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Green Sheet Scores High Marks
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However, with the exception of western Europe smart card technology has
failed to come close to meeting these expectations. Paper check usage
continues to grow and while debit card usage is growing, many users
continue to carry their check register in order to maintain a level of
comfort in the control of their personal finances.
A growing number of individuals and organizations in our industry believe
that to affect the way payment transactions are implemented, a new
business model must be developed. In order to create real value for
everyone, this model must focus not only on the merchant and the financial
institutions, but also on the needs of the consumer. Without consumer
buy-in, any new effort will likely suffer the same fate as the smart card. Consumer
Problem
As the pace of everyday living continues to accelerate, consumers are
finding themselves with less time to focus on the mundane activities in
their lives. For many, this means money management practices have
literally gone by the boards. Consumers find themselves trying to manage
several, often incompatible, payment systems. In this environment, payment
details (receipts) are thrown away more often than not. At the same time,
merchants require payment receipts in order to accept a return. Consumers
are not the only losers in this scenario; merchants also have a problem.
As a group, merchants are experiencing $500 million in annual chargebacks
because they are unable to locate the paper record receipt which, in a
dispute, must be produced as proof of purchase.
Everyone in the financial services industry has managed to overlook the
needs of the consumer. At the same time, the penalties continue to rise
for poor budgeting and control. It is not a surprise that smart cards are
failing in the U.S. Consumers simply do not perceive any added value in
the financial management process. Specifically consumers were, and are,
concerned about: •
the aggravation of learning a new payment system, •
the perceived additional risk of tampering with their financial
data, •
the risk of exposure of their private information, and •
the absence of new benefits that might otherwise improve knowledge
or control of their financial situation. Creating
a Digital Payment System
Creating a digital payment system will only be successful if it addresses
the consumer’s needs and provides clear benefits. As history constantly
demonstrates, consumers will continue to use tried and proven methods
until an easier solution to their financial management requirements
presents itself. In addition to meeting the consumer’s needs, the new
system must also take care not to add additional burden to the financial
infrastructure. That is, it must work within the existing structure of
transaction capture, clearance, and settlement causing few, if any,
changes.
The tried and proven method of financial transactions is still the paper
check. Seventy-three percent of all financial transactions are processed
via paper. The bankable household writes an average of 415 checks per
year. According to First Data, 50% of these checks are tendered at the
point -of-purchase. This means that approximately 70% of transactions
taking place at the point-of-purchase are paper check transactions.
Therefore, point-of-sale purchasing is the place to create end-to-end
digitization of transactions.
Because consumers persist in using checks as the best mechanism for
financial control and budgeting, a significant consumer advantage must be
included in a new check processing system or a new payment system. This is
a key requirement.
Various studies have indicated that paper check handling costs run between
$2.00 and $3.00 per check. Approximately 50% is merchant check cost and
another 15% is for verification, authorization, fraud, and bank
statements. Substantial reductions in these various processing costs for
both merchants and financial institutions are also key requirements of a
new payment system. End-to-End
Digital Payment Architecture
Creating a digital system requires that the interface between the consumer
and payment system be made digital. Interactive payment system terminals
provide only limited consumer value. A much broader approach will be to
move more of the payment terminal functionality into the consumer’s
hands.
The proliferation of information appliances with Infrared communications
capability already installed represents a unique opportunity for clever
payment applications. It is possible to truly begin the elimination of
paper at the appliance, thus providing the consumer with added value.
There are more than 100 million infrared-enabled appliances in the
marketplace today. This includes virtually all of the approximately 10
million hand held information appliances which are IrDA enabled (i.e. palm
pilot and other appliances with Microsoft CE O/S). Further, industry
forecasters project the continued migration of consumers from PCs to
mobile devices. This means that: •
a substantial installed base of consumers already own, use, value,
and understand these IrDA enabled tools and •
this stock of early adopters is growing as each day passes.
More importantly, these devices can actually make the consumer’s life
better. The benefits derive from digitizing the transaction end-to-end and
including all elements of the payment. To do this, one must consider what
happens when a consumer implements a transaction. The consumer provides
the merchant with a check, a credit/debit card, or cash. When the
transaction is completed the consumer is usually handed a register receipt
and a carbon of the transaction. In the case of paper checks, the consumer
sometimes records the transaction in a register or uses carbon checks.
