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«July 2012 THE WORLD BANK Acknowledgements The preparation of this paper was led by the Financial Inclusion Practice of the World Bank. Lead author is ...»

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Credit cards were introduced in the 1950s, and their use grew rapidly over the next three decades. The infrastructure of credit cards was developed and managed mainly by card associations Visa and MasterCard. Companies such as American Express, Diners Club, Discover, and some other national and regional brands also introduced payment cards in the form of charge cards during this period.21 During the late 1980s and 1990s, with increased sophistication in technologies relating to information processing and telecommunications, which among other features allowed online transaction authorization by the issuer, credit cards became a widely accepted form of payment in many countries. As volumes grew, the processing of credit card payments also became The Global Payment System Survey 2010 showed that a total of 92 countries were served by at least one ACH. This is a small increase in relative terms to the 2007 survey which showed 83 countries being served by an ACH. The existence of ACHs is more frequent across the European Union, other developed countries and in Latin America and the Caribbean. They are also more frequent in larger countries.

USAA Bank in the U.S. launched the first iPhone application that allows users to capture the photo image of a cheque and send it to the bank for processing. This development has moved part of the process of cheque processing right down to the beneficiary of the cheque.

Charge cards, unlike credit cards, need to be settled in full at designated intervals, typically once every month.

more complicated. To address this need, third-party payment service providers started to emerge to provide specialized services related to both the issuing and the acquiring sides of the business. To address these complexities, the international card associations developed rules and standardized procedures for handling transaction flows. They also created international processing systems to handle the exchange of money and established dispute resolution procedures, including arbitration mechanisms to handle disputes between consumers and merchants.

In the 1980s, another form of payment card, the debit card, started to evolve as an important form of electronic payment instrument. Today, in some countries where credit card adoption has been slow due to limited infrastructure for credit information and other reasons like cultural preferences, debit cards have become the most popular electronic instrument for making retail payments. The growth in debit cards has been dramatic over the last 25-30 years. At first, debit cards emerged as an enabler for moving customers from bank teller counters to the then newly deployed ATM systems. Over time, instead of using the card to withdraw cash from an ATM to pay merchants, bank customers could simply present the card to the merchants and have their bank account debited directly. Given this tremendous potential, debit card products evolved globally and began using the infrastructure that was already in place for processing credit card transactions at the point of sale. There are a few variants of debit cards like ―delayed‖ debit cards, where the payment instruction resulting from the usage of the debit card for payment results in placing a hold on the funds in the underlying account, as against, resulting directly in a debit. There were also variants based on whether the authorization was taken online or offline. The offline authorization cards mostly relied on information recorded on the chip.

The market for prepaid cards, also commonly called stored-value cards, has also emerged as one of the fastest growing segments in the retail payments industry.22 In the 1990s, when prepaid cards were first issued, they were mostly issued by non-financial businesses and used in limited deployment environments such as mass transportation systems. In recent years, prepaid cards have grown significantly as financial institutions and non-bank organizations target unbanked and migrant remittances segments. Some prepaid cards already use the existing infrastructure for traditional credit and debit cards.23 Technological innovations in the way information is stored (e.g., magnetic stripe or computer chip), the physical form of the payment mechanism, and biometric account While the terms prepaid cards and stored-value cards are frequently used interchangeably, differences exist between the two products. Prepaid cards are generally issued to persons who deposit funds into an account of the card issuer. During the pre-funding of the account, most issuers establish an account and obtain identifying data from the purchaser (e.g., name, phone number, etc.). Stored-value cards do not typically involve a deposit of funds into an account as the prepaid value is stored directly on the cards.

These are typically ―branded‖ prepaid card, i.e., supported by an international payment network such as Visa or MasterCard. Branded prepaid cards have similar functionality to debit cards, the only relevant difference being that prepaid cards are not linked to a current bank account, as is the case with debit cards.

access and authentication are converging to create efficiencies, reduce transaction times at the POS, and lower transaction costs.

Since the late 1990s, financial institutions and retailers have also been developing electronic payment instruments for use mainly in the Internet. Using specialized accountto-account services, individuals can transfer E-money value to other individuals or businesses. Consumers can use the payment instruments for purchases at retailer websites or they can transfer cash to other individuals in some cases identifying the recipient by email-identification. Pre-funded accounts that consumers can use for online auction payments are among the most recent applications. In these applications, individuals use a credit card or signature-based debit card number to pre-fund the web certificate or electronic account, and recipients redeem the value from the issuer at the time of the transaction. PayPal is the iconic product in this space.

The increasing popularity of social networking websites is also translating into increased e-commerce activity amongst the members of the social network and also with external entities who create content such as games for sale on such sites. This closed user group kind of environment is creating a demand for efficient micro-payment solutions.

Facebook, one such social network, has created a closed-loop payment product ―Facebook credit‖ which is pre-funded account akin to PayPal with the restriction currently that it is used only for purchases in the Facebook environment. Payments and other fees accounted for $557 million in revenue for Facebook in 2011, up from $106 million in 2010, showing the dramatic growth in payment volumes on such platforms.24 Mobile telephony started spreading around the world in late 1990‘s. The inherent data communication capability of mobile phones caught the attention of banks and they started launching basic inquiry services like account balance inquiry, and slowly starting expanding the range of functions to also include transaction services like funds transfer.

