s a student of payment technology white papers, I couldn't help but wonder why Visa decided to issue this first-in-a-series of white papers. The second page of the white paper held the answer to my question.

The premise behind this document is that efficient payment systems translate directly into higher standards of living and benefits across society. And not surprisingly, I read, "...the most efficient vehicle for maximizing [benefits is] the self-regulating, joint venture model represented by member associations such as Visa International."

The next twenty pages of the white paper present a historical and economic argument for the need of governments (especially those of underdeveloped countries) to accelerate the transition from relying on cash and checks to using electronic payment methods maintained by Visa.

While the document might stretch the reader's imagination by claiming that payment systems alone can raise a country's standard of living, it does contain a number of insights that help explain the behavior of major payment processors such as First Data Corp. and Total Systems (TSYS).

Executive Summary

Major payment processors and other large financial institutions are turning their attention to the deployment of electronic payments internationally. The Visa white paper suggests that the motivation behind these actions might lie in the fact that "as much as 70% of the world's population" is unbanked. And moving these individuals and their household assets into a country's banking system would create multiplier effects resulting from the increased lending and investment opportunities they generate within an economy. This logic is further strengthened by the efficiency of digital payments over physical payments. With large capital investments already made to create the global electronic payment networks, the incremental cost of processing additional transactions would shrink over time.

This places more and more pressure on underdeveloped countries to encourage their constituents to replace paper (currency and checks) with plastic. It fuels a ROI for deploying to retailers interfaces to the Internet and new terminals; it also places smart cards in the hands of consumers.

History's Lesson About Payments

Let's put these arguments in perspective. The white paper's first chapter describes payment lessons learned from history. As societies evolve, they seek more efficient and convenient forms of payment exchange: barter was followed by coin and currency, which was followed by electronic payments.

In the evolution of payments, there has been a consistent set of drivers: lower cost and more convenience. The "golden rule" tends to operate in payments as in most other aspects of economic life: "He that has the gold, rules." Visa International is confident that its payment offerings will prevail based on the historical lesson that consumers faced with payment alternatives migrate to the cheapest and easiest to handle.

Lower Cost, Higher Value

The next chapter delves into greater detail regarding the current mix of payment options and how electronic payments benefit both buyers and sellers. Visa believes that parties on both sides of the transaction are looking for increased convenience and security, which electronic payments can provide consistently better than checks and cash.

The flexibility of electronic payments enables the design of card service offerings such as 'pay in advance' (stored value), 'pay now' (debit) or 'pay later' (credit). These capabilities allow plastic cards to be molded around major payment categories such as payroll, government benefit transfers, large ticket purchases, recurring payments and small value transfers.

By using cards instead of cash, consumers and merchants can also benefit from improved security. Lost or stolen cards are replaceable; lost or stolen cash is not. Authorization and guarantees supported by regulations to resolve dispute resolution are significant benefits to all parties in a payment transfer. And sellers of merchandise or services understand the reduced risks associated with theft or loss when electronics replace cash receipts.

The Big Picture

In the chapter titled 'The Big Picture,' the authors of the white paper explore the potential benefits that could be gained if electronic payments used in the twenty most advanced countries are overlaid on the rest of the world.

Here the strongest argument is that cash-based economies are experiencing a serious drag on their standard of living, which is caused by the variable cost nature of this type of payment method. In contrast, global electronic payment networks basically operate on a fixed-cost platform, with smaller and smaller unit costs as they scale to larger volume loads. The more transaction volume moving through an electronic network, the lower the average cost per transaction. The white paper compares individual countries to show these differences can be as much as four times greater for cash compared with plastic.

The credibility of this argument is stretched when the differences expand to such a degree that an accelerator effect takes hold and significant increases of incremental spending take place. This is because of the efficiencies of electronic payments. It is hard to imagine that electronic payments, even in countries like the U.S. (where they represent less than 20% of total payments), could be generating upwards of $10 trillion of additional GDP, this white paper reports.

The white paper authors use this argument to encourage government policy-makers to foster electronic payments over cash/check payments. They also begin to diverge from their earlier research findings by encouraging governments to step in and set policy in favor of one method of payment (card based by joint-ventures such as Visa) over another, rather than letting the marketplace make this decision in its day-to-day behavior.

Also, the tenacity of cash transactions is notable in the white paper's payment mix charts, but is conveniently ignored in its conclusion. One chart analyzes and projects payments from 1997 to 2010. Throughout this time period, the percentage of cash transaction remains virtually constant at greater than 40%.

With all the discussion about fixed and variable costs, the realities of interchange fees dictate that the use of bankcards such as Visa or MasterCard is not efficient for purchases made below $10. The implied assumption is that electronic payments will not have a serious effect upon this large segment of payments. The emerging technology of micro-payments was simply not considered in the scope of this document-probably because "joint ventures such as Visa" haven't conceived of a means of delivering these transactions within their current business model.

Excerpts from this Research Report

• "Ultimately, consumers determine what form of money is most desirable-people simply substitute cheaper and more convenient forms of money for expensive and inconvenient forms. It is ultimately through this substitution in use that new money forms embed themselves in the marketplace."
• "Through shared investments, the Visa association created a global system to authorize transactions, clear and settle electronic payments, codify operating regulations to protect consumers and merchants alike, and set interoperability standards to ensure that, unlike cash and cheques, a Visa card could be used anywhere in the world."

Benefits to Buyers

• The convenience of global acceptance, a wide range of payment options and enhanced financial management tools
• Enhanced security and reduced liability for stolen or misused cards
• Consumer protection through an established system of dispute resolution
• Convenient and immediate access to funds on deposit via debit cards
• Accessibility to immediate credit Benefits to Sellers
• Speed and security of the transaction processing chain-from verification and authorization to clearing and settlement
• Freedom from more costly labor, materials and accounting services required in paper-based processing
• Better management of cash flow, inventory and financial planning because of swift bank payment
• Incremental purchasing power on the part of the consumer
• Cost and risk savings by eliminating the need to run an in-house credit facility A critical challenge for many economies is drawing more people-and their capital-into the banking system. The question for policy-makers is: How do we get more people under the big economic tent?

Web Sites for More Information

www.greensheet.com/CheckStudy/ConsumerSurvey.htm

The Green Sheet, U.S. Consumer Survey of Payments, 1999.

www.mastercardbusiness.com/assets/resource_center/whitepapers/one_card_2000.pdf

One Card Programs Continue to Gain Momentum, Deloitte and Touche. A study commissioned by MasterCard to explore the requirements of corporate card programs.

http://webevents.broadcast.com/ibm/fss/payments/docs/062303_FSS_Payment.pdf

Cashing in on Retail Payments, June 2003, IBM Institute for Business Value. IBM's perspective on the importance of payments for the banking industry and various projections of possible changes.

Eric Thomson is Executive Vice President of Profit Source Advisors, LLC. He can be reached at eric.thomson@profitsource.us.