Tim Jones, CEO of Simpay, talks to Parveen Bansal about the future direction of the payments industry and the power of technology to shake up accepted ways of doing things.
The payments world has evolved in a complicated way, says Tim Jones, chief executive officer of global mobile payments scheme Simpay. This state of affairs – due to “all manner of reasons” – has led to the current way in which the world’s payment systems operate, which he describes as “complicated, and by no means optimal”.
With more than 15 years’ experience at NatWest in the UK, and as co-founder of Mondex (with Graham Higgins), Mr Jones is passionate about payments. “New technology and architecture developments enable us to take a blank canvas approach to creating solutions for a particular problem (in this case the global payments arena), and this can then be compared with what already exists,” he says. It is, he adds, a useful discipline when looking for solutions to a problem.
The card pioneer
He cites the invention by Dee W. Hock 40 years ago of BancAmericard (which later became Visa). “Dee was a true industry visionary – he realised that the charge card concept of Amex and Diners was powerful. But, they were effectively single-company ventures, which effectively limited their power. Dee realised that if the issuer-to-cardholder relationship could be decoupled from the merchant acquirer-to-payee relationship, then this would offer a highly attractive system of trust between merchants, card-holders and issuers.”
What he created, explains Mr Jones, was effectively a three-box model where, for a transaction to happen, not only are the merchant and the consumer engaged, but behind this there are three “boxes” of effort: the acquirer (the bank dealing with the merchant), the hub (routing the payment to the relevant issuer), and the issuer (the bank dealing with the card holder account). This is effectively what Visa and MasterCard represent.
New contender
However, he says while this three-box model was visionary then – and still works and is popular now – it is under threat from new payment models that embrace new technology. He is referring specifically to the internet, and offers the example of PayPal.
PayPal is the value transfer system that is widely used to make payments on the online auction site eBay. The cost of an intra-PayPal value transfer is probably less than $0.01. “It offers a profoundly cheaper way of transferring value when compared with the cost of a Visa or MasterCard transaction which is probably an order of magnitude higher,” says Mr Jones.
“Any exchange of goods and payments normally requires a clear and unambiguously stated shared contractual agreement. The embodiment of this shared contractual agreement is usually a brand. PayPal offers just this,” he says.
The PayPal model, he explains, is a single-box model. There is a single pool of liquidity where payers and payees have chosen to place a share of their liquidity. He says, “the payment is just a shift of value in the database.”
Essentially this offers buyers and sellers on eBay the ability to pay each other without the money having to go through the costly process of settlement and reconciliation (as happens in the case of card payments). “If you can continue to pay across a whole value chain using PayPal, then you can pay down a supply chain without incurring any cost for settlement. The liquidity in PayPal is circulating without settlement.”
Cheaper and easier
What results is a sort of ‘voluntary conspiracy’ between a group of buyers and sellers to lodge liquidity in one bank – the PayPal money pool. Except that PayPal is not a bank, only a special purpose payments engine that has crunched the three-box model into a single logical point. “It is a profound threat to a three-box model because it’s cheaper and easy to use.”
Mr Jones is not suggesting that PayPal will displace retail banks. “People will still have their retail banking relationship with a bank, but what may happen is that more and more payments are made using PayPal – because of the ongoing voluntary conspiracy to use PayPal for value transfer and because it is an order of magnitude cheaper than the cost of a card transaction.”
This is only possible now because of the pervasive nature of the internet. It has enabled the creation of an infinite number of logical connections to a single logical point, something that was not previously possible without a relatively cheap and secure communications channel. “Given that many point-of-sale and mobile devices today are internet-enabled, the distinction between the physical layer and the network [internet] of payments begins to disappear.”
He dismisses any legal rumblings about PayPal as “noise on the line”. “There has been discussion about its regulatory status, but it is irrelevant. It’s got its status in America, its status in Europe. I believe it is an electronic money issuer (ELMI) – fully regulated – and, with a passport, it should be able to passport its ELMI status around Europe.”
And it is with some awe that he notes: “Every time I visit the PayPal website another few million members seem to have signed up. They already have over 40 million members worldwide.” The fast global adoption of PayPal is a classic network effect.
“The banking community has to understand that it hasn’t responded to the changing payments needs, and PayPal is working off a profoundly different cost base from it.” He says it poses a significant threat to the fundamental cost structures inherent in the way the banking community has organised those kind of front-end retail payments, and that’s what banks should recognise.
Mr Jones describes his start-up venture after he left Natwest, called Purseus. “Purseus effectively recognised that the same fundamental cost and simplicity logic that PayPal represents for small payments can also be put to bear for commercial payments,” he explains. So Purseus was PayPal for banks. The concept was that banks would have voluntary agreements to place liquidity into a single bank called Purseus, and by using existing messaging standards and the internet, you could effect a commercial value transfer in multiple currencies at the cost of a domestic clearing house.
The idea was that Purseus would be one big liquidity pot – filled in the morning and emptied at the end of the market day. This would have removed the need to shift liquidity – a costly exercise with much waste associated with it. While noting its similarity to continuous linked settlement (CLS), Mr Jones highlights that in the case of Purseus, it would not have the same clearing bottleneck that CLS has. He says that while CLS uses the same architecture, currently it only focuses on managing foreign exchange settlement risk.
“Purseus would have offered a blindingly cheap and simple settlement system,” says Mr Jones, noting that banks could then use the high velocity of circulation to leverage a small amount of liquidity.
Similarly, he explains how Purseus was also a model for a global automated clearing house (ACH) able to settle spontaneous commercial settlements or pay salaries.
“Automated clearing houses do exactly the same thing around the world; the only reason why there are separate ones for each country is political. The Euro Step 1 and Step 2 from the European Banking Association is hoping to create a single eurozone ACH eventually,” says Mr Jones.
The creation of the euro as the single currency in the region requires that there is a single European payment area. However, he asks: “The business requirement is not just for a single-currency ACH, so why not create a multi-currency ACH for businesses that are present in multiple countries across different regions, and create a whole new magnitude of economies of scale?”
Purseus was folded after several years of trying to gain support. “While bankers understood the concept and realised that it was cheaper, faster and simpler, they were not willing to back it. The quantity of change that Purseus represented was very profound. It basically said that Swift is great but what you need is a messaging standard. You don’t need Swift; you can close it down. And so a whole part of the panoply of correspondent banking as an industry goes away; it is unnecessary.”
Recognising the issue
At present he sees a temporary period of major frictional hold-up in the industry. What is clear is that once the difference between what is now and what can be becomes very great it can lead to extraordinarily rapid change.
He gives the upheaval in the Swiss watch industry caused by the arrival of quartz technology as an example of what happens when there is a credible undermining of a unique selling point, however well established.
Mr Jones emphasises that banks need to be clear that whatever part of payments they are involved in, there are huge opportunities for change and cutting costs. “To the extent that some of the leading bankers recognise this as a real issue, it is up to them to drive the industry and its trade associations to effect change.”
