Business Process Services. White Paper. Designing an Effective and Successful Card Payment Solution

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Designing an Effective and Successful

Card Payment Solution

White Paper

Business Process Services

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About the Author

Zubin Tafti

Zubin is a Business Consultant with Tata Consultancy Services (TCS) and works in the Business Process Management (BPM) Center of Excellence. He focuses on advisory and performance improvement initiatives for domestic and international clients. He specializes in cards and retail payments within the Consumer Banking domain. In his current and past roles, he has advised banks, card schemes, payment processors, and regulators on a variety of initiatives. He has a Bachelor's degree in Engineering (Electronics) and a Master's in Management Studies.

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Abstract

Over the years, technological advances have led to an increase in alternative

forms of currency and payment options such as air miles, loyalty points, and

electronic and mobile payments. However, the success of such card payment

solutions cannot be predicted. This requires enterprises to identify the key

elements that de ne the success of a payment solution.

This paper highlights three basic elements of a good payment solution and their

importance to its success. It also discusses the need for payment solutions that

are not only secure but are based on a sustainable business model and ensure

consumer privacy, creating a win-win situation for all stakeholders.

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The three factors for a successful card payment

solution

Three key factors – an effective business model, security and privacy, and convenience – are necessary for a payment solution to succeed.

These three key factors, illustrated in Figure 1, are explained below.

Enabling a convenient payment process

Convenience is characterized by the solution's simplicity, multifunctionality, and ability to provide immediate payments. Here is a description of each of these characteristics:

Ensuring simplicity of use

A payment solution that seamlessly blends with existing consumer habits is likely to witness a higher adoption rate. A payment solution that requires a change in consumer behavior requires collaboration between various stakeholders across the payment transaction value chain. For instance, the adoption rate

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of Near Field Communication (NFC) payment in the U.S. is relatively slower as opposed to Japan .

Contactless payments were introduced for train and subway tickets in Japan. A large fraction of Japanese consumers use public transit, and this accelerated adoption of the technology. As outlined in Figure 2, behavioral change involves more time and substantial investments.

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Figure 1: Key factors necessary for a successful payment solution

Size indicates importance

The Sweet Spot Eﬀective Business Model Security Convenience 1

Kiosk Marketplace, press article, 'Hold onto your wallets: Mobile payments seeing slow adoption', published January 2012, accessed September 2015, http://www.kioskmarketplace.com/news/hold-onto-your-wallets-mobile-payments-seeing-slow-adoption/

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Various innovative and effective ideas are emerging in the payment market space. Some of them include:

 Leveraging social media and enabling Peer-to-Peer (P2P) payments, or splitting bills among acquaintances

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 Enabling payments through handshakes or a wearable device (such as a watch, band, or ring)

 Using speech and facial gestures for enabling payments

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For instance, ICICI Bank and Barclays allow payment through Twitter. Similarly, Rakuten Bank allows payment through Facebook. Such novel payment solutions require behavioral change from all the stakeholders along the value chain. However, to improve the success rates of such solutions, banks can build on consumers' established behavior so that the time taken for and the resistance to adoption are reduced.

Providing immediate payments

The growing appetite for rapid transaction processing is now permeating banking services, and

consumers are looking to make high-speed payments. Figure 3 highlights key imperatives and barriers to immediate payments.

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Figure 2: Enabling simplicity in payment solutions – key imperatives and barriers Key

Imperatives

 Customer habits vary by segment, and the payment solution should align with the target segment’s habits

 Short-lived or trending behavior should not be considered  Features should not be over-engineered or increase complexity

Barriers  High cost of implementation  Concerns around security and risk

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TProPortal, Apple Watch handshake payments patent led, published 2015, accessed September 2015, http://www.itproportal.com/2015/07/07/apple-watchs-handshake-payments-patent-is-being- led-by-apple/

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ICICI Bank web page on Twitter payments, accessed September 2015, http://www.icicibank.com/Personal-Banking/insta-banking/internet-banking/twitter-banking/index.page

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Barclays press release, “Barclays launches Twitter Payments through Pingit”, published February 2015, accessed September 2015, http://www.newsroom.barclays.com/releases/ReleaseDetailPage.aspx?releaseId=3119

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Rakuten, Inc., media release, 'Rakuten Bank Launches Japan's First Money Transfer Service Using Facebook', published August 2014, accessed September 2015, http://global.rakuten.com/corp/news/press/2014/0805_01.html

Key Imperatives

Barriers

 Timely noti cation to the payer and the payee on the success of the payment transaction  Assurance to the payee of non-reversal of payment

 Real-time robust authentication process to authenticate the payer and validate the payee account  Near-real-time posting/availability of funds to both payer’s and payee’s accounts

 Concerns around security and risk

 Real-time clearing required, necessitating large infrastructure changes  Resistance to adoption by merchants due to change in their POS infrastructure

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When a central regulatory body, such as Society for Worldwide Interbank Financial Telecommunication

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(SWIFT) , provides ready infrastructure that supports 24X7 immediate payments, it provides an impetus for payment solution providers to adopt and embed immediate payments into their payment solutions. Another growing trend in this segment is mobile payments. With the growing adoption of smartphones and rising consumer preference for m-payments, solution providers are linking consumer bank accounts, credit and debit cards, and mobile wallets to enable P2P transfers and People to Business (P2B) merchant

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payments . Some solutions, including m-pesa and Barclays Pingit , have enabled this for non-smartphone users by using SMS or Unstructured Supplementary Service Data (USSD) technology.

