Sunday, April 25, 2010

A world where push payments rule

Airplanes have a very specific characteristic. They can only fly forward. It is impossible for aircraft to fly in reverse. The aerodynamics and principle of flight dictate that flying should be in a forward motion - this is just the way that it is. The problem with the payment world is that it is running in reverse. The fact that the payee initiate the payment process and not the payer is the wrong way round. In the world of check payments, of debit orders and credit card payments, the guy receiving the money must start the electronic process. Also referred to as a pull payment. This is akin to allowing some-one else to take cash out of your wallet, rather than you taking the cash out and handing it over.

The danger of this approach is that fraudulent transactions are much easier, controls and audits are much more complex and a transaction takes a long time to complete completely. (because one must allow the payer to dispute the transaction and then to be able to reverse or refund the transaction). This became evident to me recently when I read about the conflict between Blippy and Amazon (read here). The concerns that Amazon has about another system getting access to card payment information is real, because this information can then possibly be used to pull money (fraudulently) from another credit card.

Payments should be a push affair. The payer should start the payment process and money should drop in the payee's account with a real-time confirmation. This approach is easily deployed by means of mobile payments and millions and millions of push payment transactions occur daily in emerging economies where mobile wallets take-up is more dramatic than spectacular. It would have been great if payments in first world countries could have been architected in the right direction (rather push than pull). I am sure that new innovations (like Blippy) would then have taken off much faster and with less risk.

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