Cash is not king: the future of consumer electronic payments

Yahoo''s regional financial controller Honnus Cheung and HSBC vice president Ben Arber discuss the future of consumer electronic payments.

- While many payment solutions have been on offer in the recent past, most of them have proven unsuccessful due to overambition and failure to focus on the customer.

- However, the advent of e-mail brought versatility to these solutions for merchants and has proven attractive to customers who appreciate online auctions.

- E-mail money allows cross-border payments for customers, and holds additional corporate opportunities with its cost savings, risk reduction and increased efficiency.

- However, the growth of such solutions may be inhibited by the lack of inter-operability, customer registration, regulatory environ-ments, and security issues.

No more coins and notes. That is the banner under which numerous new business-to-business (B2B), business-to-consumer (B2C) and consumer-to-consumer (C2C) electronic payment solutions have been launched. Even for a close industry watcher, the sheer weight of new schemes launched is difficult to keep up with, particularly as most have names that end in "-cash" or start with "pay-". Many failures litter the landscape. Yet there have also been some notable success stories, and the potential benefits remain attractive for both consumers and merchants.

So why have so few of these payment solutions succeeded? What is the promise of such initiatives? And how relevant are they to the corporate treasurer - now and in the future?

Cashless Society

The replacement of physical cash with an alternative has been the preoccupation of bankers, technologists, entrepreneurs, and others for many years. The objective has usually been to achieve a more efficient and cost-effective mechanism for day-to-day value transfer than the use of physical cash. With a two-day fund clearing cycle as standard, and USD20 considered cheap for an international transfer in the retail market, pressure to increase speed and decrease price has been clear. Other factors driving this movement have included: introducing a borrowing element to simple transactions; the concept of a single global cross-border currency; and reducing the physical size of people's wallets.

The advance of technology at such a rapid rate in the second half of the 20th century - epitomised by Moore's Law, which states that the processing capacity of semiconductors doubles every 18 months - has meant that the movement to come up with a successful and widely-accepted alternative to cash gathered pace.

The first major success was the advent of the credit card. Now a well-known story, it took nearly 40 years to combine technological innovation (the magnetic strip) with communications improvements (the proprietary international processing networks of the card schemes) in an interoperable business environment (where merchants can accept payments from cards issued by any authorised institution) to reach mass-market acceptance. This objective - mass market acceptance - has proved to be the holy grail of new non-cash consumer payments initiatives and forms a paradox, which is core to why many efforts have floundered. In any new scheme, who comes first: merchants or consumers? An organisation trying to convince merchants to subscribe faces the usual riposte: "when it is widely accepted by consumers, I will start to get interested" - and vice versa. It is of little use to consumers having a new way to pay when they cannot buy anything with it.

The success of the credit card gave more impetus to both the theory and the practice. The scenarios imagined where a new version of cash may be applicable became increasingly far-fetched. Every situation - from buying a morning coffee or newspaper, to paying off a friendly debt without cheque or cash, to making a remote purchase via a mobile device while sitting on a train - had a potential solution in an electronic form of payment.

During the past two decades, a plethora of ideas - some taking advantage of existing bank systems and others proposing new ones - emerged. Some more well-known propositions included:

- using new value pools (virtual accounts) that users fund from bank accounts or credit cards;

- creating a new virtual payment system in place of traditional bank- or state-owned clearing systems; and

- creating a form of international virtual currency.

All these concepts and more became business processes pioneered (and, in many cases, patented) by companies small and large. The majority were backed by one or two key payment opportunities - from unattended parking meter payments to small-value-only payments to larger-value remote shopping-type payments. The majority had one or two defining features or unique selling points - from enhanced chip-based security, to the immediate wireless transfer of value, to the ability to use consumers' "dead time"... and the majority failed.

Two common themes among the failures were overambition and the failure to focus on the customer. Nor were failures restricted to start-ups. Multinationals embarked on many flawed ventures; for example, a particular chip-based proximity payment solution promoted by a number of large banks. Banks have tried and failed to promote their own proprietary e-payment solutions. Those that succeeded have been companies that were able to get a niche customer proposition correct (the killer application). A good example would be Octopus in Hong Kong, where instantaneous and contactless micropayments within a mass transit customer experience are well catered to.

