Why do I need to know what payment systems my vendor accepts?

The answer seems obvious. Because I need to be a member of one of the payment systems my vendor accepts in order to complete a transaction. But it then occured to me that it does not necessarily have to be so. Wouldn’t it be simpler if I could use whatever payment system I want to release a certain amount of cash and if the vendor can have some guarantee of being the owner of the money before releasing the good to me? The answer is of course yes!

In fact, to get back to the former answer, it is not necessary that one organization like Visa, PayPal or a coalition of them controls the entire chain for making the whole thing possible. It’s only because this entire chain of processing takes today very long – like days or even weeks – to complete that my vendors asks me to use the payments systems they accept. They need to be sure of receiving the money, some day, to agree handing the good over to me now.

So, if we had an open and real-time settlement system, we could perfectly imagine that we would no longer have to care what is the ultimate system that vendors would be using.

To give a brief explanation of what a settlement system is, I’ll just say that this is a way to make valid the change of ownership of a certain financial property, in this case cash, from one party to another. A real-time system would be a system that would process the entire chain in a couple of seconds. And an open one would be a system which would let any cash sending system and cash receiving systems interoperate.

So, if my vendors could know in real-time that the money I’ve just parted with is now in his full posession, they would be perfectly happy completing the transaction. Which means I could send the money from my mobile phone – or any other online device – using whatever payment system I would like and I would feel comfortable using. My vendor could also use the payment system most convenient for him. As long we are both happy and trust our payment providers, we would no longer have to determine if both of us are members of the same systems.

Now, do you think it all sounds science-fiction because we can not create such an open and real-time settlement system or because current payment service providers have too antiquated backbones to dream processing such a transaction in real-time and have no incentive to move to an open system? If this is the latter, this suggest the word “Disruption” to me.

2 Responses to “Why do I need to know what payment systems my vendor accepts?”

  1. 1 yatahonga January 22, 2009 at 12:22 pm

    Hi Frédéric,

    To address your payment systems’ agnostic requirement first, what about a basic fund transfer request to your financial instutions that they should send funds to credit the vendor’s account at his/her own bank?

    – The only requirement for the vendor is to indicate his account number and his bank’s BIC (and of course to have a bank account so the model might be ready in heavily unbanked developing countries).
    – The only requirement for you is to use your own bank’s e-banking front-end to request for the transfer (which the bank will turn into the appropriate good ol’ SWIFT MT103 message).
    – The only requirement for the banks is to be on SWIFT.

    Now, to make sure that both parties are protected:

    Your requirements only look at the vendor’s assurance that he will be paid for what he is shipping. But what about addressing also your own requirement that goods you will receive are indeed the ones you have ordered and paid for?

    To address both needs, a simplified electronic retail version of the well-known Letter of Credit (http://en.wikipedia.org/wiki/Letter_of_credit) used in the corporate world would do the trick:

    1. You (the buyer) gives instructions to your bank you accept to have funds wired to the vendor’s account but only once he/she presents a specific document confirming that goods have been shipped (tracking number from the shipping company, invoices, whatever you agree upon with the vendor).

    2. The vendor is made aware of this by his bank which would have received the above instructions from yours. The vendor has now confidence that he will be paid if he does his part of the deal but even more importantly that a bank is comitting to it (and they should trust a bank more than you so even better).

    3. They present the selected document and your bank releases the fund transfer once it has validated it.

    4. Your account is debited and everyone is happy (courtesy of SWIFT and at least one enlightened banking systems provider).


    • 2 Frederic Baud January 22, 2009 at 2:02 pm

      Olivier, you’re right that I was not explicit enough and that I’ve voluntarily talked about the specific case of a transaction at the point of sale, where the good is released immediately, hence the requirement for real-time processing.

      When delivery and payment are not done at the same time, real-time settlement is not necessary – and nor desirable. So I support the idea of a letter of credit, even if I would recommend having a third party providing custody of the money instead of the buyer’s bank. But we can transfer the question of the unwinding of the transaction at the moment the good is delivered. Wouldn’t it be nice that the delivery man asks for a confirmation (that will make the letter of credit irrevokable) before releasing the good into the buyer’s hand? And it would probably be nice to have an open and real-time system then to support this last step.

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