Live at Apex: Knowing the Unknowable
By: Matt Gertler
Welcome to the official All Payments Expo Blog. The purpose of the “Live at APEX” series is to highlight the key takeaways from this year’s panels in a manner that is both informative and enjoyable, even if you were unable to attend this year. If you have any questions that you would like answered in a future post, tweet me @magertler using, #APEXLV15.
We just wrapped up the “Knowing the Unknowable: Payment Predictions” panel. While it is impossible to know the future, our panel of payments experts, Stefan Happ (American Express), Jack Stephenson (First Data), and Amir Wain (i2c) did an awesome job explaining what they think the payments ecosystem is going to look like in the not-to-distant future. I would like to thank them and our moderator, Matt Harris (Bain Capital Ventures) for joining us today.
What impact does Bitcoin have on the existing payments infrastructure?
Bitcoin is a technological innovation that will radically change the existing payments infrastructure. Bitcoin solved the Byzantine Generals’ Problem, which is a computer science problem that asks how trust can be established between two unrelated parties over an unsecured network, such as the Internet. Bitcoin offers the first practical solution to this problem in that it allows for the safe, secure, and permanent transfer of ownership in digital property at a near-zero cost. Accordingly, Bitcoin offers a potential alternative to conventional payment processers that charge merchants 2-3% in fees.
Fraud is the biggest reason that payment processors charge these fees. During an earlier APEX workshop, Rich Stuppy (Kount) reported that there were more than 1500 data breaches in 2014 and 76 percent of them occurred in the United States. This “perfect storm of fraud” is increasing as mobile payments become more ubiquitous. M-commerce makes up a disproportionate share of credit fraud relative to its share of transactions. In fact, a Jan. 25, 2015 survey by LexisNexis Risk Solutions found that “mobile payments account for 14 percent of transactions among merchants who accept them, [but] make up 21 percent of fraud cases.”
Bitcoin can prevent fraud. In his, “Why Bitcoin Matters” article, Marc Andreessen (Andreessen Horowitz) offers an example of how Bitcoin could have made the “Target hack” impossible. He writes:
“You fill your cart and go to the checkout station like you do now. But instead of handing over your credit card to pay, you pull out your smartphone and take a snapshot of a QR code displayed on the cash register. The QR code contains all the information required for you to send Bitcoin to Target, including the amount. You click “Confirm” on your phone and the transaction is done (including converting dollars from your account into Bitcoin, even if you did not own any Bitcoin).”
A third impact that Bitcoin will have on payments is that “micropayments” will offer new monetization options for companies. Micropayments are transactions that involve payments between about 75 cents and a fraction of a penny. They have never before been practical because conventional payment system fees are too expensive for such small amounts. Since Bitcoin is divisible to the eighth decimal point, it provides a practical way to transfer values as small as fractions of pennies. For example, this offers content producers a new way to monetize their content, rather than having to rely on traditional subscription and advertising methods.
What current crazes will be irrelevant in 5 years?
There is a current craze of characterizing payments based on the device being used to conduct the transaction. We use terms such as point-of-sale (“POS”), e-commerce, and m-commerce; but, this is going to change. The lines between POS and mobile are being blurred, and they will continue to blur further. For example, eating at a restaurant has traditionally been considered POS, but OpenTable allows people to not only make reservations, but also pay for the meal via the app. Other companies, such as Lyft, Starbucks, and Subway are all changing the purchase experience.
The likely trajectory of this is that all types of payments will be streamlined. It is not hard to picture a future where you can go to a market, fill up your cart, type a few buttons on your phone, and leave (or maybe you will not even need to take out your phone). Monday’s keynote speaker, Jim McKelvey (Square) suggested that “Indoor Location Services” will allow for the streamline of payments in retail establishments and the technology is only a year or two away from becoming “good enough” to be mass adopted. He suggests that many retailers are not adopting now, thinking they have time to do it later. The risk of this is that a market-leading retailer (e.g. Barnes and Noble, Blockbuster) may wake up and realize that all of their customers switched to a competitor offering a better service (e.g. Amazon, Netflix).
What will the mobile operating systems (Apple, Android) bring to the table?
Mobile operating systems are going to radically change POS transactions. Both Apple Pay and Google Wallet work at retail establishments that have NFC-enabled POS systems. This is a total of only 220,000 merchants, or less than 3% of the market. The number of merchants is expected to significantly increase this year with the upcoming October 2015 deadline requiring merchants to convert from magnetic-stripe payment cards to the Europay-MasterCard-Visa (EMV) chip card standard. A merchant that cannot accept NFC payments after this date will be liable for any resulting credit fraud.
Another potential product from Google is a POS system named “Plaso,” which is currently being tested by Google employees. It leverages the Android platform to notify retailers when a Plaso-enabled device enters an establishment. Customers pay for goods and services at checkout by giving their initials to the checkout clerk. While there is no guarantee that Plaso will ever be released to the public, it is clear that mobile is changing how we pay for goods and services.
Mobile operating systems allow us to interact with our environment. While today this is somewhat limited to smartphones, in the coming years, “mobile” will include wearables. Samsung is already in the market and has its own operating system, “Tizen.” As wearables take new forms and are adopted, it is likely that new mobile operating systems will emerge that enable these devices to perform previously impossible things.
Matt Gertler is the Head of Strategy at the Digital Currency Council (“DCC”) and is pursuing his JD/MBA at USC. He is experienced in FinTech, having worked for Venmo, Braintree Payment Solutions, and Earnest before joining the DCC. If you have any questions, please tweet @magertler using, #APEXLV15, and they may be included in a future post.
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