Citizens - the super user - its all about us (baby)!

Today's episode is all about you, the citizen, and your role in the payment's ecosystem.

With so much of what happens in payments,  terminology and brand names often occluding what's really happening.  No more so when it comes to us and what we do and how we use payments. So, I'm going to try and explain payments as they relate to us as Stakeholders and explain how this payments stuff works as we are the superuser!!!

So let's be somewhat self-indulgent let talk about us (baby) .......Let's dive in!

Payments Industry Insights

History of Payments

Payment System Explained

Corporate Payments Strategy

Payment Regulations Impact

ISO20022 Standard

Digital Payments Evolution

CBDC Advancements

Cryptocurrency in Payments

Financial Technology Education

Transcript

SPEAKER_01: 0:01

Welcome back, dear listeners. Welcome back to Bite Size Payments, where we look at the history of payments, how they work, and of course, who does what. So after a few episodes where we've explored payment rails, this episode is going to be all around the key stakeholder in payments. The stakeholder that is often overlooked, but frankly is at the heart of payments. We're going to discuss the most important stakeholder of all in today's episode. And it's all about you, dear listener. the citizen and your role in the payments ecosystem. As with so much in payments, the terminology and the brand names often include what's really happening. And that's just so true when it comes to how we use payments and what we use them for. So I'm going to try and explain how payments relate to us as a stakeholder, how they work, and why we are in fact the super user. So let's be somewhat self-indulgent. Let's talk about us. Let's dive in. So it really is all about us. The payments ecosystem, as we've tried to unpack is a complex network of banks payment processors governments businesses merchants etc but at the heart of it all is us the citizens the consumers if you will the users of these systems but whether you're buying groceries paying bills or sending money to a friend you are an essential part of this ecosystem so while nobody well very few Anyway, wake up in the morning and think, today's the day. Today's the day I'm going to make a payment. More likely you will want to buy a train ticket or a cup of coffee, etc. And therein is kind of the issue that we have. When we think of our use cases, we don't think about payments. We think about purchases. We may think about being paid or paying our bills, but all of these things are in fact payments. And we use and consume a lot of payment types. ACHs, cash, cards, immediate payments, occasionally RTGSs, real-time gross settlements, even cheques still. And sometimes even cross-border SWIFT transactions. So what types don't we use? Well, actually, not a lot. But we don't tend to think about it like that. In the earlier episodes, we took a journey back in time from bartering for goods to shells, how coins came about, how paper came about. But the way that we pay and are paid has evolved. Today, it's more likely that you'll talk about card payments or digital payments or mobile wallets because they're pretty much the norm. But it wasn't that long ago that we just had cash and cheques. You were typically paid in cash and are most likely going to be paid by ACHs, as Eric and I discussed. But what drives these changes? It's the need and behavior of citizens like you and me. Indeed, the shift towards convenience, security, and speed has shaped the payment methods that we use today. If it's easier to use, we use it. And then those things become the norm. We just use them all the time. So when was the last time you wrote a cheque? Do you even know where your chequebook is? Some people carry cash. I tend not to, but the truth of the matter is every now and then you do need it. But I can't remember the last time I was paid in cash. But you kind of get my point. These new, more modern things come, they replace some of the older ones, and it just becomes the norm. I think to be able to take this to the next level, I think it's probably best that I look at it in two different ways. One is how we get paid and how we pay others. But before I jump in, I just want to say that not everyone has equal access to banking and payment services. Financial inclusion is and should be always ensuring that all citizens, regardless of income or location, can get access to these essential services. However, even those that have access to these services don't always use them in the right way or have the ability to use them in the right way. And I'll try and pull that out later on. So, how do we get paid? Well, typically, there is a payroll that our companies run. And I can tell you that's an interesting job to do, having been involved in payroll in my very early years. And when that goes wrong, bad things happen and people get upset very, very quickly. I can remember a time when our payroll routines died and I was sent out to go and explain to some dockers that they weren't going to get paid that day. It wasn't a lot of fun. Anyway, the truth of the matter is they create the payroll run, there is a cutoff when they can't make any more changes, and then they prepare the ultimate file and they send that out to the clearing system, the ACH system, BACs, if you will, here in the UK. And if you want to know more about ACHs, please do listen to the episode on ACHs with the rockstar Erica. Typically, they require three days before the payroll is due to pass. Then, On that magic day, the money appears in our bank accounts. Yay! This day is generally fixed, say the 31st of the month, et cetera, and that's because we can then budget for all our outgoings, our