But what is the bigger picture for larger-value transactions? What about those transactions that bankers and corporations have traditionally been more interested in?

Payment by E-mail

Electronic mail has brought the most dramatic change in communications since the advent of the telephone, and in a considerably shorter period of time than any other communications standard. E-mail has revolutionised the way we run our lives both inside and outside the office, and it is truly international and low cost. The remarkable prevalence of e-mail in today's society, along with the will to find a more efficient way to transfer value from one party to another, have been the two major driving forces behind the recent emergence of e-mail money. Also referred to in various contexts as e-money, virtual cash, peer-to-peer (P2P), and a raft of other names, the basic concept is the transmission of money via existing national or international banking systems from one party to another.

The attraction of e-mail-based person-to-person-type payment solutions is partly their versatility. The concept of the transfer of value from one e-mail "person" to another can be expanded. Replace person with company and extend e-mail to mobile phone number, and nearly every payment situation can be catered to - from face-to-face transactions to remote not-present payments. However, the real catalyst can be attributed to a single factor, the archetypal killer application: online auctions.

Yahoo! PayDirect from HSBC, PayPal, Checkfree, and others turned conventional wisdom on its head by showing that consumers were willing to subscribe to and use a new service with a brand unfamiliar to them to conduct financial transactions - away from the trusted secure relationship with their bank. PayPal has proved this to the tune of 31 million customers in 38 countries, at the latest count. Use in Asia is growing, particularly as auction service providers such as Yahoo! and eBay gain ground. An area with significant growth and potential is China. EachNet has also been increasingly successful recently.

Case Study Part 1: Yahoo! PayDirect from HSBC

Yahoo! PayDirect from HSBC is a typical example. The service allows individuals to send and receive money using e-mail, with the transactions being funded by transfers from credit cards or bank accounts. A virtual PayDirect account is maintained online and funded by users periodically from accounts or credit cards. The service is browser based and primarily accessed from PCs, although in the US users can dial in via mobile devices. Figure 1 demonstrates the process flow.

There are simple reasons why such a solution has been a success, in spite of issues such as the potential lack of trust in a non-bank brand as previously mentioned. Obviously, a high level of online auction activity is a necessary precursor - and in many developed and developing countries, this is not yet the case. With traditional payments methods, the main drawback from the auction sellers' perspective is that, once a sale is agreed, they either ship the goods without any assurance that they will be paid, or wait until a cheque or bank transfer has cleared. E-mail money speeds up this process immeasurably by giving sellers the funds instantaneously (not just the assurance that they will get paid as in the credit card environment), and allows sellers to ship the goods. Likewise, the buyer benefits from access to the goods earlier than without e-mail money.

Cross-border E-mail Payments

At first glance, it seems obvious. E-mail address penetration is remarkably high in nearly every country in the world - including the developing world. International electronic money transmission systems have historically relied upon good communications and messaging networks. Cross-border payments have always been inconvenient, expensive or both for the consumer: high charges are the norm and in-person visits to bank branches or money order processor outlets necessary.

Case Study Part 2: Yahoo! PayDirect International

PayDirect International - a variation of Yahoo! PayDirect from HSBC - is designed to offer a cheaper and more convenient alternative to telegraphic transfers or using international money wire agents. There are a number of options:

- Simple cross-border transfers where sender and beneficiary are both PayDirect users, using a cross-currency or the same currency: they are ideal for ad hoc payments (buying gifts for friends in the target country, for example) or for payments to overseas auction sellers. Alternately, they could be used for regular remittances where the receiver may want to send money to other relatives, or split the money into different bank accounts.

- Payments to recipients who do not have a bank account or access to a local version of PayDirect: PayDirect users can send money for collection at non-bank partner agent outlets. The transfer can be effected in 15 minutes. It would also be suited to customers who need to make emergency payments.

- Money transfers to bank accounts in different countries and different currencies: PayDirect users will be able to select a country and obtain an exchange rate for converting their domestic currency into the currency of the destination country. This would take several days and be low cost.

