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Electronic Payments

July 17, 2016

It’s a curious thing that I’m investigating electronic payments, as I do most of my payments with cash.  I always pay restaurant bills with cash, and pay cash for my groceries.  I do use a credit card for other purchases, though.

I’ve been following the Mintchip project of the Royal Canadian Mint.  It was intended to develop a cash replacement, a way to eliminate coins and small bills.  I was disappointed to hear that they had cancelled the project and sold Mintchip.  By that time, it had become just another payment system.  Of course, payment systems of all sorts are one way to eliminate cash transactions.

In parts of Africa, people use a payment system called M-pesa that uses text messages from ordinary mobile phones to transfer money.  These people generally don’t have bank accounts.  Instead, their telecom company provides accounts, and allows them to transfer funds in and out of these accounts.  An M-pesa trial failed in South Africa, likely because most people there already had bank accounts, and already used credit or debit cards for payment.  Another reason for that failure may have been the requirement for an official bank to be involved, rather than a telecom company.

In North America, everybody seems to carry a mobile phone, and most of them are smart phones!  Well, maybe only 75% of people carry them.  The major vendors of mobile phone operating systems all have their own proprietary payment systems.  There are three right now.  Since they are all different, merchants have to buy wireless payment machines that at least handle the popular ones.

In parts of Asia, people use a more flexible payment system, based on a mobile phone messaging application.  The phone itself displays an image that can be scanned by the clerk at the checkout counter.  This scheme works the same with any mobile smart phone, requiring less investment by the merchant.  It may soon appear in North America.

I notice here that credit and debit cards are still the most popular way to make payments.  Using them certainly does eliminate the need to carry cash.  Cash is quicker, though.  That’s one reason I prefer to pay with cash most of the time.

What do people want in a payment system?  I suppose that convenience is the main thing.  Some people also want to collect points of some sort.  I don’t.  Most people also want a payment system that’s free to use, although they often don’t consider hidden charges.  Certainly, fees the merchant has to pay are of no concern to most customers.

What do merchants want?  I suppose the main thing is to attract customers, and certainly not to drive them away.  They also want low cost, of course.  Merchants have to pay for the point of sale equipment, the back-end computer system, and for payment services.  In the case of credit or debit cards, there’s a whole list of companies that take their cut.  The banks and credit card companies are only part of the list.  Merchants also want security, to avoid the bad publicity that occurs when millions of credit card numbers are disclosed.

There is something new out there in the world of payments, something called a blockchain.  It’s an open distributed electronic ledger.  It’s appeal is that it can replace banks, although anything doing banking business in this country is protected by legislation.  Banks, of course, have their own ledgers where transactions are recorded.  These were once books that were filled in by trusted clerks writing with quill pens.  Now they are computer databases kept behind locked doors.  Used appropriately, a blockchain should be able to provide secure and low-cost electronic payments.  No doubt banks and other large financial institutions will want a piece of this market.



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