mortgages, our bills, et cetera, et cetera, et cetera. But that's not the only way, and we're seeing more and more people being paid immediately by immediate payments, which arrives instantly. Anyway, some people do, of course, get paid in cash, typically cash in hand, which there are issues with, and we can discuss that when we talk about cash. If there are any deductions to be taken, typically they are. They're generally taken out before the funds are released to us. Not always, but generally so. The same process works for governments when they send benefits out to citizens or from companies when they're paying out pensions. So happy days. We have funds to spend. Let's go spend them. So let's discuss how we spend. Of course, we still use cash. We still use cheques. And in different countries and cultures, people use more cash or less cash. And some people love their cheques. Now, as I said, I can't remember the last time I wrote a cheque, but hey, some countries really do love their cheques. Now I'm going to have an episode soon on checks, so I won't talk about them too much, but we should probably talk about the introduction of cards. In the 1950s, diners issued a card, which on launch was available to be used in some 27 restaurants in New York. Then later on in 1958, the American Express Corporation expanded the concept from restaurants to merchants. In 1966, the Bank of Delaware introduced the first debit card, and Visa introduced a nationwide debit card in the United States in 1982, called the Visa Check Card, which further popularized the use of debit cards for everyday purchases. In the 70s and 80s, debits and credit cards became the norm, even became a status symbol. However, there are some now 17.9 billion debit cards and credit cards in circulation worldwide. Wow. Debit cards, of course, also allow us to use ATMs. These automated telemachines allow us to get cash, so we don't need to go into the bank to get cash. The world's first ATM was installed in Enfield, London, on June 27, 1967. It was invented by John Shepherd Barton, a Scottish engineer who worked for Delarue, a banknote manufacturer. The ATM was also called the hole in the wall, and it dispensed cash to customers who inserted their bankcode and, of course, inserted their PINs. Well, we're going to talk more about cards and how they work. Simplistically put, a debit card takes money out of your account if you have funds, and a credit card is used as a rolling credit amount that requires you to pay some time later, maybe up to six weeks. But more on how cards work later in a separate episode, we'll just talk about cards. Cards have substantially changed. They're now standardized, but the method by which they are accepted is really has been revolutionized. Do you remember the Zip Zap device that literally took a card imprint? Now card acceptance is literally baked into every till and we have what we call a PED, a pin entry device that allows you to put your specific pin in for your credit card or debit card. Nearly every till has that now. And of course, with the online revolution, The use of cards has just grown out of all proportion to where we thought it was going to be. However, another revolution came along. The rise of smartphones and the internet has revolutionized payments again. We can now embed our cards in the phone and use our phones as if they were cards themselves in what we now call wallets. These wallets can hold several cards and effectively mean you don't have to carry your cards anymore. if you do carry your card you can just use contactless now so you don't even have to physically use the card you just take it near to the ped and away it goes takes the money we have online banking so we can go into our online apps and pay people there too we also have peer-to-peer apps where we can send money to our friends maybe to split a bill and all of these things have become part of our daily life however cards, whether they're contactless, whether they're bits of plastic, whether they're embedded in our phone, are by far and away the most used way of paying things. But they aren't the only way. In the same way that we can use ACHs to be paid, i.e. how we get funds, we can also use that same methodology via a direct debit or an ACH debit or a standing order to automate bills. So if you want to pay your mortgage, you want to pay your gas, your electricity, your phone bill, et cetera, you don't have to go in person and say, right, here's my 20 euros or write a cheque and post it. These systems will effectively automate that process for you. Now, standing orders are slightly different. They're set up by us. They're set for a specific amount on a set day. Direct debits, on the other hand, are set up by the payee. The amount can change. So if my bill goes up, i.e. gas, electricity, as we've seen recently, then you don't have to go and redo the direct debit. The amount will be automated and changed. So these are the effective ways of automating those standing bills that we need to do. Mortgages, utility bills, etc. Now, direct debits are great for the payee as they get a guaranteed liquidity stream. So no chasing the customer, etc. And they're easy for us. And typically we get a discount for using them. Well, I say easy, but it's only true if you have the funds and you can be sure that those funds will be in their account when the money is due. which is clearly not the case for everyone and especially true if you're a zero hours worker or a self-employed person who cannot be sure that they have the funds on the day that the direct debit is taken. It's also true that they lose fiscal discounts and in some cases they have even worse offers such as if you have a mobile phone on a monthly contract. Typically