When the internet first boomed in popularity, there were a number of industries and activities that analysts and others speculated would soon be “disintermediated”: estate agents (hopefully), traditional media and, of course, many “bricks-and-mortar” retailers.
The reality, so far, has been mixed. While Comet, Woolworths and other long-established high street retailers have been swept into the dustbin of history, estate agents have proved more resilient. But in many respects, the bracing effects of the internet have only just begun to blow through the global economy, and one area that it is poised to shake to its roots is the traditional payments system.
It is not simply about the technologies, such as digital wallets or near field communication (NFC) payments, with which the consumers of tomorrow may spend their money. Indeed, digital wallets, such as Mondex, have been trialled repeatedly over the past two decades and generally been found wanting by consumers who have struggled to see the point of them when there’s a cash machine on every corner.
Instead, the revolution will occur at a more fundamental level in terms of the structure of the payments system and infrastructure, cutting out middlemen and slashing the cost and complexity of making payments for everyone.
According to David Birch, founding director of payments consultancy Consult Hyperion, retailers are increasingly dissatisfied with the system they have been working with for some 50 years.
“You are beginning to see the opening shots fired in the war between the payment schemes and the banks,” he says. Merchants, he adds, are asking: “Why do we need ‘acquirers’, processors, Switch, Visa, MasterCard? The merchants don’t want all that stuff.”
Rather than working via a “merchant acquirer”, which then uses the infrastructure of, say, Visa International to arrange a payment from a customer’s bank to a retailer’s bank account, they want a relationship with customers’ banks so that they can arrange to take payment from customers directly.
In other words, major retailers such as Tesco and Sainsbury’s want to cut out the middlemen. If their customers bank with Nationwide, for example, Tesco and Sainsbury’s want to be able to handle the transaction themselves, directly with Nationwide.
“What they really want is, if you go into Tesco, you run your Tesco app [on your smartphone], which has all your coupons and offers. When you go to pay, you punch in your PIN and it’s done. The transaction will go directly through FPS [the Faster Payments System] and when you hit ‘okay’, there’s a ‘FPS push’ and the credit goes directly from your bank account to Tesco’s bank account within a few micro-seconds,” says Birch.
In the process, they would not only be able to cut the cost of payment processing, but would also ensure immediate payment, rather than payment in three working days, thereby improving their cashflow. Their suppliers, however, are likely to have no choice but to continue to accept payment terms of 30, 60 or more days.
Partly in preparation for this revolution, Tesco and Sainsbury’s – both well-represented at recent payments industry conferences – now have their own, wholly owned banks.
Tesco bought out its banking partner, Royal Bank of Scotland, for £950m in 2009 just months after the bank was nationalised in the aftermath of the global financial crisis. Sainsbury’s, meanwhile, recently concluded a £248m deal to buy out its banking partner, Halifax Bank of Scotland (HBOS), now owned by Lloyds Banking Group.