This set of services collectively started being referred to as mobile banking. The worldwide subsequent rapid spread of mobile telephony in the 2000‘s and the early experiences with mobile banking, combined with the experiences with e-money products, motivated various entities to experiment with e-money products designed with transaction initiation through mobile phones as a key design aspect. This is referred to as mobile money in this document. As per a recent industry report,25 the first issuer of mobile money in the world was Smart Telecom in the Philippines in 2004 and the 100th mobile money product was launched in May 2011, with 88 percent of them being in developing countries.

In the quest to expand access to payment services in a cost-effective manner, banks and other institutions evolved a business arrangement of using local entities like small shops to provide basic payment and banking services on their behalf. Brazil was one of

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the early adopters of this model and various countries have begun adopting this in the last few years. This arrangement has been referred to as business correspondent or agent in this document. The technological developments in payment devices and mobile phones have been leveraged to equip the business correspondent with tools to service customers efficiently and effectively, and to a large extent have been able to expand the access to banking/payment services dramatically. A recent report26 by CGAP reported on seven schemes world-wide which had an agent network of more than 10,000 each— three from Brazil, two from India and one each from Philippines and Kenya.

Developments in retail payments have typically been evolutionary, with gradual developments enhancing the scope, efficiency, and scale of existing payment instruments and systems. Many of the developments can be seen as primarily providing an additional channel to access and use the same set of payment instruments. For example, remote data capture of cheques builds on the existing cheque imaging system, by changing the channel from presenting the cheque at a bank branch to one of scanning and uploading the cheque through an ATM, Internet banking, or mobile banking channel. The development however has a very significant improvement in convenience to the customer but also poses a range of security and other risks to the payment system. Similarly, mobile payments can be seen as essentially an additional access channel to a traditional or non-traditional account. However the developments involving usage of innovative payments mechanisms like mobile payments combined with the recent developments in the use of business correspondents and non-banking entities becoming issuers of payment instruments represent more than just increasing convenience. Such services are very quickly becoming a popular substitute in environments where the infrastructure for card-based or EFT-based payments is not adequately developed, and have the potential to dramatically expand the penetration of the electronic payment instruments by both an increase in more accessible service points and the introduction of new lower-cost business models.

To summarize: an analysis of the evolution of retail payments over the last five to six

decades shows the following trends:

 Successful adoption of advances in technology have played a key role in development of new channels for payment initiation, improved authentication and efficient processing;

 Development of new payment needs like at transit payments, Internet auction sites, and social networking sites recently, and a need for expanding financial inclusion also have led to creation of new payment mechanisms; and,  Payments infrastructure created for one payment product have been successfully leveraged for other payment products – like using ACH for online banking enabled payments and successful leveraging of infrastructure created for credit cards by debit cards.

McKay and Pickens 2011.

The trends in innovations in retail payments are discussed in the accompanying document: ―Innovations in Retail Payments Worldwide: A Snapshot. Outcomes of the Global Survey on Innovations in Retail Payments Instruments and Methods 2010,‖ and also in the recently published CPSS report ―Innovations in Retail Payments‖.27 II.3 Factors Influencing the Adoption of Specific Retail Payment Instruments The adoption of any given retail payment instrument by consumers, businesses and governments is influenced by how well-suited that instrument is in addressing the specific payment need of the payer and the payee, as well as how each of these perceive the instrument in terms of risk, liquidity, cost, acceptance, and convenience.

For a payer, the choice of payment instruments is typically influenced by the following


Cost: Usage of payment instruments entails both explicit as well as implicit costs.

Explicit costs include the direct charges paid by the payer for using the instrument, such as per-transaction fees. Implicit costs incurred include, for example, the waiting time for processing the payment request or the cost of time spent commuting to a designated place to obtain cash to make payments or to be able to use the non-cash payment instrument.

Safety and reliability: A payer needs to have a high level of trust that a payment instrument will work as expected and discharge the payer‘s payment obligation to the payee as required. This includes aspects related to system uptime, fraud misuse, correcting processing errors, and so forth.

Convenience: The payment instrument needs to be convenient to use. This includes aspects like what the payer needs to remember or what the payer needs to physically carry or use when making the payment, how much time the transaction takes to complete when using that payment instrument, and other related considerations.

Acceptance: A payer would want the payment instrument to be widely accepted for his payment needs. For example, a payment cardholder might not find his card useful if the card is not accepted at locations like grocery shops and restaurants, or for utility payments and other uses that constitute a significant share of the cardholders routine payment needs.

CPPS, 2012, ―Innovations in Retail Payments‖, Report of the Working Group on Innovations in Retail Payments, available at www.bis.org.

Payment confirmation and reconciliation: A payer would want a confirmation that his payment has been processed. This is to serve as a reconciliation record and also as proof that payment has been made.

For a payee, the factors influencing his choice of payment instruments are similar to

those mentioned above, but have some important differences:

Cost: The payee incurs in various explicit and implicit costs when accepting a payment instrument. Cash, for example, has associated handling and safekeeping costs. One major implicit cost is the time taken for receipt of funds into their accounts. The longer the delay, the higher the cost in terms of unearned interest and/or higher liquidity management costs, among others.

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