- Payments to automated teller machine (ATM) networks in other countries: PayDirect user would nominate a beneficiary. An ATM card and a personal identification number (no bank account or PayDirect relationship necessary) would be assigned to that beneficiary. The beneficiary would then be able to withdraw funds from any ATM on the relevant network from the user's sub-account funded via PayDirect as and when necessary. The product is aimed at customers who want to regularly send money to a recipient without a bank.

The above scenarios are all tangible opportunities being considered by Yahoo! and HSBC. New services may be launched as and when market demand is considered reasonable and the regulatory environment suitable.

Corporate Opportunities

Having established the benefits of an e-mail-based consumer payments system and its potential as an international money-transfer solution, of what relevance would this be to large- and medium-sized companies? Once again, customer proposition is key. In the consumer world, as we have just established, there are clear instances where such a system has advantages over existing ways of transferring money: it is more convenient not needing to know your counterpart's bank details and only their e-mail address; selling an item via an online auction becomes much less risky as you get paid before you send your goods; and paying your son's or daughter's living allowance while he or she studies abroad is much
less expensive.

In terms of the corporate proposition, it is tempting to see a future where:

- Large companies will make bulk payments (payroll, recurring payments to suppliers) via e-mail. Back-office systems will no longer need to contain large amount of information on each beneficiary and their relevant bank; file uploading and downloading will become a thing of the past; and complicated interfacing issues will no longer be relevant. All that the company will need to know is an e-mail address.

- Receivables will be collected and reconciled automatically as billing becomes automated and funds are remitted via e-mail.

- International payments to counterparts will be subject to more lenient cut-off times. Payments of all sizes will be bulked together and transferred cross-border by mainframe-to-mainframe automatic transfer. Beneficiaries will be notified by e-mail or mobile alerts.

However, before we get carried away, there are a number of significant issues that need to be overcome if growth in these payment instruments is not to be severely restricted. Before assessing these issues, it is worth taking stock of what advantages e-mail payments now offer to corporates and how far existing schemes have gone in catering to this market.

There are a number of key advantages why online payment solutions may be attractive to merchants (mainly smaller businesses) with the following being the most significant:

- Cost saving: merchant acquisition fees are usually cheaper than the major payment associations.

- Security and reduction of risk: it reduces the likelihood of customer non-repudiation, as payment transmission is earlier with, in theory, a clearer audit trail identifying the relevant consumer as the individual who executed the transaction in question.

- Increased efficiency: as opposed to waiting for a payment if no credit card relationship is in place, merchants are in a position to ship goods to customers sooner, as payments will have already been received.

Case Study Part 3: Yahoo! PayDirect Professional

Yahoo! PayDirect Professional is a package aimed at small businesses comprising acceptance of credit card and online electronic payments, online reporting of transaction details and fraud protection. It consists of a number of bundled merchant services and is now only available in the US, but may be launched elsewhere in the future. Central to the proposition is the concept of group billing - which is available to all users in Hong Kong at present. Group billing is a variation on the standard Yahoo! PayDirect from HSBC but remains one of the core functions, and essentially allows an individual or organisation to route payments from an unlimited number of individuals (customers, subscribers, and donors). Figure 2 illustrates the process flow.

This is a straightforward example of e-mail peer-to-peer (P2P) being used in a wider sense, but one that has significant potential. This scenario is immediately applicable to small charities and sole proprietors collecting similar-sized payments from a number of individuals. From this base, it is a collection of funds from a larger customer base by, for example, an Internet service provider or telecom that could be envisaged - in the same way Internet payment gateway transactions are processed. Furthermore, invoice details can be included by the sender, providing the potential for receivables reconciliation. However, as mentioned previously in this section, there is some way to go before such visions move closer to reality, as we examine in the following section.

Barriers to Growth

The following are some of the key factors that may inhibit the growth of e-mail money in future.

Lack of Interoperability

A fundamental and vital element in the success of banking and payment systems historically has been the concept of interoperability - defined as "the ability of a system or a product to work with other systems or products without special effort on the part of the customer". This can be demonstrated by a couple of simple illustrations. Imagine trying to pay for goods at a retail store and finding out that they only accept payment by credit cards issued by a certain bank, or trying to execute a telegraphic transfer to beneficiaries in another country where those beneficiaries can only receive the funds if they open an account with the same bank via which the funds are being remitted.

