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Battling for an edge in payment processing methods and technologies

According to a 2009 report from the Federal Reserve Bank of Boston, the number of check transactions in the United States has been declining at a rapid pace (estimated to drop to 20 billion in 2012 compared to 40 billion in 2002). The number of cash transactions has also declined, but not at the same pace as check transactions. Consumers instead are relying on debit cards and credit cards to make payments. The small amount in fees that banks charge merchants for each card transaction multiplied by the billions of transactions that occur every year brings in close to $48 billion in interchange fees for financial institutions. Despite that large amount, the use of debit and credit cards as a payment instrument has not yet reached its true potential.

According to a report from RBS, the number of electronic payments is expected to grow at a rate of 20 percent a year to reach 30 billion in 2013, with debit, credit and prepaid cards contributing the majority of transactions. The number of mobile payments is expected to grow at a 48 percent annual rate, reaching 15 billion in 2013. APAC and BRIC (Brazil, Russia, India, China) countries posted the most growth in the number of non-cash transactions. From 2001 to 2009, BRIC experienced a compound annual growth rate (CAGR) of 12.4 percent in non-cash transactions, with cards accounting for 38 percent of non-cash transactions in 2009. Among BRIC countries, Russia and China led with 25.5 percent and 20.8 percent CAGR, respectively, in non-cash transactions from 2001 to 2009. In China, cards accounted for 65 percent of all non-cash transactions in 2009, compared with just 12 percent in 2001.

In developing countries like Kenya, alternative payments using mobile phones are proving successful. Vodafone and Safaricom launched M-PESA in 2007 that allows callers to transfer payments by using short message services (SMS). According to a report from NACHA, as of mid-2009, M-PESA had 6.5 million customers and conducted 2 million transactions a day. A popular payment method in Korea is direct mobile billing, in which consumers use their mobile phone to make Internet purchases, with the cost applied directly to their mobile phone bill. Verizon and AT&T are testing direct mobile billing services in the United States.

Evolving technology
What lies ahead for payment processing methods?

In North America, debit and credit cards have traditionally dominated non-cash and non-check payment transactions. However, rapidly changing technological innovations are influencing the way consumers make payments. A leading technology in next-generation payments is Near Field Communication (NFC), which enables payments using mobile phones that have an NFC-enabled chip. Google Wallet, a major initiative by Google, currently uses NFC on Sprint's Nexus S 4G for Citi PayPass eligible MasterCard credit cards and the Google Prepaid Card. Although Google plans to add more cards to Google Wallet, the technology faces challenges because only 1 percent of point of sale (POS) devices in the United States are currently NFC enabled. Aite Group estimates that POS payments using mobile devices will grow to more than $70 billion by 2015. Compared to total dollar payments at POS terminals, that is a relatively small amount, but it is a step toward making mobile payments at POS terminals a mainstream alternative.

Another emerging player is PayPal, which is currently equipping 2,000 Home Depot stores to accept payments using a mobile phone number and PIN combination. PayPal has experience handling online payments and risk management, but competitors note that paying with a mobile number and PIN combination poses significant risks. The jury’s still out as to whether other big retailers will follow Home Depot’s lead and partner with PayPal.

Square, which enables merchants to accept credit card payments anywhere with an iPhone, iPad or Android phone, is another payment alternative that does not require merchants to install POS terminals. PayPal recently introduced PayPal Here, which works very similar to the service from Square.

Critical factors, such as adoption by merchants, ease of use for customers and security/privacy concerns, will decide who or which technology or model will win the payment processing battle. There’s little doubt, however, that the payment landscape will continue to evolve over the next few years as more technological innovations and business models emerge in payment processing.

Comments

Great article!

I also believe that the payment landscape will see an influx of competition from start-ups trying to gain a piece of the pie through innovation and niche markets; existing firms will aim to expand their presence in the industry through growth and new endeavors.

Yes, I agree with this. Credit card transactions have been increased since last five years. People are very keenly interested in online payments rather than cash and check payments.definitely the growth will be increase day by day. There are many benefits of online payment that is the reason people are rapidly moving towards online credit card processing. The advancement of the technology is that merchant can maintain the order; check the list of the transaction of mobile. So futures prospective are high.
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merchant services credit card processing

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