The Green Sheet Online Edition

September 26, 2011 • Issue 11:09:02

Peering into payments' not so crystal ball

By Nicholas Cucci
Network Merchants Inc.

The credit concept has been around for centuries. Back in the 1800s, general stores allowed customers to purchase products and services without paying for them in full. This enabled sellers to reach a larger base of customers, letting them pay their debts over time. The concept obviously spread like wildfire, even in the 1800s.

The first bankcard - named Charg-It - was introduced in 1946 by John Biggins of the Flatbush National Bank of Brooklyn, N.Y. The program benefited bank customers and local merchants. This advancement was followed in 1950 by the Diners Club Card, which was the next step in credit cards. By 1951, 20,000 Diners Club cards were in circulation.Cards issued by Diners Club and American Express Co. "functioned in what is known as a 'closed-loop' system, made up of the consumer, the merchant and the issuer of the card," Stan Sienkiewicz wrote in a paper for the Philadelphia Federal Reserve entitled Credit Cards and Payment Efficiency. He noted, "In this structure, the issuer both authorizes and handles all aspects of the transaction and settles directly with both the consumer and the merchant."

The (re)invention of revolving balances

In 1959, the option of maintaining a revolving balance was introduced, according to MasterCard. This meant cardholders no longer had to pay their bills in full at the end of each billing cycle. While this carried the risk of accumulating finance charges, it gave customers greater flexibility in managing their money. As in centuries past, today we find ourselves torn between maintaining credit balances and paying our debts instantly. We are beginning to see signs of changing consumer behavior when it comes to making payments, especially in the e-commerce world. We have also seen certain new features, such as MasterCard's PayPass contactless card technology, pop up in the retail environment.

The decline of credit

According to a recent report by Javelin Strategy & Research, online credit card use "continues to decline, representing a sustained and ongoing change in customer behavior." Javelin reported that total payment volume from credit cards fell to 40 percent in 2010, down from 44 percent in 2009. As the Internet emerged and people started buying more online, the credit card became more versatile. Yet it was obviously not designed with the Internet in mind, which has since created problems. For example, repeatedly entering credit card information every time you make a purchase over the Internet has become an exercise in annoyance.

The advent of NFC

Today, certain technologies are emerging, such as near field communication (NFC), which allows for simplified transactions, data exchange and wireless connections between two devices - typically smart phones. However, these devices are expected to communicate at a distance of up to only 10 centimeters (four inches).

NFC can be used for a variety of activities:

• File sharing of contacts, photos, songs, applications and videos
• Sharing of electronic business cards and resumes
• Electronic payments between friends by tapping two devices together and selecting the amount to pay
• Mobile gaming, including multiplayer games
• Mobile wallet, including credit card payments made by touching the terminal when checking out, after a PIN is entered
• Boarding passes for air travel, reducing delays
• Instant coupons sent to smart phones by retailers to attract potential customers, based upon the location of the consumer's NFC device, providing a Groupon-like experience

The Javelin report provides a few more key statistics:

• The total dollar volume of online alternative payments sales grew to almost $43 billion in 2010, up from approximately $34 billion in 2009.
• The total dollar volume of online alternative payments sales is projected to reach $86.6 billion by 2015.
• Forty-six percent of online consumers made an alternative payment within the past year.
• Thirty-six percent of online shoppers report using an online alternative payment option due to "greater protection from fraud or other misuse of my information."
• Ninety-one percent of online consumers have used PayPal Inc.; 24 percent have used Checkout by Amazon, and 9 percent have used Google Checkout.

End of the beginning

The adoption of alternative payments doesn't spell the end for credit card payments. All payments will continue to evolve in the near future for the following reasons:

1. Increased sales: All types of industries are switching over to mobile processing. Customers don't always carry cash on them, and offering another method of payment only increases sales, especially when the other method offered is more convenient.

2. Portability: Credit cards are accepted anywhere you can do business. Merchants need not spend thousands of dollars on mobile hardware from a vendor. They may simply buy or download an app to a smart phone. Professions that benefit are plumbers, electricians, carpenters and delivery drivers.

3. Secure transactions: Your data is always transmitted securely when you are mobile. Mobile processing even cuts down on fraud. A check can get lost or bounce when cashed. Sensitive card information used to be written down and processed later back at the office, passing through multiple hands and leaving card data more susceptible to fraud.

4. Fast processing: Account setup and maintenance are extremely fast and efficient. Funds are also transferred to your bank instantly, or within a few days.

5. Low cost: Some mobile credit card processing services do not have contracts, termination fees or monthly minimums. For example, some Apple Inc. iPhone apps may be free to download but carry a monthly fee of $5 because the swipe is hardware encrypted. Overall, the cost of mobile processing is significantly lower in literally every way.

Mobile devices could be the wave of the future for payments. These solutions help integrate e-commerce with retail transactions. We are right on the cusp of another emerging technological advance in the payments industry. It remains to be seen what solution will take the lead.

Nicholas Cucci is the Director of Marketing for Network Merchants Inc., a graduate of Benedictine University and a licensed Certified Fraud Examiner. Cucci is also a member of the Advisory Board and Anti-Fraud Technology Committee for the Association of Certified Fraud Examiners. NMI builds e-commerce payment gateways for companies that want to process transactions online in real time anywhere in the world. Contact him at ncucci@nmi.com.

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