Making Sense of Ever-Changing Payment Technologies: The Year of APIs and the Reshaping of the Payment Ecosystem

What's Next In Payments®
6:03 PM EST November 15th, 2010

Introduction

 

More than ever, the technology and platforms underpinning the technical and economic success of payments are evolving and confronting industry decision-makers with the dilemma of whether to invest in current infrastructure or adopt new delivery solutions. The technology section of the Lydian Journal will feature the thoughts of leaders of our industry on creating and delivering the tools that may transform the operation and experience of modern payment services. In this first article, we discuss how the open payment platforms have burst onto the scene and are redefining the boundaries of the industry by opening up the development cycle of payment applications.

It has been over a year since PayPal shook the payment industry with the introduction of Adaptive Payments and the PayPal X platform, making it an opportune time to evaluate how open payment platforms may help further weave payments into the fabric of commerce. ”¨When PayPal announced that it would open its APIs to payment flows and account management, more than one observer was stunned, then excited. (See PYMNTS blog post: Why PayPal May Do to Payments What Apple Did to the Mobile Ecosystem). In fairness, PayPal was not the first to offer Payment APIs to developers, as Amazon had launched the Amazon Flexible Payment System in 2007. However, PayPal went further. With PayPal X, it launched the era of “embedded payments,” potentially profoundly changing the network effects that have governed payment networks. Opening the payment flows enabled a number of transactions in the social space and commercial space that were difficult, if not downright impossible, to complete over traditional payment engines. Giving access to account management function built an entirely new set of acquisition channel with application developers and service providers.

The significance of the event was not lost on the industry. In the months following the introduction of PaPal X, other payment networks launched innovation labs and other open programs. Beyond payments, Yodlee launched its FinApp store for developers; Facebook launched Facebook Credits, its virtual currency system for Facebook Apps; all the while Google hinted it would revamp Checkout. 2010 will go down in the history books as the year payment platforms burst to the front of the eCommerce scene.

Why does it matter? The electronification of payments is a seminal trend that fueled the success of payment networks for several decades and should generate an estimated $3.5 trillion in transactions in the United States this year alone. However, most of the traditional retail commerce use cases are now covered. Growth is therefore expected to come from other applications, many of them enabling online services, for which the ISO 8583 standard is severely limiting. The ISO 8583 standard is built on a message format first conceived when dial-up was the primary method to connect a POS to a network. It was designed for compactness in order to contain the transaction times. However, much of today’s advanced commerce applications require a richer set of payment instructions, more varied transactions flows, and a support for many more data types. New platforms, such as Syncada and Revolution Money, are expressions of the need to offer broader functionality to pursue these opportunities.

In today’s connected world, the distinction between commerce and payment is increasingly blurred. Already the notion of “checkout,” mimicking that of a physical store, is challenged: App stores and music stores, for instance, have substituted pre-registration and authentication for the act of approving an order and selecting a form of payment. Increasingly, as buyers and sellers connect over mobile or Internet connections, they exchange information in a string of activities that include payments as an embedded step. Consider the not too hypothetical of a consumer ordering a pizza on a mobile phone, after having received a targeted digital coupon tied to her loyalty card,  which she will redeem at the restaurant by flashing a 2D bar code while also paying using a payment account linked to the loyalty account. Already, Domino’s Pizza has experienced serious sales lift from targeted mobile couponing, and the likes of Target and Starbucks have explored 2D bar codes on smartphones used in the store, demonstrating that in the single flow from lead generation to post purchase service, the consumer is better satisfied with a fully-integrated experience. Such integration requires different applications – in this case targeted promotion, loyalty, payments, order management – to share data, potentially across the systems of different services providers. This can only be accomplished by opening up the various platforms involved.

This example shows not only the blurring of the lines between commerce enablement and financial transactions but also between face-to-face transactions and online remote ones. There is no denying that our current payment infrastructure has been optimized for face-to-face transactions. Labeling online transactions “card not present” is the best demonstration of that. Buyers and sellers, but also peers involved in a casual transaction, need new tools to establish an account relationship and complete transactions.

In addition, the conjoint development of cloud computing and open source are also seminal trends that are profoundly changing the dynamics of online services. The innovation benefits of open source are well documented, as proven by the rapid progress of Linux. Many companies are leveraging the cost advantages of running their applications on a SaaS platform. Witness, for instance, the opportunities that small and medium businesses now have to utilize ERP systems that five years ago were the realm of large cap companies.

