solutions is also an area to watch.

In my role at Microsoft I define blueprints for what our Services teams worldwide do to help our Financial Services customers achieve more. Views are my own.