The payments industry has been heading in a more digital, more consolidated direction for years. And it looks like it has reached the era of real-time payment rails and payment solutions embedded in various mobile devices. More and more people adopt hardware and software solutions with the industry moving past the stage of credit/debit card use. And the banks and payment processors are thrilled with the developments.
They tout the advantages of the new payment solutions in every way they can. They praise adopters as those who will reap significant and real benefits from their choices as those inclined to “wait and see” will grow to regret their reluctance.
What are the less obvious advantages of the real-time digital payments era?
The Advantages of Instant Payments
Credit and debit cards allow users to access the funds a centralized third party holds for them and use these funds for payments. Consumers don’t have to carry around cash, but they give up direct control of their finances to an entity with its own interests and priorities.
Instant digital payments offer more for the same cost.
- As transactions are processed, the money is locked in the financial system, unavailable to either party involved in the transaction.
- Businesses and consumers must cover this “downtime” by maintaining cash reserves.
- The ones this processing downtime hurts the most are small businesses and consumers who pay their bills at the last moment.
- Real-time payments can have a huge impact on these two client categories.
The real-time payments industry has been looking to fill gaps in payments technologies, not necessarily replace any existing payment solution. This approach has opened the doors to innovation, however. And soon, real-time payments may become the new normal. Banks are already onboard and testing various payment solution prototypes they can take and customize according to their needs.
By adopting these payment technologies, last-minute bill payers get:
- The certainty that they won’t have to pay late payment fees.
- Peace of mind regarding the receipt of their payments.
- Access to flexible payment schedules.
- Transparency in billing.
Small businesses benefit as well, by:
- Tightening their control over their cash flow.
- Gaining access to improved liquidity due to the immediately available funds.
- Resolving customer bill questions quickly and easily.
In addition to the immediate certainty of payment reception, consumers value the security of their funds and personal information. This is the Achilles’ heel of the current payment processing industry. And no new technologies can solve this problem short of decentralization.
The Problem of Centralization
As long as centralized entities hold control over people’s funds and personal information, the possibility of fraud and abuse remains.
Everyone in the industry seems preoccupied with pushing technology and innovation, and no one seems concerned with the elephant in the payments room: centralization.
As long as the entities controlling the new payment technologies are banks and developers build their technologies according to the needs of banks, the problem of centralization remains.
The Consequences of Centralization in Payments
Unlike many of the touted advantages of centralized payments, the negative consequences of centralization are real, and we’re already dealing with them daily.
- Crazy fees. Centralized payment-handling entities can set their fees as they wish. You can pay late penalties, overdraft fees, out-of-network processing fees, international fees, unnecessary currency exchange commissions, or the simplest payment fees that tend to crawl ever higher.
- Data collection and sale. Social networks collect your personal information and sell it to third parties. They profile you to display optimized ads you are more likely to click. Banks do the same, but unlike social networks, they have access to your SSN, ID information, residence address, and information about your employment. Banks know how much you spend, on what, and where you shop. And when a human-controlled entity has unfettered access to and control over such information, it will abuse its power over it.
- Human bias. As much as they would like you to think otherwise, banks do not have your interest at heart. They have their own interests. And if, by any chance, those interests clash, you know who is getting the preferential treatment.
- Force majeure. Unforeseen circumstances that may prevent the bank from fulfilling its contractual obligations toward you, the client, are never more than a financial crisis away. Should its interests demand so, amid a financial meltdown, the bank will seize your assets, give your savings an arbitrary “haircut,” or deny access to your funds. History is testimony to that.
The issue of centralization is one the payments industry will have to face sooner or later. For the time being, we seem happy to cruise along, drunk on the more or less obvious convenience the fast-evolving payments technology gives us. We will, however, sober up one day. And the issue of centralization will be there in all of its dubious glory to welcome us to reality.