Katya Malinova PRO
I am an Associate Professor, Mackenzie Investments Chair in Evidence-Based Investment Management at the DeGroote School of Business, McMaster University, Canada.
Intro to FinTech
MBA F741
Payments Part II
Instructor: Katya Malinova
Lectures 6-7
Feb 13
Plan for today: Payments
- Finish up the "history"
- The basics of the existing payment system
- Innovations in payments (will probably spill over to Lecture 7)
History of Money (Last time)
barter
coins/commodity money
paper money
fiduciary money
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
Let's return to discussing innovation in payments
What do we want from payments?
fritctionless
fast
open/expandable
cheap
secure
Trends? Example: Air Canada Accepted Payments
https://www.aircanada.com/ca/en/aco/home/book/payment-methods.html
What does Air Canada NOT accept (at least, not everywhere?)
CASH!
Are we becoming a cashless society? Should we?
Should we become cashless? (Discussed much of this in lectures 1-2!)
- Time savings
- Money savings
- Reduce frictions
- Reduce crime (?)
- ??
- Security/system failure concerns
- Access for everyone?
- Financial literary
- Privacy
- Loss of anonymity(?)
- ??
Cash and drugs: Cannabis legalization in Canada
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!
Source: How can payments modernization benefit Canadian businesses? Evaluating the cost of payments processing; EY and Payments Canada, 2018
Is it a choice?
Are people well serviced?
-
student from China
-
no family in Canada
-
moves to the UK
-
needs to transfer funds and has yet to establish bank account in the UK
International remittances: $600B (U.S.) p.a.
all in: 10% fees
From Lecture 1: International Remittances
2015: 7.68% fees
2017: the total cost of sending remittances = $30 billion = total non-military foreign aid budget of the US!
An enormous transfer from the poor to the rich!
Not just consumers ... Anecdotally:
Credit
Financial institutions often won't offer payment solutions to small business, due to their credit risk profile.
Credit cards:
SMEs need to use owner's personal card which affects their personal credit score
Expensive B2B payments:
most financial institutions charge base fee + transaction fees
Accounting/corporate finance
Small businesses have to integrate payment activities to accounting platforms themselves.
Business: Need Better Data and Faster Processes!
Where does the money go, where does it come from?
\(\Rightarrow\) inadequate cash flow information
Source: How can payments modernization benefit Canadian businesses? Evaluating the cost of payments processing; EY and Payments Canada, 2018
Bottom line? Not there yet!
Source: How can payments modernization benefit Canadian businesses? Evaluating the cost of payments processing; EY and Payments Canada, 2018
Innovations in Non-physical Payments around the world
Scandinavian Digital Payments
Mobile
Money
Mobile Apps in Emerging Economies
Danish Mobile Pay
4+ million users (population 5.7M)
235+ million transactions, 8.6Bn EUR value
launched by Danske Bank, but bank-neutral
instant payments based on mobile phone numbers
Critical PreReq for Danish Mobile Pay
government issued digital ID
available to anyone with a SIN
common login for:
civic services
banking
taxes
other businesses, e.g. telcos
Components of Danish Mobile Pay
a mobile app
links to existing bank account
uses trusted infrastructure and authentication
cleverly leverages what you have
adoption rate shows the value of form factor/frictionless experience
Mobile Money in the Developing World
bank account
access to saving vehicles and safe storage & transfers
better economic future
Mobile Money in the Developing World
Mobile Money
Mobile Payment
Cash-In
agent
Cash-Out
agent
Mobile Money: M-Pesa
Mobile Apps in Emerging Economies
https://www.payments.ca/sites/default/files/canadianpaymentmethodsandtrendsreport_2019.pdf
Component of : digital identity + Unified Payments Interface
"To empower residents of India with a unique identity and a digital platform to authenticate anytime, anywhere."
- "[PayTM] want[s] to become the universal payments layer on every bank account"
- "something that was going to take 3-6 years now takes 3-6 months"
UPI puts multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments under one hood.
some stats for India
-
450 million users
-
5 million transactions per day
-
over 12 million merchants
-
over $4 billion per month
These apps offer more financial services than payment
Why is this relevant (even if you aren't interested in FinTech)?
Will new students ...
-
get a bank account?
-
or just choose merchants by whether they can use WeChat pay?
How about new immigrants?
-
At what point will they simply stop using Canadian banks?
Potential problems with "outside" payment solutions?
(Until just a over a week ago?), the largest money market fund in the world was ...
Remember our discussion on crypto-exchanges taking deposits .... ?
Is PayTech a thing in Canada?
Innovations by BigTech
BigTechs operating as FinTechs in Canada
Why does BigTech enter the finance game?
Chances are: they have ZERO interest in becoming a financial institution/bank
\(\rightarrow\) no expertise
\(\rightarrow\) competitive market
\(\rightarrow\) one of the most regulated business environments
Several possible explanations:
They are trying to deal with frictions that impede their business
They aim to collect data which will vastly improve their business
Why is payments data valuable?
How much money is coming into and out of the account each month
If you had a full view of payments, what would you learn?
Spending habits: what you spend money on and where you spend it
Payment habits: Are you paying bills way ahead of deadline or tardy?
There is more to payments than payments!
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!
Things to keep in mind? Know what the data tell you!
Abraham Wald: The armor should NOT go where the bullet holes are. It goes where the bullet holes aren’t!
Back during World War II, the RAF lost a lot of planes to German anti-aircraft fire. So they decided to armor them up. But where to put the armor?
Social Credit System in China
Pilot programs with various tracking metrics and consequences for violations
- Public shaming of those who don't pay the bills or behave in a socially "unacceptable" way
- “Deadbeat Debtors near me” map via WeChat
Things to keep in mind? Limits to what the data can be used for?
Why do PayTech solutions emerge?
people want mobile, frictionless, and immediate
Reduced payment
risks
new customer-business relationships (data collection)
Business integration and accounting simplification
expansion of merchant and user base
Payments Part II
By Katya Malinova
Payments Part II
This is the second set of slides on payments for MBA F741
