By: Muhammad Nauman

BBA-6D
Trends in Consumer Payment Systems

 According to studies about 215 billion purchases were made by

American consumers totaling a value of about $5.9 Trillion.

 Transactions ranged from purchases of $0.5 gums to million

dollar homes.

 The methods used to make the payments were also diverse.

Consumer Payment Systems
CASH:
 Cash remained widely in use for small transactions

 According to the American Bankers Assosiciation estimates U.S. consumers used

cash to pay for 45% of the 58 purchases they made each month.

 It was a fast and easy as a consumer payment system and was widely used.

 Furthermore the introduction of ATM Machines had made it easier to have quick
access to cash.

 The average American adult withdrew about $108 worth of cash every 14 days.

 It was also a low cost way for merchants to receive payments

Challenges to CASH as a Payment System

 U.S Norms discouraged carrying large stacks of cash.

 Relationship b/w carrying cash to the risk of violent crimes.

 Social stigma related to carrying substantial amount of cash. e.g. only drug dealers
carry that much cash.

 In places requiring smaller transactions the time required to accept cash and make
changes could cause delays in the service process.

 Innovations such as the automatic change-dispensing machine reduced that delay

albeit with some consumer scepticism and capital cost.

 By 2011, usage of cash had also begun to decline.

Consumer Payment Systems
CHECK:
 Checks were paper-based financial instruments that caused payments to flow from the
consumer or check-writer to the recipient.

 Consumers paid for checks in two primary ways.

 First, writing checks required that a consumer have a checking account. 95% of checking
accounts had monthly maintenance fees which charged consumers directly.

 Other checking accounts required that consumers maintain a minimum balance, and
deposits in a checking account typically forced a consumer to forego some or all of the
interest that could be earned in a savings account.

 Many banks also charged consumers in proportion to their usage of checks .

Challenges to Checks as Payment
System
 A major challenge of checks was the lack of assurance of payment.
 Merchants attempted to reduce the risk by tactics like refusing checks from
out of state customers, requiring photo i.d with checks or join a check
writing program.
 A 2003 Check Clearing for the 21st Century Act allowed a digital image
to substitute for a printed check.
 In 2006, checks represented 35% of non-cash payments, making them the
most prevalent non-cash payment method.
 However, by 2009 checks had fallen to 22% of payments, less prevalent
than debit cards.
 Checks have remained a preferred choice for high-value payments.
Consumer Payment Systems
CREDIT CARDS:
 Credit cards developed from a set of payment cards previously issued by some

merchants in the early 20th Century.

 The modern credit card system operates through a series of intermediaries.

 Card networks varied in their business structures

 Visa and MasterCard began as non-profit associations but became for-profit

corporations. American Express was a for-profit company since its inception.

 Merchants processed Credit Cards through relationship acquirers which

processed charges, obtained authorization and remitted payments.

Consumer Payment Systems
CREDIT CARDS:
 The credit card network sits between the issuers and acquirers that sets certain policies
applied through a system.

 The parties communicated through standardized electronic systems to confirm a

consumers ability to make a purchase, to report and describe purchases and to transfer
funds appropriately.

 Card issuers usually accepted or solicited consumers based on detailed information

about consumers credit history and creditworthiness.

 Credit information came from Credit bureaus such as Experian and Fair Issac.

 To accept credit cards merchants pay discount fees, that are shared between three
parties, card association, card issuers and merchant acquirers.
Benefits of CREDIT CARD ( Consumer)
 Delayed payment (“float”): Consumers had a certain amount of time,
typically 20 to 30 days, after the close of a billing period to pay their bills.
 Revolving credit. Rather than paying a bill in full, a consumer could make
a small minimum payment and defer additional amounts
 Rewards. Many cards offered consumers bonuses proportional to the
amount they spent.
 Consumer Protection. If a charge was made without a consumer’s
authorization (e.g., after the card was stolen), or if a consumer had any other
defence that would be valid against the underlying merchant the consumer
did not have to pay any resulting charges
Benefits of Credit Card ( Merchants)
 Fast payment. When a consumer paid by credit card, the resulting funds ordinarily
appeared in the merchant’s account in two to three days, which was faster than
checks.
 Assurance of payment. In ordinary transactions, a merchant could be confident of
receiving payment if the merchant swiped the consumer’s card and obtained
electronic authorization from the credit card network. Even if the card was stolen,
the merchant still got paid.
 Increased consumer spending. Credit card networks and merchants observed that
consumers who paid by credit card spent more than those who paid cash. To accept
credit cards, merchants paid “discount fees” which were shared between three
parties: card associations (i.e., Visa and MasterCard), card issuers, and merchant
acquirers, consumers largely viewed credit cards as “free. While credit cards have
grown dramatically in popularity, their usage has recently begun to slow; credit card
usage actually shrunk 0.2%
Consumer Payment Systems
Debit Cards:
 Although a credit and debit card may look similar but the basic difference between the two is
unlike the credit cards which have an extended float of money to spend from, debit cards
deduct money directly from the consumers bank account.

 At the point of payment Debit Card allows two distinct mode of action,

 Signature based debit card, that looks just like a credit card and maybe presented or swiped
with a signed receipt.

 PIN Based Debit Card, requires the customer to type a pin code to authorize the transaction.

 Because PIN Based Debit was cheaper for merchants, some encouraged users to pay by PIN-
based rather than signature debit.

