Payments World - Super Compressed
These two pyramids were built by two civilizations which were continents apart and without any contact with each other. How?
Maybe ancient aliens or Atlantians taught them!
Or a simple explanation is that layering stones is the easiest way to build a tall building.
Not just Pyramids, throughout the history of the human race, many inventions happened in different parts of the world by people who are not connected.
Examples: Agriculture, fire, wheel.
And of course, the money (the concept of ‘money’)
Money was created many times in many places. Its development required no technological breakthroughs - it was purely a mental revolution. It involved the creation of a new inter-subjective reality that exists solely in people’s shared imagination. - Yuval Noah Harari
Then Money as a concept evolved… from barter to gold/silver to coins to notes. While the ‘money’ was being shaped/perceived differently by different countries/cultures, we came up with ‘digital money’ along with financial institutes, payment instruments, and payment infrastructure to move that digital money from point A to point B.
Today we have hundreds and thousands of payment instruments that come in various shapes and forms. Let’s look at a few popular payment methods.
I have covered these payment modes in detail in Chapter 25 of my book AUTH N CAPTURE (Revised Edition)
Here is a super compressed summary of the Payment Instrument Landscape of the World.
A. Cards
Throughout the world, cards (credit, debit, prepaid) are the prominent payment instruments.
These cards can be used for online and offline payments, and cash withdrawal at ATMs.
Cards are issued by card issuing entities (bank and non-bank entities), and the card networks provide infrastructure, processes, platforms, and frameworks for issuance, acceptance, fund movement, and dispute management.
Global Card network
Visa and MasterCard are the world’s largest card networks, and then there are other global card networks such as American Express, Diners and Discover (all are from USA).
JCB (Japan Credit Bureau) is one of the first card networks that originated from Japan, and then was spread to many countries. Then came the dragon (China) with its Union Pay card network.
Domestic Card Networks:
In the last couple of decades, many countries have launched their own domestic card networks and the reasons for that are:
Today there are 30+ countries with thriving domestic card networks.
Domestic card networks which were started to cater to the domestic market and, eventually, expanded / intend to expand to other territories.
The card network can do this expansion on their own (like Visa, MasterCard, or Union Pay) or partner with other country’s domestic card networks or global card networks.
B. Real-Time Payment (RTP) Rails
RTPs are known by different names - Fast Payments, A2A payments, instant payments etc.
RTPs are designed to cater both P2P and P2M (in store as well as online) payment use cases with capabilities of (near) real-time payments, and such payments should be economical (acceptance infra and processing cost).
Simple RTP system (Source: https://www.moderntreasury.com/)
Above diagram is the simplest schematic of a RTP system. And yet, each RTP rail works differently in terms of transaction processing, settlement time, clearing process, dispute management.
Many countries want to achieve different objectives with the RTP rails.
Countries that have Real-Time Payment Rails:
Geo Expansion:
RTPs are not stopping at domestic level and are expanding their horizon by unlocking interesting cross-border remittance use cases.
C. CBDCs
CBDC (Central Bank Digital Currency) is a legal tender issued by the central bank of a country in a digital form. It is the same as sovereign currency and is exchangeable 1:1 with fiat currency.
Different countries have different reasons/motives to launch CBDC.
We have three types of money: Cash, Digital Money (which is in our bank accounts) and CBDC.
CBDC is different from the cash and digital money as CBDC is the liability of the central bank whereas other types of monies are liabilities of banks
CBDC is similar to cash (fungible, non-interest earning) but yet different (form factor). CBDC and Digital money are the same (digital form) but they are different (interest earning and fungibility)
Common thing about all these three are that they can be exchanged at 1:1:1
CBDC - possible types:
100+ countries are researching, piloting, and launching CBDCs.
Source: https://www.atlanticcouncil.org/cbdctracker/
However, not all countries are equally enthusiastic about CBDC - Few countries are interested in either retail or wholesale CBDCs, whereas few are interested in both types of CBDCs. Few countries are working on domestic CBDC whereas few are focusing on cross-border use cases.
Few countries which have shutdown/canceled or inactive CBDC programs for various reasons (lack of adoption, no real need, political crisis, economic conditions, wait & watch, etc.)
Few cross-border Projects:
Cross-border remittance/payments is one of the biggest use cases of CBDCs. And there are quite a few countries that are working on these cross-border projects.
The world is in the early stages of CBDC as nations are figuring out many things, such as utility, risks, operationalization, adoption, resources, etc.
This is a ‘new money’ and it is expected to redefine how we use the money. So definitely there are challenges, but it will also be equally exciting!
D. Cryptocurrencies
On 31st Oct 2008, a mysterious person named Satoshi Nakamoto published a whitepaper on Bitcoin which gave birth to Crypto currencies, and now we have thousands of them.
Cryptocurrencies are not created by the government/central bank but are ‘mined’ (tokens are awarded for the fastest nodes that verify crypto transactions added to the blockchain) and ledger of tokens is maintained by all nodes (i.e. distributed ledger).
Although the name itself carries ‘currency’ in it, the majority of people are interested in cryptocurrencies not because of its utility but ‘get rich method’. That is the reason, most of the countries have classified cryptocurrencies as Virtual/Digital Assets (if not banned them).
Cryptocurrencies are too volatile to be used for payments. Thus, stable coins were designed which are pegged to a US Dollar (or any other fiat currency)
Popular stable coins: USDC, USDT, Athena USDe etc.
Although stable coin based payments are cheaper, faster and easier, they haven’t made a significant impact on the payments landscape mainly because ‘they are cryptocurrencies’. :)
Many people believe cryptocurrencies are the future of payments… Why shouldn’t they? Modern finance and our credit system is based on ‘belief’... Think about it!
