The huge success of the Internet and World Wide Web was made possible by the continuous advances in digital technologies over the past few decades. The technology advances were absolutely necessary, - but not sufficient. The underlying IT architecture supporting the new Web-based applications had to radically evolve as well in order to take advantage of the advances in technology. And the organizational architecture of the private and public sector institutions that were embracing these new Web-based applications had to similarly change, in order to translate these technology advances into productivity and quality improvements.
Web applications typically run on a three tier IT architecture. In tier one, users link to the Internet with their PCs, smartphones and other devices, and access the Web with their browsers and related software. These tier one clients connect to the tier two https-based web servers, which process the browser requests, access tier three back-end systems as required, collect all the needed information and send it back to the clients. Tier three comprises the different applications and information in back end systems, including mission critical transaction processing and data bases.
This three tier architecture has contributed greatly to the success of e-business solutions, by making it possible to quickly combine the standards, universal reach and connectivity of the Web-based systems in tiers one and two, with legacy and new applications, data bases and other back end resources in tier three.
As we now contemplate the evolution toward universal mobile digital money and smart digital wallets, I believe that we are facing major changes not unlike those that accompanied the advent of the Web and e-business, which will require similar technology, architecture and organizational innovations. The need for privacy and security concerning money, credit cards and personal IDs requires a highly sophisticated IT infrastructure to support this transition. Today’s payment systems and the organizations that operate them will need to significantly evolve in order to handle the combination of huge transactional volumes, very low costs and high degree of security, as well as compliance with the variety of financial regulations in countries around the world.
I am a bit surprised that universities have conducted little research on such important and complex subjects. The expertise in payment systems is primarily found in the banks and other institutions that build and operate the systems, and in the consulting companies that work with them. Mckinsey, in particular, has written extensively on the subject.
In this excellent overview, Global Perspective on Payments, the authors discuss the evolution of four main kinds of payments: cash, checks, cards and electronic payments.
Cash remains the most widely used payment instrument around the world. Based on 2007 data, the use of cash in more advanced economies ranges from 47 percent of payment transactions (not value) in Finland to 88 percent in Japan. In the US, cash accounts for 57 percent of total payment volumes; 55 percent in France; 61 percent in the UK, Australia and Hong Kong; and 75 percent in Germany. Emerging economies are much more dependent on cash, accounting for 99 percent of payment transactions in India, Indonesia and Colombia; 98 percent in China, Mexico and Russia; and 93 percent in Brazil.
The transition to a future where a significant fraction of these cash payments become electronified will require a vast retooling of today’s electronic payment systems to be able to cope with the much, much higher transaction volumes.
Checks have long provided the main alternative to cash in countries with advanced banking systems, but their use is rapidly declining. In some countries like Finland and the Netherlands, checks are no longer used. Check volumes are mostly concentrated in the US, France, the UK and a few other countries, and never really took hold in China, India and other emerging economies. Given that checks will become obsolete over time, emerging economies will likely skip them altogether.
Credit and debit cards usage continues to grow rapidly all over the world, but especially in cash-intensive emerging economies like India and China where improvements in telecommunications infrastructures and reduced costs have made it possible for merchants of all sizes to accept card payments. Card usage is also growing in cash-intensive developed economies like Japan and Germany that have a relatively low volume of card transactions. In the US, where per capita card transactions have been almost five times higher than in Germany, continued volume growth will require significant innovation, especially given the increased regulatory pressures on card fees and interest rates.
Electronic payments are poised for major growth. Large companies already rely on electronic payments in their dealings with each other, but there is a huge untapped opportunity for bringing the benefits of digital payments to companies of all sizes around the world. In large companies, payments are closely linked to the financial components of their Enterprise Resource Planning (ERP) systems. Over time, electronic payments will likely create opportunities for a new generation of simpler, more flexible cloud-based ERP services suitable for smaller companies around the world.
Those individuals with a bank relationship, credit cards and Internet access have long enjoyed the benefits of electronic payments. e-payments have enabled the growth of online commerce. Electronic bill payments is one of the most successful e-banking applications. Many interactions with government agencies can now be done online, including the electronic payment of the accompanying fees.
The biggest opportunity for explosive growth in electronic payments lies with the unbanked, the billions around the world without an account at a bank or other financial institution, who have therefore not enjoyed the benefits of our increasingly digital economy. Even in the US, it is estimated that about 25 percent of households, more than ten million, are unbanked or underbanked. These numbers are much higher elsewhere around the world.
According to Mckinsey's Mobile Money for the Unbanked:
“About one billion consumers in emerging markets own mobile phones yet lack access to even basic banking services. Most stash their savings wherever they safely can and turn to relatives and friends whenever credit needs arise. Today, however, mobile money technologies make it possible to deliver banking and payments services to hundreds of millions of these unbanked consumers and, in the process, generate substantial new revenue streams for banks, telecommunication operators and other providers.”
But, while the opportunities are huge, realizing the potential will require a massive transformation of the world’s digital payments infrastructures. “Managing the payments business of a typical bank is a bit like commanding a squadron of fighter pilots who are receiving instructions simultaneously from 20 different commanders,” is a succinct description of the challenge.
In part II of this entry I will discuss some of the key challenges, as well as opportunities in this transformation of the world's digital payments infrastructure.