Has the Time Come for Visa, MC, Amex and Discover to Retire…Indefinitely?

One of the responsibilities I’ve maintained throughout my Payments career has been global market analyses of Payments trends. While doing so, I’ve studied multiple case studies of the Payments system operating outside of the Big 4 Card Networks (i.e. y, I’ve had front-row-seat visibility into the technical debt accrued over the years. It seems whenever a (r)evolutionary Product is introduced, more time is spent figuring out how to make the idea viable given the infrastructure constraints rather than focusing on the innovation itself. This has led me to believe the US Payments system must fundamentally change if it has any long term chance of survival. Only out of the ashes of the old infrastructure can the US Payments system rise like the Phoenix into the new world solution it is destined to become.

Let me be clear – I am not suggesting the demise of US Payments. Regardless of the archaic rails, the US is still one of the strongest Payments ecosystem in the world. However, I believe an infrastructure overhaul will usher in scalable capabilities that are currently non-existent, ultimately transforming US Payments into something much greater than has been seen. Unfortunately, this metamorphosis is likely to exist outside the realm of the Big 4…at least in their current capacity. Now, before you label me a Payments heretic and have me proverbially burned at the stake, please understand my perspective is not as an outsider. I am a student of Payments and am an enthusiast at my very core. However, that doesn’t negate the realities I see as I encounter Payments practices around the globe. The foundational Payments infrastructure in the US is incapable of meeting tomorrow’s needs in spite of our valiant efforts to keep it relevant. How do we fix this? The answer lies in a concept I learned in college called „The Law of First Principle.”

The Law of First Principle originated from Aristotle many centuries ago. The philosopher defined it as the „foundational, self-evident proposition or assumption that cannot be deduced from any other proposition or assumption.” While I know that’s a mouthful, it really is a simple concept. In essence, the Law of First Principle is all about understanding truth from the core components regardless of any other realities. For example, do you remember in college when you had an assignment to write a term paper? You tried to combine a few papers you’d written in the past to cobble together something that could work. Do you remember eventually recognizing you needed to scrap the whole thing and simply start over? Your epiphany to start from scratch was the epitome of the Law of First Principle.

Another example of this principle can be demonstrated with the inheritance of real estate. Imagine there is a 500 year old house on the land you’ve inherited. You must decide to build upon the existing structure or demolish everything and start anew. Choosing the latter option is embracing the Law of First Principle. Fundamentally, the Law of First Principle is understanding one’s current realities should not be viewed as a constraint for accomplishing the objective at hand. The final solution should always originate from a „starting from scratch” mentality. If the existing solution aligns with that First Principle solution then it may makes sense to build upon it. However, if the existing solution doesn’t align with First Principle, the existing solution should be overridden by the First Principle solution. Not doing so will be costly, create technical debt, deliver a sub-optimum customer experience and do little more than elongate the inevitable demise of that solution.

Got it?

Do you now understand the Law of First Principle?

Good. Then let’s talk through how this applies to the US Payments system.

For just a moment, I want you to put your experience and expertise on the shelf. Forget about PCI DSS, Durbin, EMVCo, ISO Payments Standards, the system of Interchange, etc. Forget about the Big 4 Card Networks. Forget about everything that currently exists in Payments. What if you could simply start over? What if neither money nor time was an object and you had access to the greatest global Payments minds yielding their expertise to create the quintessential Payments system? What if you had a magic wand and could do whatever you wanted with regards to the Payments infrastructure? If you did, would the US Payments system remain the same as today? Probably not. Sure, there is a baby in the Payments bath water that you wouldn’t throw out. However, few would debate the reality that the decades-old US Payments infrastructure is in need of a major overhaul. Think about it, the rails of our existing system were created well before there were Mobile phones, E-Commerce, M-Commerce, Virtual Reality, Augmented Reality, Artificial Intelligence, etc. At the onset of Payments, no one envisioned the need for biometric capabilities. So, over the years we’ve finagled the system to do what we needed, but in the process we’ve created technical debt that has terribly jeopardized our ability to maintain a quality user experience.

Let’s take EMV as an example. Due to the proliferation of credit card breaches in the United States, the Payments industry had to quickly come up with a solution to ensure cardholder trust. EMV seemed to be an obvious choice since in other countries the solution had proven an effective deterrent against card-present fraud. The first EMV roll out introduced a perceived increased transaction time. Consumers, accustomed to a sub second card swipe, now painfully waited 10-30 seconds as their cards remained inserted into terminals. Sure, we’ve remedied that now with solutions like M-Chip and Quick Chip; however, consumers aren’t applauding per se. From the cardholder’s perspective, any introduction of new technology should not have degraded their experience, so fixing what it seemed we broke did not get us any special recognition.

So, why the initial epic EMV user experience failure? Several reasons. However, one of them was the hodgepodge US Payments infrastructure simply wasn’t originally constructed with EMV in mind. So, we retrofitted EMV to work with what already existed. What would have solved this? You guessed it: The Law of First Principle.

