Innovation invades the payments world

If you are passionate about cars, you’ve probably participated in intense discussions about whether the Ford Model-T was the first street legal car. But no one ever talks about the first traffic light. Aficionados talk about whether Wilbur and Orville Wright invented the first aeroplane, but the first air traffic control tower probably just quietly came into place one day, keeping all these aircraft up in the air safely.

Innovation is exciting. Imagine looking over your shoulder to see a self-driving car next to you at an intersection, when you’re en route to the seventh test to get a driver’s licence. While you were marvelling at how technology is transforming the human experience, did you spare a thought about whether that car is licensed to drive? And who carries the insurance? Who is liable in case of an accident?

In the financial space too, while innovation and technology transform transactions, the rules of the game are being redefined in the background. Whether the players are a merchant and a consumer, or a small local bank and a global major, or two local entities reaching out to create a regional bridge, a regulatory safety-net ensures that the payments trapeze goes on without a hitch.

Payments today are affected by multiple policy-level factors — data privacy, banking regulation, cross-national rules and ensuring a level playing field for all players. The pace of technological innovation and change is an ongoing challenge to the process of regulation. The changes it makes in the way we do business need to be tracked and their impact extrapolated on the areas that come under the purview of ethics, best practice, law and the eco-systems around the law.

Let’s address privacy. Biometric systems that enable payments — whether it’s scanning your iris or your fingerprint for verification — may be the ultimate in convenience. The larger issues of this are privacy and data protection. Do I want my fingerprints to be sitting in a supermarket till? And if I do, is the payments processor also capturing them? What will they do with the data? As a society, it’s a leap straight out of our current comfort zone.

Another aspect is consistency. Even though technology today can embed a little payment chip in your bracelet or on a ring, just because we can is not good enough reason for central banks to give their approval. Regulatory authorities have controlled transactions ever since we moved from barter to money, which not only acted as a medium of exchange but also stored value over time.

So, while technology may evolve enough for you to scan a magazine advertisement with your phone and pay for that fancy watch via a mobile wallet, someone somewhere with a head for the fine print needs to ensure that the transaction followed all the rules for good payments behaviour, and that you know what to do if you end up with a dud watch or if the merchant does not receive his money.

Regulation, of necessity, lags innovation. But it is essential because you don’t want everyone to be running off and creating their own systems, or duplicating what already exists. Consistency in platforms to avoid replication and consistency in rules to ensure fair play are the two corner stones of these rule books.

Often this means that the stakeholders get together and agree to expend resources on a single platform; the mobile wallet in the UAE, a project by the UAE Banks Federation (UBF) comprising of 49 banks is an example.

The UBF recommends regulatory and legal frameworks for the direct debit system to work, which will allow consumers to use their mobile phones to pay. Empowering the consumer to take advantage of the simplicity of paying by simply tapping their phones on a point-of-sale machine requires robust legal background work.

This could be made easier by the fact that the bulk of electronic transactions — 85 per cent — take place at a domestic level, empowering the regulator to promulgate best practice rules around them. But this does take away from the fact that the regulation also needs to tie into global best practice.

One large piece of the regulation jigsaw relates to creating a common processing base. This becomes extremely relevant at a time when a multitude of domestic schemes are challenging the hegemony of global processors while also pushing for wider international acceptance.

GCC Net, for example, needs standardisation of rules tackling conflicts on charge backs. A bank in Kuwait may have a different set of rules than a bank in Ras Al Khaimah. For cross-border traffic to flow smoothly, you need a standard set of traffic lights to regulate it and the colours (or rules) must be recognised by all parties.

This will also create a sense of safety, leading to a more robust adoption rate for such payments innovations.

— Bhairav Trivedi is the Chief Executive Officer of Network International.