Low-value payments aggregator Cardis has struggled to
sell its payments aggregation solution to the banking sector. As it
goes live with its first fully-fledged programme – a mobile
payments application for Raiffeissen – Duygu Tavan asks whether the
best solution to the low-value payments problem has yet to be
found

 

In 2010, Electronic Payments
International
reported that Canada’s domestic debit scheme –
Interac – pulled the plug on its deal with low value payments
processor Cardis. Had it gone through, it would have been the first
major implementation project in Cardis’ 20-year history.

At the time, Ken Howes, an independent
consultant who had been working on behalf of Cardis, said Interac’s
decision was made for “political reasons”, but did not elaborate
further. More than a year on and Cardis is finally live. Raiffeisen
Bank International (RBI) in Austria has gone live with a
Cardis-powered mobile contactless payment solution that does not
require a corresponding debit or credit card, called
CardMobile.

Cardis’s low value payment (LVP) solution,
which can be added to the back end, is based on “aggregation
technology that could make contact/contactless/NFC payments
economically attractive to all stakeholders”.

The software is capable of fitting into the
existing four-party model for card-based payment systems.
Nevertheless, the solution can also be used to process stand-alone
mobile operator driven payments, closed loop transactions, or
online wallets.

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According to Cardis and global payments
consultancy Edgar, Dunn and Company (EDC), LVP (defined as retail
payments below € 20/$25/£15) is “by far the biggest opportunity for
the payments industry worldwide”.

Within the LVP segment that Cardis is focusing
on, EDC found that, at least in Europe, micropayments below € 5
still make up the majority of LVP in the physical world.

Within the Cardis solution, small payments are
aggregated into larger value-load transactions, which can be
cost-effectively processed through the existing payment
infrastructure (e.g. debit/credit card or ACH), Cardis argues.

There is no individual transaction-level
processing at any point in the value chain and the secure stored
value and value transfer technology eliminates most charge back and
dispute processing related to fraud (especially relevant for
virtual world payments).

The system supports multiple form factors:
contact/-less cards, mobile phone: NFC, microSD cards. And both
physical and virtual world LVP can be addressed with the same
software solution.

 

In a presentation shared with Electronic
Payments International
, Cardis argues:

“All past initiatives by banks and payments
organisations to capture the LVP segment in the physical world have
been unsuccessful. The LVP opportunity continues to be aggressively
addressed through deployment of advanced payments technologies and
significant growth for some of these technologies is forecast.

“However, the fundamental economic challenges
that emanate from traditional payments business models persist even
with advanced technology application. The LVP opportunity can only
be met by also addressing these challenges.”

Cardis says that the migration from cash and
cheques can help address issues of tax evasion, money laundering
and fraud and that it is only natural that new and non-bank
payments service providers, such as telcos, handset manufacturers,
social networks, Google etc, will focus on the LVP segment when
entering the payments space because LVP are low risk and virgin
territory, but offer high volumes and a good fit with the digital
economy. Hence the need for banks and payment schemes to
fundamentally innovate the way of processing LVP.

But some industry insiders remain skeptic.
Cardis has not got enough scale yet, and “you do need critical mass
– you need loads of consumers using the solution, and a lot of
merchants accepting it to really call it a success,” many told
EPI.

There is a lot of revenue potential from
processing low-value and micropayments. But a viable solution
within the industry still needs to emerge.

The likes of Boku, Vodafone – institutions
that have the required distribution network already – are better
placed to generate high revenues from small payments.

Yet, Cardis has proved its resilience over the
past few years and now that it has its first client, it remains to
be seen when or if any more will follow shortly. Although there is
a large difference between getting a country’s national debit
scheme and an individual bank on board, it is a start nonetheless.
Raiffeisen has a big network in Central and Eastern Europe where
the appetite for alternative payments is growing, although there is
no confirmation that Raiffeisen will roll out the solution outside
of Austria yet.

If Cardis does achieve the scale it is aiming
for, it will indeed be a successful LVP processor.

 

According to Cardis, the economic
challenges of LVP are:

  1. “Traditional payments business models do not allow for
    profitability for LVP transactions combined with attractive
    merchant fees” – merchant willingness (or reluctance) to pay for
    LVP does not allow to cover variable costs of banks
  2. “Typically one or more stakeholders of payment transactions are
    disincentivised under current models, or transactions have to be
    cross-subsidised.” There will be an “inevitable economic loss for
    one or more parties unless underlying cost is significantly
    reduced.”
  3. The argument that economies of scale will resolve the LVP
    problem are spurious and can be disproved-they have not worked to
    date
  4. Advanced form factor technologies per se do not solve the
    economic problem as processing costs are not altered by these
  5. In the future the problems will be exacerbated by growth in
    LVP. Any conversion of  LVP cash payments to electronic
    payments, will result in the losses, which are borne by one or more
    stakeholders, to grow

Cardis highlights that traditional card
products require each transaction to be processed individually and
end-to-end. The resulting variable costs are therefore too high for
LVP – the choice is either a revenue loss for issuers and
acquirers, or high fees that are unacceptable to merchants.