Evolution of Payments & Whats Next ? — Payment 2.0
They way we pay or technically how we transfer value has been evolving and we see increased speed in evolution with devices like mobiles being mainstream these days. Millennials and their habits fueling this evoution. This is an execise to understand the evolution of the payments and innovation. I have described different steps of evolution below.
Cheque
A cheque, or check (American English; see spelling differences), is a document that orders a bank to pay a specific amount of money from a person’s account to the person in whose name the cheque has been issued. The person writing the cheque, known as the drawer, has a transaction banking account (often called a current, cheque, chequing or checking account) where their money is held. The drawer writes the various details including the monetary amount, date, and a payee on the cheque, and signs it, ordering their bank, known as the drawee, to pay that person or company the amount of money stated.
Definition of a cheque as per The National Provincial Bank circa 1968 was “an unconditional order in writing drawn on a Banker, signed by the drawer, instructing the Banker to pay on demand a sum certain in money to or to the order of a specified person or to Bearer and which does not order any act to be done in addition to the payment of money”.
Cheque use in Australia has dropped by 83% over the last 10 years. Only small numbers of cheques are still used by certain sectors in the community.
Wire Transfer
The first wire transfer service was created in 1872 by the Western Union bank using its telegraph network. A “sender” would give a payment to a telegraph operator in one office, who would then use a codebook and passwords to “wire” money to the telegraph office of the “receiver.” This how the name “wire” transfer actually orginated. The sender of a wire transfer first pays for the transaction upfront at his bank. The initiating bank sends a message to the recipient’s bank with payment instructions through a secure system, such as Fedwire or SWIFT. The recipient’s bank receives all the necessary information from the initiating bank and deposits its own reserve funds into the correct account. The two banking institutions then settle the payment on the back end (after the money has already been deposited). This model is shown below.
Bank Cards (ATM, Debit/Credit)
A bank card is any card issued against a depository account, such as an ATM card or debit card. In most cases they are issued as VISA or master card. Most cards carry EMV chip and or a magnetic strip. Card carries account and identity information. Payment life cycle of a bank card that uses master card is shown below.
Debit cards serve a dual purpose: They allow the user to withdraw money from his or her checking account through either an ATM or the cash-back function many merchants offer at the point of sale. Some debit cards are ‘dual network cards’, which means you can also use them as a credit card. Most debit cards have Visa’s payWave or Mastercard’s PayPass as a contactless payment option. This means you don’t have to insert or swipe your card or use your PIN for transactions under a certain limit (e.g : $100).
Universal Card
Universal card has the same form factor as a magnetic stripe card (“magstripe”) or chip on card (EMV, chip and PIN). Universal card works tandem with a mobile application which exchange data and instructions over Near Filed Communication (NFC) or Bluetooth. Card is being reprogrammed with a one-time-use prepaid virtual card number (VCN) on-the-fly created by the mobile application. This allows user consolidate multiple cards, rewards and memberships in to one physical card.
xxxdsEscardgot’s HELIX is one of the leading example.
Some banks provide metal cards additional to traditional plastic cards : N26 Metal.
Pre-paid Cards
Pre-paid card is mechanism where user don’t need to have a bank account or a credit / debit card. Following model is used in pre-paid cards.
Digital Wallet
Essentially a Digital Wallet works like an electronic version of your current wallet. It will allow you to make electronic payments with your digital device and hides the actual financial information. It authenticates your purchases through encryption and digital certificates to secure the payment processes from the consumer to the merchant.
Most payments will use NFC, a technology that allows radio frequencies to communicate with each other.
Payments through a Payment Service Provider
PayPal like payment services providers make the infrastructure for transfering money over internet beyond geographical boundaries. Payer and payee is identified by there email which is linked to a Paypal account. Transaction is established between two identities represented by email ids. PayPal provide the communication infrastructure and linking value stores like cards or bank accounts as shown below. Further PayPal account itself works as a value store.
Walk-in Money Transfer
Western Union or MoneyGram is a way of walk-in money tranfer. You go into the Western Union Agent location, write down the name and location of the person you want to send money to and choose how much you want to send. Western Union will then assess a fee. That fee can be as much as 10% if you’re sending a smaller amount of money. The more you send, the higher the fee will be. It will get progressively smaller as a percentage, though.Once you give Western Union the money and its fee, the clerk will provide you with a control number. You will then have to give the number to the person who will receive the cash on the other end. They can then take the number and their identification card to a separate Western Union location. The agents there will pay out the money transfer, giving your friend or loved one the cash amount you sent. This can all happen within a matter of minutes if you select the “Money in Minutes” option at the Western Union location.
