Payments Watch

No one is going to use your new payments platform until a significant number of businesses or people accept the new method, yet no one is going to invest in the infrastructure to accept and handle the new payment method until lots of customers are using the new method. This chicken & egg problem needs to be addressed in any strategy, and the answer is often having a backward compatibility option that dissolves the problem.

New payments methods and technologies such as smart cards, NFC and other mobile device methods inevitably come up against the classic chicken & egg problem: how to convince merchants and businesses to invest in the infrastructure necessary to support them when magnetic stripe cards are pervasive and the technology is mature? Think about it: smart cards have been around since the 90’s yet they have hardly been implemented at all in North America (I know, I know, its coming…). What proof do we have that mobile payments will catch on any quicker?

One way to deal with it is by changing the rules. So for example, the idea to shift liability for fraudulent credit card purchases to the merchant. Supposedly the added cost of fraud will justify the investment in smart card POS technology. Maybe. Although this seems more like heavy handedness than a business case.

Another way is building in backwards compatibility. I can think of no better example than cheque image exchange. Image exchange is a platform for clearing cheques where a bilateral agreement exists between cheque collectors and cheque payers so that images can be used to settle cheque payments (the traditional method is for the collecting bank to present the original paper document to the paying bank). Why has image exchange exploded in the United States since the introduction of Check21? The Check21 law gives substitute cheques similar legal standing as the original items. It basically ensures a backwards compatibility option for clearing cheques and that is why image exchange is so successful. As a bank, you can collect and electronically process images. If a paying bank wants to do things the old way, you can simply generate a substitute document at a place in your process that is convenient. To the paying bank doing things the old way, the substitute cheque works just like the original check (its a piece of paper with MICR).

Smart cards and mobile payments may be able to learn something from this. In the case of smart cards, it means leaving the magnetic stripe on the back and allowing merchants to process card transactions the old way until their is a business case for them to upgrade and support the chip technology. For mobile phones, it probably means having prepaid debit and credit cards tied to the mobile account so that purchases can be made when NFC support at the POS is not available.