Enabling a multifunctional solution

Multifunctional payment platforms are gaining prominence as they enable the convergence of point-of-sale, mobile, online, and other payment channels. Some of the key considerations for and barriers to enabling multifunctional payment solutions are enumerated in Figure 4.

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Globally, several success stories, such as Octopus cards , can be cited for payment solutions that provide the multifunctionality feature. Many of these solutions are based on contactless technologies such as Near Field Communication (NFC) and Magnetic Secure Transmission (MST).

In addition to technological considerations, these successful solutions maximize various touch points at which they can be used for payments. Some of these solutions enable multifunctionality by aggregating existing payment instruments; for instance, integrating multiple cards (debit, credit, prepaid, corporate, loyalty, etc.) onto a single card that can be used anywhere.

Key benefits accruing from such payment solutions include:

 Quick adoption due to multifunctionality and applicability across areas such as mass transit systems, general stores, convenience stores, restaurants, vending machines, and self-service kiosks

 Improved convenience for customers through ease of use and versatility of the payment system

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Figure 4: Enabling multifunctional payment solutions – key imperatives and barriers Key

Imperatives

 Support multiple channels and payment instruments that include credit, debit, loyalty, transit tickets, etc.

 Provide both online and oﬄine payment modes, and seamlessly morph between them  Support multiple payment methods including emerging payment standards (e.g., NFC )  Accommodate merchants of all sizes, from multinational brands to small-medium sized stores

Barriers  Difficult to retain simplicity in a multifunctional solution that offers myriad payment options  Difficult to identify suitable technology to underpin the solution as the payment acceptance

process and security IT landscape are not fully standardized

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Society for Worldwide Interbank Financial Telecommunication, accessed September 2015, http://www.swift.com/about_swift/index?lang=

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Society for Worldwide Interbank Financial Telecommunication, 'The Global Adoption of Real-Time Retail Payments Systems (RT-RPS)', published 2015, accessed September 2015, http://www.swift.com/assets/swift_com/documents/products_services/White_Paper_Real_Time_Payments.pdf

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Safaricom Limited, M-PESA, accessed September 2015, http://www.safaricom.co.ke/personal/m-pesa

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Barclays Pingit web page, accessed September 2015, http://www.barclays.co.uk/Mobile/BarclaysPingit/P1242603570446

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CNN, 'This little card is why people in Hong Kong don't carry cash', published July 2014, accessed September 2015, http://edition.cnn.com/2014/06/12/business/hong-kong-octopus-card/

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 Easy integration of complex fare collection or pricing strategies such as inter-modal discounts, loyalty schemes, application of different fares at different times of the day, and so on

 Economies of scale due to all participating operators sharing a common system infrastructure

Strengthening security

Service providers have adopted various security measures, including biometrics and the use of personal information for authenticating transactions. Payment solutions are now capable of performing activities that secure and verify signatures. These include assessing and analyzing various data points such as the pressure applied, the number of keystrokes used, when and where the finger or stylus leaves and returns to the screen.

Adopting an effective business model

The business model should identify and segregate various stakeholders across the transaction value chain. The stakeholders can be segregated into two segments – those who will pay to use the solution and those who will receive the fee to support or promote solution usage. Stakeholders may include issuers, acquirers, processors, merchants, card schemes, end users, transit authorities, and utility billers. This gives rise to questions such as:

 Should the merchant pay a substantial proportion of the fees, as the payment solution improves his receivables and Days Sales Outstanding (DSO) or helps push sales?

 Should the payment solution provider be awarded a larger share of the revenue?

 Should the issuer (payment instrument provider in case of credit cards) receive more revenue as it bears higher risk, and the end user is its customer?

 Should end customers pay for certain transactions for the convenience they enjoy? Will such fees deter them from using the payment solution?

 Should the merchant conduct transactions based on consumers’ preferences of its product and services?

 Can the solution owner offer value-added services to merchants or end customers to earn additional revenue? (examples of such services are customer segmentation, sales forecasting, peer comparison of sales for merchants, expense tracking and management for consumers, advertisements for merchant and third-party business owners.) Can this value-added revenue fund the end-to-end payment solution?

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A payment solution should balance different stakeholder needs to ensure successful deployment of the necessary infrastructure, and provide incentives to stakeholders who will eventually drive adoption by end customers.

The transaction fee may be a prorated value, a flat fee, or a combination of both. While using the network of any prominent card schemes, solution providers need to follow a shared-fee model. However, if prominent networks are not used, then a fraction of the transaction can be paid as a fee, though this needs to be compelling enough for adopters to pay more for the proposed payment solution.

For providers, a payment solution is only profitable when they process high volumes of transactions, as the fee per transaction is very low. Thus, transaction throughput is crucial for a viable and sustainable business model.

Enhancing the bottom line by improving the

consumer payment experience

New innovations, participants, and systems are changing the landscape of the global payment system. The growing importance and preference for digital payments is forcing solution providers to launch new solutions that effectively address customer concerns of security and privacy. As a result, payment

solutions need to offer frictionless, easy, convenient, and secure consumer experience to ensure high adoption.

In the future, solution providers could look at launching new business models such as charging entities not directly related to the transaction value chain. For instance, they can charge for market insights that are derived from their transaction process. Alternatively, they could request governments to fund their solutions by highlighting the economic and financial benefits. Regardless of the model chosen, the key to the success of a payment solution is a superior transaction experience and a business model framework which ensures profitability for all stakeholders concerned.

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