Digitizing all elements of this process while the transaction is taking
place and effortlessly incorporating the information in a money management
system creates important value for the consumer.
Today, there are check readers that can accomplish the check digitization
process at the point-of-sale. However, they are in very limited usage due
to the high cost of infrastructure support required of the merchant. Less
than 10% of all merchants can afford to have these devices in their
operations. Lower cost systems are expected to be introduced to the market
in the near future. These systems will be affordable to the remaining five
million retailers and will allow for much greater access by the consumer.
These new devices must be infrared enabled in order to accommodate the
hand held information appliances using new financial transaction software
which currently only accommodates person-to-person payments.
The majority of credit card readers, which are installed almost
universally, can very likely be retrofitted with a low-cost Infrared
interface device (dongle) that can quickly enable electronic device
transactions at the point-of-sale.
Looking to the near future, Motorola, Nokia, and Ericsson are including
IrDA ports in new cellular phone models. The ability to conduct secure
financial transactions from a cellular phone at the point-of-sale is just
around the corner. Why
IrDA?
Infrared is the interface of choice when creating communications with the
consumer’s electronic appliance due to its low cost, security, and
short-range directional connection. By using IrDA, a proven standard can
be brought to bear that considers all issues and is already universally
installed in information appliances. Payment terminals must include IrDA,
and the IrDA protocols must be extended to cover the financial world’s
interfaces and security needs.
IrDA was formed in 1993 to define a replacement for the serial cable using
infrared transceivers. Since that time, the group has been joined by
virtually all major computer and computer peripheral manufacturers
resulting in the deployment of 100 million IrDA enabled devices. IrDA has
been incorporated in the operating systems of Windows 2000, 98 & 95,
Linux, WinCE, and the Palm O/S. All the WinCE and Palm based hand held
devices have IrDA ports. IrDA will persist in being the primary
connectivity model in these devices because it is the smallest, fastest,
and lowest cost method of connecting two hand held devices. The IrDA port
is the ideal choice for data ports in public areas since there are no
exposed slots or wires to wear out or vandalize. NTT has already deployed
5,000 IrDA ports in the public phones in Japan and plans to deploy 400,000
new ports over the next five years.
IrDA standards have been adopted by many international bodies. ISO, JTC1,
TCC, IEEE, and IEC have all referenced the IrDA protocols in their
publications. Rapid development, high visibility, wide participation
within the industry, and strong cooperation with international standards
bodies make IrDA a good choice for developing a standard. First
Step
Major cooperative effort is required to achieve an end-to-end digital
transaction system at the point-of-sale and elsewhere. Many different
entities need to become involved before, in Dee Hock’s (former CEO of
VISA) words “Money becomes guaranteed data in the form of arranged
electrons and photons which move around the world at the speed of
light.”
However, the emergence of consumer information appliances with incredible
power makes it possible to envision taking the first step in this process.
By creating a connection between the point-of-sale and the consumer with
one of these devices, it will be possible to start the process with the
consumer—an element that creates tremendous value for the consumer.
Obtaining detailed electronic receipts at the point-of-sale clearly
creates consumer value. Applications running on information appliances can
capture electronic records, instantly update active balances for the
consumer’s account, and capture the data for financial management
software. The net result is significant value added for the consumer. Virtual
Transaction
Virtual transaction implies the ability to digitize any type of payment
transaction at the point-of-sale. This step requires secure communications
between the information appliance, cellular phone, etc., and the
point-of-sale terminal. The consumer initiates the process. The payment
terminal is provided with essentially the same information it can receive
from a paper check’s MICR encoding, a credit card’s magnetic strip, or
a stored value card’s chip, and more. Various security measures may be
employed: PROM processor number, lock-step codes, signatures, etc. Of
these, the PROM processor number appears to be essential since it
addresses card present issues. (It proves that this is the consumer’s
payment-making instrument).
Upon transmittal of the payment information, the information flows through
the same automated transaction processing systems that financial
institutions and transaction processors have developed over the last
several years. Upon receiving approval, the full content of the receipt is
uploaded into the consumer’s electronic appliance. The merchant also
saves the receipt electronically.