 Walmart sued VISA , alleging that it had improperly required merchants to accept both kind
of Debit in order to increase merchant payments to VISA.
Benefits of Debit Cards
 Consumers considered Debit Cards as an easy way to avoid
going into debt.
 Another benefit was Debit Cards yielded no monthly bill for
consumers to pay.
Stored Value Cards
 Some merchants issued payment cards for use at that merchant
 These were often styled as gift cards, though they could also be frequent
shopper cards.
 Consumers chose these cards to give as gifts, to speed transactions, or to
obtain benefits or incentives.
 Gift Cards have received widespread usage accumulating around $800
billion in 2010.
 Some credit card issuers have also issued multi merchant stored value cards
such as the VISA GIFT CARD, that can be used at a variety of locations.
Benefits of Stored Value Card
 Stored Value card provide favorable cash flow to consumers as merchants can receive

payment before providing service in actual.

 They can provide potential links to incentive programs, loyalty programs and other

efforts to track and influence consumer behavior.

 They induce users to usually buy more than they intend.

 Finally if the buyer gives the gift card to a friend or relative, the merchant therefore got a

chance to develop relationship with a new customer at minimal marketing expense.

Electronic Funds Transfer

 Automated Clearing House (ACH)

The automated clearing house (ACH) sent payments using the
routing numbers and account numbers printed on checks.ACH
could be used both to send money (“ACH credit”) and receive
money (“ACH debit”). To date, ACH’s widest appeal remained
its use for payments associated with a long-term relationship. A
consumer could specify that payments be debited from
someone else’s account, simply by specifying that person’s
account number. To consumers, ACH looked free— indeed,
cheaper than the envelope and stamp otherwise required to pay
many bills.
WIRE TRANSFER
 Invented in 1871 to send money by telegraph, the wire transfer
system remained used primarily for large amounts, e.g., home
closings. It offered two key benefits over ACH: First, wire
transfers were near-instantaneous, which was especially
important for large transmissions and for confirmation of
payment. Second, wire transfers were widely supported
internationally, whereas ACH was largely limited to the
UnitedStates.The sender of a wire transfer payment paid a fee
(typically $15 to $50) to the bank that initiated the wire
transfer.
RECENT INNOVATIONS
Online Payments
 The rise of online auctions had brought the need for person-to-
person payments.
 Users funded their PayPal accounts using credit or debit cards,
ACH, or person-to-person payments.
 In 2011, PayPal remained leading in person-to-person online
payments, Approximately 38% of PayPal’s transaction volume
came from eBay auctions.
 eBay initially featured its own payment service, Billpoint. But
PayPal offered a $10 bonus to anyone referring a new user
 In 2002, eBay acquired PayPal for $1.2 billion.
 Google also began it’s online payment service Google checkout.
 Google would charge a customer’s registered credit card and forward funds
to the merchant.
 Sellers also enjoyed low fees from Checkout.
 Google initially also offered free or near free credit card processing to
Checkout sellers using GOOGLE ADWORDS.
 Users still hesitated to make small purchases online.
 Mobile payments start up Zong proposed to pay for consumers’ small
online purchases through charges placed on users’ mobile phone statements.
 In July 2001, eBay acquired Zong for $240 million
 BILL ME LATER

Bill Me Later replaced card-not-present credit card payment

and streamlined real-time credit decisions. Rather than entering
a credit card number on a website, a consumer would provide
her date of birth and the last four digits of her social security
number. Bill Me Later charged fees as much as 40% lower than
traditional credit card processors. Once Bill Me Later
authorized a transaction, it absorbed the risk of a consumer
failing to pay.
 E –BILL-ME

E-Bill-me began as service billed as “online cash payment.”

First, a consumer would check out at a participating retailer’s
web site, specifying e-Bill-me as the payment method. The
retailer would then provide the consumer with an account code.
The consumer would then send funds to that account . The
consumers order would be only processed after payments were
received.
 DECOUPLED DEBIT

 A decoupled debit issuer could not know for sure whether the
consumer had the requisite funds on hand. Rather, the issuer
predicted availability based on the consumer’s credit history.
In a nightly transaction, the decoupled debit issuer then
retrieved the specified funds from each consumer’s bank
account using an ACH debit.
Stored value for public transportation payments

 U.S. cities with widespread public transportation had moved

toward stored-value cards for public transport payments. The
1972 launch of BART in San Francisco included a stored
payment card, although payments were possible only on BART
trains. By 2007 Atlanta, Boston, Chicago, and Washington had
moved to contactless smart cards, which users did not have to
remove from their wallets when passing through entry gates.
Contactless Payments and Payments by Mobile Phone

 Mobile payment starts up Face Cash launched a mobile payment system that combined

debit functionality with photographic verification.

 First, users deposit money into their Face Cash accounts and install the Face Cash

application on their mobile phones.

 To pay by Face Cash, a user activates the Face Cash application, and the application

displays a unique barcode for a merchant to scan, along with a picture of the user to let

the merchant confirm the user’s identity.

 Face Cash then forwards the appropriate payment, less processing fees, to the merchant.
 Bling Nation placed near-field stickers onto users’ mobile phones and deployed

contactless payment terminals to affiliated merchants.

 ISIS announced its intent to provide mobile payments via users’ phones. ( Merger of

AT&T , VERIZON Wireless and T-Mobile)

 In May 2011, Google announced its Wallet service, which provided contactless

payments integrated with selected phones running on Google Android.

 Because Google Wallet was compatible with the MasterCard Pay Pass system, users

could immediately use Google Wallet payments.