This is my notes on Coursera’s “The Future of Payment Technology” course. During this learning I came across DeFi (decentralized finance) that interests me a lot. I may have a future blog about DeFi.

1. Introduction

Traditional banking’s service includes three major services: Transferring money, Raising money, and Investing money. FinTech innovates every aspect with technology advantage.

i. The Checking System and the Importance of Financial Intermediation

a. Limitations
  1. Takes a long time to complete transactions
  2. Theoretically possible to spend the same money more than once
b. Importance of Financial Intermediation

Essentially to allow transactions with untrusted parties with asymmetric information.

  1. Reversibility of check payment
  2. Pre-authorization of funds
  3. Electronic routing & verification

ii. Electronic Fund Transfers Using Automated Clearing House (ACH)

a. What is ACH

b. Advantages
  1. Information flow in the system evolved from physical to the digital form
  2. Significantly improved clearing speed
  3. Lower fraud potentials

2. Digital Wallets

i. Pure Digital Wallets

  • Examples: Paypal
  • The “real-time” transaction happens within PayPal’s Bank account by rewriting the balance to a different user.
  • Business model: free to most; Premium for instant withdraw; charge on credit card
  • How to profit:
    1. use existing payment rails (AHC for example), so low fixed cost
    2. Easy to scale so low marginal costs

ii. From Pure Wallets to Payment Ecosystem

Address several challenges:

  1. Product differentiations
  2. Incentives for users to keep balance within the wallets and not withdrawing right away
  3. Appeal to offline users
  4. Add-on services with higher margins

iii. Social-Network-Based Payment Innovations

Examples: Venmo (payment as a mean of social communications); WeChat: from social network to payment platform

3. Credit Card Innovations

i. Origin, key stakeholder and business models of the credit card network`

a. Origin
  • Bank extends a revolving line of credit to customers
  • Within the line of credit, the bank guarantees real-time availability for funds to merchants, while bills customers later and bears all default risks
  • Charge merchants for these costs
b. Key stakeholder
  • Card-issuing bank
  • Cardholder
  • Service Provider
  • Merchant bank
  • Card acceptor

c. Business Models
  1. Card networks (e.g., Visa)
    • set overall processing fees, but do not get the biggest share.
    • have a high fixed cost and low marginal cost
    • Competitors: issuer-run networks
  2. Issuers
    • Get most of the fees, but bear the risks
  3. Acquirers provide fund settlement services and maintain merchant accounts
  4. Processors provide hardware to process payment requests
d. Advantages and Inefficiencies
  • Advantages
    1. Efficient and near-instant transaction clearance
    2. Value-added services for consumers
  • Drawbacks
    1. Security issues
    2. Limited customer base

ii. Innovations that make credit card transactions more secure

  • EMV (chip cards) helps reducing card skimming and duplication (capture static accounts physically at the points of sale)
  • Tokenization helps merchants to encrypt data for stored card information
  • Mobile-based security helps guard end-users directly

Apple Pay as an example: card number only stores at the high-secured bankside

iii. Innovations that expand credit cards’ customer base

a. Offline payment gateway
  • Small business prefer convenience & low cost over fancy tech, so use existing devices like POS terminals
  • Examples: Square, an independent payment processor that facilitates card acceptance
b. Online payment gateway
  • Small business can not afford a dedicated IT team for card network connections, so provide plug-in software connections
  • Examples: Square, an independent payment processor that facilitates card acceptance by online merchants

Payment Technology in Emerging Markets

Take M-PESA as an examples