So, how do we apply the Law of First Principle today? Unlike in my aforementioned example, neither money nor time is unlimited. The reality is we’ve spent trillions of dollars investing in the US Payments infrastructure. It isn’t realistic for us to just start over………..or is it? A company called The Clearing House has been grappling with that exact question since 2014 and has been developing a new-rail solution to answer the question. The Clearing House (TCH) is one of the nation’s two ACH switches. They’ve been part of a task force led by the Federal Reserve on a manner in which to facilitate real time payments. No more three day funding period or even next day ACH…we are talking about truly real time payments that align with consumers current pace of life. I recommend you check out their website here so you can see more of how their unique approach (leveraging expertise from the UK) has the potential of revolutionizing our industry. Sure, there are many questions that must be answered before this entirely disrupts Payments as we know it….things like security, costs, distribution, etc.

Also, the concept still needs to be proven with testing to begin Q3 of this year. Still, my larger point is this: when TCH decided they wanted to make headway into the the NextGen of Payments, they intentionally did NOT build on what already existed. Instead, they recognized the Law of First Principle and entirely started from scratch using their industry expertise as the stepping stone into the envisioned reality. SVP of Product and Strategy at The Clearing House, Steve Ledford, stated, „This is an entirely new rail. We felt it was necessary to build a new payments [system] that was inherently real time…rather than try to build those on top of the existing payment networks.” Their system is outside of the ACH network, outside of the Big 4 Card Networks and outside of all rails that currently exist in the US Payments industry.

Like most of the nation’s Payments enthusiasts, I am anxiously anticipating the results of TCH’s proof of concept. However, I wonder if this signals a paradigm shift in the thinking of US Payments professionals. We’ve renovated the Payments industry infrastructure for long enough…we’ve painted it, replaced the roof, repaired foundational cracks and have been incredibly faithful over this existing system. Now it is time to start anew and envision what Payments can be instead of remaining extended versions of what is. When that happens, many existing players in the Payments ecosystem may be eliminated in an effort to offset build costs by eliminating middleman costs. It isn’t inconceivable that the Big 4 (among others) are some of the eliminated players forced into an indefinite early retirement.

The ball is now in the court of the Big 4…and all Payments players…to determine what they will do to remain relevant.

The ball is in our court to return to the Law of First Principle as we create the new Payments infrastructure that will last us for the next 100 years!

Comments

Joseph Smutz -Director, Product Integration at Sage Payment Solutions:
„I’m still of the mindset that Apple is in the best position to disrupt if they so choose to do it. The infrastructure is already there and the Brands gave them sweetheart deals just play in the Apple sandbox. With a few very small incentives to change consumer behavior and and easy to adopt Merchant angle it wouldn’t take much for them to remove the big four from the transaction flow entirely. Maybe you see Apple acquire someone like PayPal and it’s game over.”

Steven response: „I completely share your sentiments. I am convinced Apple’s end game is to disintermediate the Brands. Right now they are playing ball as they figure out Apple Pay and increase adoption. Then they are now also doing the P2P payments via the iMessage. They have global reach to at some point simply make Apple a closed loop system and call it a day. Just like that, the Brands are disintermediated. Give it time and I think they will make that play. Not to mention they have the available cash to purchase a smaller issuer and acquirer. All that said to say, I think yo are perfectly on point sir!”

Bala murali – Director
„Undoubtedly, card based payments will be obsolete soon with the flurry of alternatives ready to take over. UPI, is just the small step in making this possible.”

Steven response: „Indeed. It is pretty amazing to see the case study before our very eyes in what India is doing to convert to truly a cashless society. I think it will be the basis for other regions to do the same. UPI is pretty fascinating.”

Yanhia Camino-Margolis PMP, PMIACP, SCPM, CSM – Senior Project Manager at Visa:
„Don’t underestimate the big 4 payment processing giants, they are fully aware of what’s coming and have no doubt they will be able to provide solutions that are optimal and in line with IoT, which as you know, will be the catalyst driver for this paradigm shift. In the payment processing ecosystem, the big 4 companies cannot arbitrarily make the changes on their own, there has to be a partnership and support with their clients and merchants. Stay tuned.”

Steven response:
„No doubt there at all. Big pockets, great expertise and brilliant minds have made the Big 4….the Big 4! Still, I think there will be shifts to fundamental thinking. I wonder though if IoT would look differently if we had started from new/different rails. I don’t know. You’re right though…this article was more meant to be thought provoking not necessarily prescriptive. However, I must say as we innovate, we won’t be able to simply extend what exists. I am a fan of everything Visa is doing to move the mark on IoT. However, I wonder if it is enough. I guess time will tell. I also wonder if we would have done it different had it incorporated the Law of First Principle instead of building on existing rails. We shall see!”

Source: Steven Q. Riddick – Linkedin