The net result is dramatic improvement in all stakeholders’ positions.
The following shows the positions for consumers, merchants, and financial
institutions. Consumer •
Instant, digital record collection, •
Effortless integration with money management software or Internet
aggregation, •
Faster checkout lines, and •
Better service. Merchant •
Lower transaction costs (card present issues solved with
microprocessor burned ID) •
Reduced fraud costs •
Digital records reduce charge backs Financial
Institution • Lowered transaction processing infrastructure costs Infrared
Financial Messaging (IrFM) Development Road map
A successful and enduring implementation of Infrared Financial Messaging (IrFM)
protocols and technologies will rely heavily on both the depth and the
breadth of stakeholder support.
The stakeholders in this context are consumers (individuals and possibly
businesses), financial institutions of all kinds, hardware (appliance)
manufacturers, software manufacturers, legislative and regulatory entities
at local, national and global levels, and financial clearing and
settlement infrastructures.
One cannot expect instant and universal adoption. The introduction of IrFM
will follow an evolutionary cycle beginning with introduction of the
concept in stages designed to educate and engage the various
constituencies. Increasingly sophisticated business system requirements
definitions, as well as progressively more robust proof-of-concept
demonstration systems will characterize these stages. As a first step
along the developmental path, a core group of “promoters” have
convened to establish a program White Paper (this document), a preliminary
proof-of-concept prototype, and a charter membership plan involving a
number of key alliances. Alliances A
fundamental precept of the development plan is the inclusion of as wide a
range of stakeholder representatives as is possible. In the early stages,
the list of participants should include: •
speakers for the consumer community, •
representatives of the financial services community, •
hardware (appliance and POS terminal) manufacturers, •
software developers, and •
the communications industry. Imprimaturs At
least three criteria will have to be met before the IrFM objectives can be
achieved. The first of these is that the consumer community finds these
methodologies and technologies at least as straightforward and simple to
use as existing peer-to-peer and network-based payment options. That is,
as simple as cash, checks, and credit cards, but with no extraordinary
acquisition and maintenance costs. In the ideal solution, a new form of
payment mechanism will be more attractive than any of its predecessors.
This proposal, in fact, adds a distinctive feature, which is not commonly
available in bearer-like transactions: a digital receipt created
instantaneously with the transaction event. This benefit is available in
any transaction whether it is consumer-to-business or
business-to-business. As a first step in illustrating these capabilities,
the project proposes to establish a demonstration prototype that is
simple, based on existing technologies and easy to use.
Secondly, the financial services community will need to see the value of
this solution in terms of contribution to the bottom line or, in providing
greater production efficiency. Contribution to profitability will be the
most powerful inducement for application of IrFM technologies among banks
and payment processors. Reductions in the cost of processing check-like
payments will run a close second in the race to improve customer
servicing. Whatever the incentive, a project objective will be to secure
the industry’s backing and commitment using the prototype to underscore
the benefits and feasibility.
Thirdly, all concerned will need to be assured of, and have abiding faith
in the security and stability of the proposed mechanisms. This will be
accomplished by the application of proven security policies and procedures
including, but not limited to: •
established cryptographic techniques, •
mutually assured identification of transaction parties, •
assured integrity of transaction data, and •
guaranteed privacy.
To achieve these objectives, it is vital to form alliances among industry
trade and oversight organizations to work in a project environment with
the aim of producing standardized and open protocols to support the
Digital Payments System. The recommended associations follow. Trade
and Oversight Organizations Infrared
Data Association (IrDA) and Financial Services Technology Consortium (FSTC)
are two significant and well-established trade organizations with a
tradition of successful research and development efforts in their
respective industries. A partnership by these two groups will provide
technical excellence, project management, and financial services industry
business expertise so crucial to successful development. Infrared
Data Association (IrDA)
IrDA was established to set and support hardware and software standards,
which create infrared communications links. The Association’s charter is
to create an interoperable, low-cost, low-power, half-duplex, serial data
interconnection standard that supports a walk-up, point-to-point user
model that is adaptable to a wide range of applications and devices. IrDA
standards support a broad range of computing, communications, and consumer
devices.