these are cheaper and you get a better deal and you have better offers than if for instance you pay as you go. Well, there's an inequity here. Who pays is a separate question, but an important one. But typically we do. I guess that's not a surprise. When the card is used at a merchant, there are fees and the merchant passes that on to us. Typically, it's about two and a half, three percent of the cost of sale, as we discussed with Paul Rogers when we discussed merchants. Cash also costs too, and those costs are about 7%. And of course, there are less and less ATMs. Now, some of those ATMs are free and often they are not, and they charge you a fee to use them. While direct debits don't cost us per se, the Payee, i.e. the person who receive the funds, the utility company, the mortgage company, etc., they're charged by the bank. And so you could argue that that all flows through to us. But from a payment fee point of view, we are not charged for that automated process. However, as I mentioned, there is an inequality here for those people that can afford to use direct debits and those people that cannot. So, as is quite often in the case with payments, it's not always clear. But as a rule of thumb, payments are very rarely free. There are some cases where that's going to be the case. However, by and large, it's us that pays. We don't always see it, but it's there. There are two other use cases that we need to talk about. Now, these two are very rare compared to the other types of transactions we've talked about. But in the lucky situation where we're going to buy a house or an apartment, we use what we call real-time gross settlement to move the funds to be able to buy the house. Now, typically that's under the direction of our solicitors who charge us a whopping fee for doing so. RTGSs are most commonly used by corporates as Roy and I discussed. But for those times when we need a key purchase, we use them too. But how many times in our lifetime? Well, anyway, so we do use them to buy property or very large items. Now there is another use case and that use case is essentially for sending monies across border. So whether that's you're sending money to friends or family in a different country, or you're sending money to your kids at college in a different country, then you can send them that money via SWIFT, which effectively does the foreign exchange and transfers the money to the account that they need. Now, by the way, that's a very expensive way of doing things if you use the high street banks, but as I'm sure people are aware, there are cheaper ways of doing that. That means that we citizens really are the super user of payments. While we're not moving millions and trillions, we do touch just about every payment type and that, I think, makes us special. But we are fickle. We want it easier, quicker, safer. We drive payments faster than any other stakeholder. Think of the use of cards from the Zip Zap to contactless to using them via our phone. We're using less and less cash and we automate things as best we can with direct debits. However, typically we don't care what these underlying payment methods are. And I think, as I've said before, that ultimately immediate payments, because it's a digital payment technology, will be the payment that underpins just about everything we do. Whether it's how we get paid, how we pay friends and family, how we pay across border, how we even buy houses, whether it's ultimately used by our phone or by our card, I believe that the ultimate rail will in fact be immediate payment rails. It's also true to say that our role in payments is changing. Newer generations, older generations, we adopt things very quickly. And especially as we saw during COVID times, contactless and using our phones really, really changed the way that we do things. It's pretty hard now to find a ped, a merchant that won't take a payment from a phone. Very rare indeed. But it's also true to say that what we want from payments changes as we get older. When we're younger, slightly more laissez-faire. As we get older, we have other things to think about. We have to pay gas bills. We have to pay the mortgage. And so we think about things in slightly different ways. Having said all of that, the real key thing here is that we as citizens, as a stakeholder, we are the recipient and the initiator of nearly all the transactions around the world. And as I hope that I've shown, we've used nearly all the different payment types that actually exist. We really are the super user of payments. And let's not forget that because I think it's really important that sometimes we just get a little bit overlooked. It really is all about us. Well, there you go. I hope I've been able to outline a lot of the payment processes that underpin the things we do on a day-to-day basis. How we pay, how we get paid, and how we automate a lot of things, and how we've changed a lot of things in the industry. When push comes to shove, we use nearly every payment type there is. Some people will use them all, the majority will use most. However, we are by far and away the stakeholder that is sent and sends the majority of all the payments around the world. And as such, I believe that we are the super user, which is kind of ironic because compared to say a corporate or the government, we don't care how these things work. All we care about is that we get paid And we can buy things, hopefully in an easy, automated way. But least we not forget, we are truly at the center of the way the payment works. And we have a large say how they work. Cheers. Oh, just before you go, if you'd be so kind and you've enjoyed the podcast, tell a friend for me. Just say, hey, give this a listen. It's worth a go. Thanks a lot. Cheers again.