Can existing payment networks meet future needs? A conference summary

Chicago Fed Letter, Oct 2003 by Chakravorti, Sujit, Ciesielski, Thomas, Clark, Carol, Davis, Erin

End users' perspective

In the second panel, a diverse group of end users shared their insights on the potential uses of existing and emerging payment mechanisms. Jay DeWitt, senior manager, Amazon.com, Inc., said that rather than push customers toward the least costly payment mechanisms, Amazon tries to accommodate their preferences. A major concern for Amazon, like many merchants, are the fees charged by the banks that process their credit card transactions, often referred to as "acquirers." Credit cards are currently the most popular method of payment for Internet transactions. To reduce payment processing costs, Amazon is developing an ACH payment option that will allow consumers to make payments to Amazon via their demand deposit accounts at significantly lower processing costs than for credit card transactions.

Paul Kapioski, owner, West Seattle Thriftway, described a new system introduced at his store last year whereby consumers have their fingerprints scanned by a biometric reader at the cash register. Then the reader matches customers to their desired payment instruments, which are kept on file, and the consumer authorizes payment. West Seattle Thriftway has used its system to steer customers to PIN-based debit cards, a less costly alternative to credit cards and signature-based debit cards. In addition to greater convenience for consumers and lower fraud rates, Kapioski argued that the novelty of the payment experience has increased the customer base and customer loyalty.

While electronic payments may reduce costs for businesses, Gail Hillebrand, senior attorney, Consumers' Union, questioned whether these changes are always in consumers' best interests and whether legal protections are keeping up with changes in the marketplace. For example, while in practice, payment providers often offer similar consumer protections on credit and debit cards, consumer legal protections typically vary based on the payment instrument used. Hillebrand recommended the development of uniform statutory protections for all payment products to reduce confusion among consumers.

The barriers to electronic payments are much higher for business-to-business payments than for consumer-to-business payments, according to Cathy Gregg, partner, Treasury Strategies, Inc. Gregg said that 95% of business transactions still use checks. In this market segment, the cost of a payment itself is inconsequential, compared with the costs associated with receiving and processing payments, known as the accounts receivable workflow. For many businesses, electronic payments have not lowered costs, but rather have forced businesses to create separate, manual procedures to accommodate those customers who prefer to pay electronically. Gregg suggested that electronic payments should be bundled with value-added services, such as integration with supply-chain management systems or back-end processes, that are currently not provided with checks.

Leveraging the payment infrastructure

The third panel of the conference featured Bond Isaacson, co-chief executive officer, Concord EFS, Inc.; George Thomas, president and chief executive officer, the Electronic Payments Network; Steve Abrams, senior vice president, MasterCard International, Inc.; and Andy D'Amato, senior vice president, Certegy, Inc. The panelists stressed that existing payment networks will be able to meet the future demands of payment system participants. Some panelists noted that most payment innovations leverage the existing payment infrastructure. For example, Isaacson suggested that while new payment solutions might emerge for micropayments, which range from a few cents to a few dollars, eventually these systems will piggyback on existing networks. A payment might be authorized with a mobile phone, billed on a phone bill, and eventually paid with a credit card.