International in scope, IrDA is a non-profit corporation headquartered in
Walnut Creek, California, and led by a board of directors which represents
a voting membership of more than 160 corporate members worldwide. As a
leading high technology standards association, IrDA is committed to
developing and promoting infrared standards for the hardware, software,
systems, components, peripherals, communications, and consumer markets. Financial
Services Technology Consortium (FSTC)
The Financial Services Technology Consortium is a not-for-profit
organization engaging in collaborative, non-competitive, research and
development with the specific purpose of optimizing the global financial
transactions infrastructure. The consortium solicits the participation of
all parties to the provision of financial services with the aim of
creating standardized, open, and interoperable technology platforms to
further customer service objectives of financial institutions.
Members of the consortium include banks, financial services providers,
research laboratories, universities, technology companies, and government
agencies.
FSTC sponsors project-oriented collaborative research and development on
interbank technical projects affecting the entire financial services
industry. Particular emphasis is placed on payment systems and services,
and leveraging new technologies that help banks cement customer
relationships, boost operational efficiency, and expand their market
reach.
The consortium offers a number of important benefits to its membership and
the financial services industry. Member
Benefits •
Offers early information about emerging technology, •
Creates an effective voice in shaping and directing government
initiatives, •
Prorates the costs of common solution development, •
Speeds up the development and introduction of standards, •
Exposes participants to multiple viewpoints, external ideas, and •
Fosters a climate of long-term focus. Industry
Benefits •
Enables leverage of technical expertise of national labs and
universities, •
Fosters cooperation in research and development of common
solutions, •
Encourages interoperability/standards, and •
Enables more effective competition for government funds and
resources.
It is expected that IrDA and FSTC will jointly approach BITS (see below)
with a proposal to create a digital payment system based on infrared
communications technology, standardized messaging within the IR medium,
and palmtop grade appliances. Banking
Industry Technology Secretariat (BITS)
As an arm of the Financial Services Roundtable (formerly the Banker’s
Roundtable), BITS fosters the growth and development of electronic banking
and commerce in an open environment. The organization intends to encourage
greater choices in financial services software, access devices, networks,
and processing capabilities for the benefit of financial institutions and
their customers. BITS promotes safety and soundness in payments systems
and in electronic banking products to provide safe, efficient, and
low-cost services. BITS views itself as the guiding hand and a
clearinghouse for emerging banking technologies.
With the blessing of BITS and the joint work of IrDA and FSTC most, if not
all, of the major obstacles to widespread deployment can be overcome. Operations
and Program Objectives Project
Organization Following
a format suggested by FSTC operations, the project will be directly
managed by a Project Manager whose activities will be supervised by a
steering committee composed of members from both IrDA and the FSTC.
Membership in the project will be by open invitation to association
members and others subject to the approval of both associations. Founding
Document The
white paper, expanded into a proposal format, will become the founding
document and will contain executive summaries of the project objectives,
agreements concerning the participation of each project member, language
governing the creation and management of intellectual property, and
discussion on other matters relating to orderly execution of development
work. Project
Funding While
treated in the Founding Document in greater detail, funding for the joint
project is expected to be in the form of prorated contributions to the
total cost of the project. Total cost here means the valuation of monies,
contribution of labor and materials, and components of intellectual
effort. Project
Deliverables Project
deliverables will be outlined in greater detail in the Founding Document.
At a minimum, the development work will produce a financial messaging
specification document specific to infrared communications media and a
working prototype Digital Payment System with features sufficient to
demonstrate viability and broad usability. Marketing Both
in the early stages of establishing the membership list, and later during
the progress of the project, significant effort will be devoted to
evangelizing the Digital Payment System project. The team will prepare
press releases, distribute articles and essays to trade publications, and
seek to create, or participate in, educational forums to further broaden
understanding of the system and its benefits to each of the stakeholders.
Lastly, the team will encourage pilot tests and prototype installations
that demonstrate increased functionality and wider applicability. Conclusion It is possible to create benefit for consumers, merchants, and financial institutions alike by developing a new payment system. It is possible to create one payment platform with multiple options. It is possible to provide real value to the consumer without requiring major behavior modification. All of these concepts have worldwide implications. The objective is to identify and assure the benefits for all parties involved in the financial transaction. Principal among these are the consumer, the merchant, and the financial services community.
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