E-mail payments today are totally uninter-operable and proprietary. A Yahoo! PayDirect from a HSBC customer cannot pay PayPal customers unless they open an account with the same provider and vice versa. This creates all-too-obvious restrictions to growth and, until a form of exchange or operability is introduced, customers will always be disadvantaged.

Customer Registration

As many entrepreneurs and larger organisations that have launched retail services know well, the sign-up process is absolutely crucial. Attention spans of Internet users in "waiting" mode are estimated to be about seven to 30 seconds; and it is much easier to close down a browser window due to a problematic registration process than it is to walk out of a branch. E-mail money is a volume business with narrow margins, where economies of scale are vital. This means that signing up large numbers of users is a priority.

The theory of the viral nature of the proposition - wherein registering one active new user eventually leads to several more registrations once the first has paid or requested money from a number of others - mandates an effective and quick registration process. Furthermore, ensuring high levels of active customers depends, to a large extent, on how quickly new users gain access to services. If it takes new users 10 days to receive authorisation that they can begin transacting, there is a high chance that they will lose interest. Unless a service provider can manage the process of moving potential customers to full service users in an efficient manner, the chances of success are remote. Market leaders such as Yahoo! PayDirect from HSBC have already succeeded in streamlining their registration processes as far as possible within regulatory constraints.

Regulatory Environment

In deregulated economies, banking legislation covering payment systems requires rigorous procedures to sign up new customers. In most parts of Asia, the issue is even larger, as regulations tend to be stricter with exchange controls and restrictions on funds flow. In Hong Kong, for example, the monetary authority places restrictions on the size of transactions conducted by consumers over new e-payment solutions.

New legislation in a number of areas (for example, the European Union e-money directive) facilitates start-up solutions by bypassing much of the onerous Know-Your-Customer procedures; the pay-off is that restrictions are placed on the freedom for growth. In Asia, such legislation is probably still some way off. New schemes can still operate under existing regulations however, and Yahoo! PayDirect from HSBC in Hong Kong is an example.


E-mail is an inherently insecure medium. Whereas traditional bank paper and electronic payment systems have levels of security built in, e-mail does not. E-mail payment systems use e-mail for notification and traditional banking systems to transfer funds. However, the actual security of payments remains relevant and can be divided into two main concerns: transaction-level security and user authentication. The first is more straightforward and concerns the safeguarding of sensitive payment details while in transit. This can be addressed by 128-bit data encryption in a secured socket layer (SSL), which is widely accepted and is generally believed to be adequate protection even for large-value transactions. Authentication is trickier and is a justified reason why large-value payments will probably not be conducted via e-mail for some time. It is technically feasible to build a public key infrastructure behind, and an e-mail payment system to authenticate parties to a transaction, and hence provide dual-factor strong authentication, but this is not necessarily a good user experience and is certainly not an established habit yet.


So how great is the long-term potential for electronic payment solutions? Going back to our original questions - how relevant will they be to the corporate treasurer, and what impact will they have on cash and treasury management?

The answers to the latter questions are, probably not much in the short- and medium-terms. But the longer-term possibilities are clear. Electronic transmission of funds - both within one country and cross-border - using e-mail and mobile can provide significant benefits. Convenience is the first and foremost benefit; second comes cost savings; and finally, in some cases - security. It is possible to envisage a future where the following and more may be commonplace:

- e-mail payments will be used in the corporate world for domestic and cross-border payments;

- companies of all sizes will use e-mail for bulk payments such as automated clearing house and payroll functions; and

- treasurers will be notified of receivables by e-mail, which can be seamlessly and automatically reconciled with the original invoice information.

However, at present, the number of consumers enrolled in proprietary e-mail payment solutions (outside the US) is small and the number of active users smaller still. Likewise, the number of companies accepting payment by e-mail remains low. But growth rates have risen significantly of late, and it appears that the 100 million-user mark globally is not too far away. Thus, while corporations may not see a clear benefit from embracing such technology today, tomorrow could be a different story.

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