

The answers to these questions depend on a clear understanding of how payment companies can innovate. I argue that there are three ways: bring new assets to the table, use new networks (backbones) to clear payments, and provide new interfaces (chips) for existing assets and payment clearing networks. A case could be made for a fourth area, concerning the incentives to various stakeholders in the payments value chain. But often those price schemes do little to affect the fundamental business of sending and receiving payments.

This blog series is devoted to analyzing innovators in the payments market. In the coming weeks, CEME will examine one company at a time. Each post will explain what, if anything, differentiates a single payment innovator from the rest of the pack, and what are its strengths and weaknesses going forward.

The vast majority of innovation happens around new interfaces for existing payments. New hardware makes transactions faster. It can improve merchants’ control over when and how payments are taken. It can lower barriers to adoption for individuals and small companies. It can seamlessly integrate with online marketplaces. At bottom, very few businesses have either the unique market position (such as toll roads and subways) to enforce the use of proprietary closed-loop payments, and network effects prevent upstarts from displacing incumbents in well established payment markets. Established players can reinforce demand for their services with side payments to various parties, despite legal intervention in longstanding business practices.


Fiduciaries and custodians hold assets on behalf of payer and payee. Retail assets are typically denominated in currency, and typically held as deposit accounts, prepaid accounts, or unsecured credit. Typically these fiduciaries include depository institutions, credit issuers, payment acquirers, mobile money operators, or any other issuer of accounts against which payment instruments are written. In every payment system, there must be a source of funds that constitute assets promised as payment. The payment instrument is an instruction to transfer ownership of assets, in the form of an account balance, to a counterparty’s accounts.


Clearinghouses and networks are the backbones that reconcile payment instructions from payer and payee, i.e., execute clearing and settlement. Counterparties issue payment instruments to their fiduciaries to their representatives with a clearing network. Clearing networks can include the automated clearinghouse, credit card networks, ATM switches, and a variety of other clearing corporations.


Hardware and software for payments, or generically, a \emph{chip}, is simply a tangible form of structured data. Account numbers and authorization codes are stored on cards with publicly available standards: such as magnetic stripe cards, smart cards, NFC (near-field communications), and RFID (radio-frequency identification). The purpose of chips is to correctly identify the payer and payee account holders, and to transmit all (and only) valid payment instructions from counterparties to their fiduciaries and the backbone, so that clearing and settlement can occur at the network’s promised rate of speed.


Assets: Account-based payment systems are fundamentally not money. Money, in the form of currency and coin, is a negotiable commodity with a precisely known value, that bears no record of its owner’s identity. From a technical perspective, money is anonymous.

Backbones: Issuers and clearinghouses are not mutually exclusive identities. They are defined by functions. When single issuers and single depository institutions settle transactions among their base of customers, transactions can be cleared and settled without using external networks. The same is true of closed-loop prepaid cards held for mass transit and individual merchants. Once value has been stored on the card’s closed-loop account, further payments can be cleared without external access to clearinghouses.

Chips: chips need not be hardware-based. Software such as QR codes for payments can transform generic screens and bar code readers into custom-built payments hardware. Certain hardware data interchange tokens such as RSA tokens (just to pick one) rely on software for their core functionality. Web integration, which requires extensive engineering and graceful design, can give a pure software equivalent of a hardware chip, essentially creating a new front end web-based transactions with existing payment credentials. With any of these novel chips, existing issuers and network operators can choose to integrate their offerings with the innovators; and they need not be threatened by the march of technology.

The purpose of payment hardware is to encode account information in order to ensure accuracy of transaction details and raise the costs of forgery. Novel electronic standards can improve if they raise the accuracy of payment instructions, raise the cost of forgery, speed up payment tender, or drop the cost of adoption. Payer and payee hardware are frequently not symmetric.

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