E. Convenient Store Payments:
Here, we are talking about a unique (at least for Indians) payment method where cash is used for online payments… not directly, but indirectly.
Convenience stores are quite common in many countries. These are small outlets/stores that are operated by an entity (7 Eleven, Lawsons etc.).
These convenience stores act as a channel of cash to online payments.
Although the modus operandi may vary a bit here and there, this is how ‘convenient store based payments’ work.
Convenient stores charge a fee to the merchants for facilitating payment service.
Countries where convenience store payments are popular:
Convenience store-based payments are popular across the globe in both developed as well as developing countries, particularly popular in Southeast Asia and South America.
These convenience stores play an important role as they allow users to be part of the digital commerce even if they do not have the required device (e.g. smartphones), payment instruments (e.g. bank account or cards), or merchant restrictions (do not allow Cash On Delivery orders).
F. Mobile Wallets:
Mobile Wallets are prepaid payment instruments where users will load the funds and utilize the funds for payments at shops or online merchants. Wallet is a simple payment instrument - that involves a wallet-issuing entity that has to bring customers and build acceptance networks.
Wallets have certain guidelines, such as license to operate a wallet, limit on balance amount, loading channels, acceptance network, withdrawal limits, acceptance in other countries etc.
Advantages of wallets:
Wallets are largely successful in solving many of the payments-related challenges of a user and/or merchant.
Countries and Popular Wallets.
The majority of wallet operators work in their domestic market, but there are few wallets which operate in multiple countries.
Payment Containers: Users can add their cards, wallets, and BNPL accounts, and pay using any of those payment modes.Examples: Apple Pay, Google Pay, PayPal, MasterPass
Usually these payment containers are also classified under ‘wallets’ but actually they are not.
Mobile wallets may be struggling in a few countries due to the rise of RTPs (e.g., India, Singapore, or Brazil), but in the global context, wallets are thriving and continue to do so.
G. BNPLs:
BNPLs are quite new to the payments landscape.
The basics of BNPL remains same,
Give small credit to the user
Provide acceptance infrastructure to spend that credit
Customers will repay the utilized credit amount
This sounds simple… the challenges of customer acquisition, building a large acceptance network, cost of capital, and non-performing assets are the same across the globe.
Various types of entities offering/offered BNPL products - Banks, NBFCs, FinTechs (e.g. Klarna) and even big brands (e.g. Apple Pay Later). BNPL companies started in the online commerce space but have created a presence in offline models as well. Many BNPLs (e.g., Klarna) are accepted in physical stores as well.
Here is the list of popular BNPLs:
Few BNPLs have expanded to multiple countries:
Last couple years, many global BNPL companies have lost their ‘shine’ (in other words: Valuation). So, has the BNPL model hit the dead end of the road? Or will the models shift from a FinTech-led model to a consumer brand-led model?
H. Other Payment Modes
I am listing few other popular payment modes:
Carrier Billing:
In this payment mode, the user can use a prepaid amount balance to purchase the product, or the product purchase amount will be added to postpaid bill. Carrier billing is an ideal solution for low ticket transactions.
Major players: Mobiamo, Softbank, Dao Pay, Siru Mobile
Bank Transfer:
Direct bank transfer to business or person (similar to NEFT, RTGS)
Banking platform - similar to our net-banking; usually referred to as EFT (Electronic Fund Transfer)
Virtual Account based solution where each user/entity receives a unique account number that is created on a pool account and the user can transfer funds to that assigned account. This will help in easier reconciliation.
I. Cash
I am keeping the best one for the last!
Cash is universal - our world has 180+ currencies that can be used for purchases or exchange.
Cash is the most widely used and popular payment instrument because it is simple, easy to understand, and widely accepted.
Cash usage depends not only on the maturity level of a country’s payment infrastructure but also on the way money is perceived in that country.
Austrians and Dutch people associate cash with privacy (they don’t like to be forced to use digital payments)
Sweden and Norway are encouraging citizens to keep cash in the perceived threat of future war in Europe [Link]
We, Indians, love cash - big we are not only big in UPI but also in corruption so cash is easier to hide from taxmen and authorities
Currency acceptance:
Since the end of World War II, the US Dollar ($) has been the dominant currency, and countries keep USD reserves to purchase commodities (e.g., crude oil).
Few countries are pushing their own currencies as global currencies, e.g., Russian Ruble, the Chinese Yuan, and the Euro. Recently, India has also been trying to push the Indian Rupee for trade settlement.
Closing Remarks
“You can't be a real country unless you have a beer and an airline - it helps if you have some kind of football team, or some nuclear weapons, but at the very least you need a beer.”
- Frank Zappa (American Music Composer)
A payment professional would have quoted - “You can’t be a real country unless you have Real Time Payment (RTP) rail and domestic card network - it helps if you have some kind of CBDC or mobile wallet, but at the very least you need an RTP rail”.
The world payments landscape is extremely diverse, interesting, and evolving. We are witnessing the rise of Real-Time Payment (RTP)/A2A rails, domestic card networks, and the world is excited about the potential of CBDCs. There are wallets and BNPLs, and few countries have retail chains to make online payments, and of course, the king of all, Cash.
Countries are building digital payment infrastructure for domestic usage and also for cross-border payments.
In this connected world where trade, commerce, and travel are happening at a global level, countries want to provide free movement and seamless cross-border payments for their citizens and businesses.
At the same time, the country wants to safeguard its citizens’ data and protect its sovereign interests (by promoting its own payment infra, card network etc.). Also, the country wants other countries to use its payment infrastructure or currency.
It would be interesting to see how a country will balance between nationalization and globalization at the same time, and how these ‘moves’ will be perceived by other countries.
Money is the most universal and most efficient system of mutual trust ever devised. - Yual Noah Harari