Andreas Park PRO
Professor of Finance at UofT
MGT444: Fintech
Payments Part I
Topic:
Payments are like plumbing ...
https://www.cbc.ca/news/canada/ottawa/phoenix-ottawa-timeline-1.3691812
Innovation is ongoing ...
Amazon Go Stores
Check out the video "Just Walk Out"
Innovation is ongoing ...
Innovation is ongoing ...
https://www.payments.ca/sites/default/files/canadianpaymentmethodsandtrendsreport_2019.pdf
1 The arrows represent the growth and decline of the key payment methods between 2013 and 2018.
Payments Canada
Payments Canada is responsible for the clearing and settlement infrastructure, processes and rules essential to those transactions.
[...] delegated by the Canadian Government. [...] provide Canada’s national payments systems.
Large Value System lets financial institutions and their customers send large payments securely. Retail System is where the vast majority of day-to-day Canadian commerce is cleared by our financial institutions.
The value of payments cleared by Payments Canada’s systems in 2019 was approximately $55 trillion or $218 billion every business day.
Payments Canada
Payments industry revenues just over $16 billion in 2016.
Larger than agriculture!
payments pieces
simplified view
CDS
ACSS
LVTS
Cheques
Debit at POS
e-transfer
Credit Card/
open loop
ATMs
Wire
Interac
Credit
Card
deposit based retail
Interac standard
credit card network
SWIFT
CSN
Settlement
Clearing process
Underlying network
Type of payment
Financial market infrastructure purpose
Securities Trading
Where is the most VALUE?
Where is the most VOLUME?
Forms of Payment: Evolution
Beginning at the beginning ...
Before we had the money, there were still transactions ....
How were these conducted?
Money = a game changer!
Three key roles of money
Key roles of money
What can serve as money?
https://www.pbs.org/wgbh/nova/article/history-money/
Pros of commodity (e.g., gold) money?
Cons of commodity money?
Clipped coins ...
The Island of Yap and the idea of money
https://www.npr.org/sections/money/2011/02/15/131934618/the-island-of-stone-money
Rai stones on the island of Yap
Paper money!
Paper money!
Pros and cons vs. gold/silver coins?
- Lighter? Easier to transport?
But:
- easier to damage, easier to counterfeit.
- requires trust in the issuing authorities
Money in Canada
Beaver Pelts
HBC made-beavers
Money in Canada
1817: the Montreal Bank’s promise to pay the bearer, on demand, the face value of the note in gold and silver coins
Fiduciary Money
Problems?
-
Time-consuming to move/process cheques
-
No immediate use of funds
-
Costly to process paper cheques
Cheques, Drafts ... "payment from an account"
Electronic forms of fiduciary money:
- debit cards
- credit cards
- pre-paid card
Prepaid Cards: Different Forms
Payment Basics ....
Who do you have a relationship with?
-
Visa?
-
CIBC?
What about the merchant?
Payment Basics .... before the Visa & Mastercard...
Imagine you run a bank
Wouldn’t it be great if your customers could go to local shops and “charge” their purchases to an account that you hold for them?
Make money offering credit to the customers and make some more money charging the merchants for providing this service.
Bank of America in 1950s
Foresee any problems?
Payment Basics .... before the Visa & Mastercard...
https://gendal.me/tag/payments/
Payment Basics .... before the Visa & Mastercard...
Payment Basics .... Clever insight
Cards "business"
= TWO businesses
Business #1: offering credit to customers & processing their payments
CARD ISSUING
Business #2: enabling merchants to accept card payments & to get reimbursed
MERCHANT ACQUIRING*
*The card payment = a receivable that the processor acquires from the merchant
Payment Basics .... 4-party model
Or: Payment Processor
Switch = set of rules + brand recognition for the merchants and customers that are members of this arrangement
Payment Basics .... 3-party model
For more info on the fees
https://www.visa.ca/en_CA/support/small-business/interchange.html
https://www.cardfellow.com/blog/credit-card-processing-fees/
https://www.costcopaymentprocessing.ca/index.html
Push vs. Pull & Tokenization
Push vs. Pull & Tokenization
Push vs. Pull & Tokenization
When you allow a merchant to store your credit card details on file, you must trust all these actors "not to mess up" ...
Push vs. Pull & Tokenization
Tokenization Example: Visa Services
https://www.bhartipay.com/payment-tokenization-benefits
Cash and Drugs
Pablo Escobar
80% of cocaine in the US
- accountants made allowances for the 10 percent that would rot via water damage or be consumed by rats
- US$1,000 per week purchasing rubber bands to wrap the stacks of cash
El Chapo:
$14 billion in drug profits
- private jet (to) pick up the cash at the border and fly it back to Mexico City ...$8 million or more per jet
- To much cash ....
- Solution? Pre-paid cards!
Cash and Drugs
Source: bbc.com
Cash and drugs: Cannabis legalization in Canada
Are we becoming a cashless society? Should we?
There is more to payments than payments!
Loyalty rewards
is (mostly) not about rewarding loyalty.
It's DATA!
There is more to payments than payments!
Payments and Monetary Policy
A
B
\(-\)
0
+
Payments and Monetary Policy
A
B
0
+
\(-\)
Option 1: borrow from BoC
lending rate:
deposit rate:
target rate
target rate\(+\)25bps
target rate\(-\)25bps
Payments and Monetary Policy
A
B
0
+
\(-\)
Option 2: borrow from another bank
target rate
How to Payments Part I: Basics of how it works
By Andreas Park
How to Payments Part I: Basics of how it works
This is the first set of slides on payments