We must consider the potential benefits of a payment platform from the dual perspective of seamless commerce flows and open platforms. Integration with other online functions will drive transactions across a number of use cases first in peer-to-peer payments, whether person-to-person or business-to-business, and eventually in buyer-to-seller transactions. I intentionally use the “buyer-to-seller” terminology as in a post consumerism era when the roles of producers and consumers of goods and services will be more fluid. I submit that the closed services will fail to capture the bulk of transactions from embedded payments. First, close platforms will limit the number of use cases serviced, while open platforms will cover for an ever-growing variety of clients and use cases by integrating applications and services from multiple providers. Second, in a world where 50,000 developers can register with PayPal X, no single company will have the ability to remain competitive on its own.

Of course, we are only at the start of the era of open commerce platforms. Few solutions exist today that, in addition to flexible payments, bring together the ability to integrate different service providers under a seamless user environment. To do so would require at least two critical enabling services – a trustworthy federated identity solution and a secure data interchange.

Identity is critical in many ways: It ensures the right degree of user personalization, enables the reliable billing of services used across a platform, and provides a strong foundation of trust for any transaction occurring on the platform.

Federated identity is not a novel concept: Microsoft attempted twice – with Passport and with CardSpace – to become the principal provider of identity for the net. Others, such as Sun with the Liberty Alliance or IBM/Novel with project Higgins, acted in response, promising a more open solution. All resulted in robust protocols and frameworks to manage identity in ways that would preserve privacy while automating a number of application-to-application interactions. More recently, Facebook Connect has resurrected the prospect of carrying an identity across platforms by enabling third-party login using a Facebook credential. However, a form of identity is only as trustworthy as the guarantee provided by its issuing party, which guarantee is generally a function of the validation that was conducted at the time of issuance, the degree of strength of the authentication completed at the time of the transaction, and the risk management performed in the background. None of the actors that helped develop identity systems have demonstrated the ability to provide a complete identity lifecycle with a high trust factor. At this point, it is likely that only an entity with a large base of fully validated and authenticated users – such as parties to commerce or payment transactions – will be in a position to offer identity services.

A secure data interchange solution is the other foundational service necessary to a healthy commerce platform. I refer here to the methods and systems permitting the exchange of data between applications in ways that maintain the integrity and confidentiality of the information, ensure the compliance with regulatory requirements, and establish clear ownership of the data created in the course of a transaction. Payment systems have created such systems and protocols. However, as discussed in the case of ISO 8583, these networks are not built to easily allow new data types. Note that a corollary of these requirements is that the data interchange must not compromise the separation of the applications of the different service providers. One would argue that service-oriented architectures have been created to address these requirements. Indeed, but as each new data security breach demonstrates, preventing unwanted leakage is not as easy as it seems.

Beyond the identity and data interchange services, a robust platform requires a hard-to-find combination of developer support, neutrality in the market, and transparence with ecosystem participants.

Developer support is more than documented APIs. The quality of the sandbox in which developers may create and test their applications is critical to the adoption of the platform. In the case where applications are co-hosted on a common platform and run as a service, the certification process of the application is equally important as every new combination of utility may affect the capacity of the platform owner to maintain a level of test coverage compatible with the risks that will be warranted against. Beyond these functional elements, engaging and maintaining the community; providing training but also generally diffusing technical knowledge amongst participants; encouraging and directing community contributions to core platform elements; are all differentiators between viable ecosystems and failed ones.

Market neutrality is essentially a business model issue pivoting around the ownership of intellectual property created around the platform. A platform provider that would protect its intellectual property while competing with the very developers and service providers it seeks to attract would likely affect the health of the ecosystem it seeks to foster. For instance, I tested in 2006 the potential of CardSpace as a method for improving the risk profile of online transactions. The solution was promising, but it lacked traction in the marketplace possibly because of the relative success of Vista, certainly because of the concerns that followed the introduction of Passport a few years earlier.

Transparency relates to the rules imposed by the platform owner on its tenants (service providers) pertaining to the application certification requirements and the monetization options. We can all think of a number of platforms where the owner changed the rules in ways that clearly tipped the economic scale in his favor or in favor of the closest allies, only to see defection by the very developers it sought to control.

For the last 40 years, success in payments was largely predicated on the reach of distribution with consumers, depth of acceptance with merchants, and the strength of the brand that would bind them together. Looking forward, I believe leading indicators of the strength of a payment solution will include the richness of the ecosystem supporting it. As the purchase cycle increasingly depends on buyer engagement facilitated by computers or mobile devices, the embedding of payments in service applications will become a primary factor of its selection by the buyer at the time of the transaction. This not only redefines the notion of acceptance but also broadens the field of participants to include, among other application developers, providers of complementary services, and IT solution providers for merchants. Winning providers will have to include not only payment expertise but also the muscles required to manage actively an ecosystem with speed and diplomacy.

In the course of its first year, PayPal reports a fast-growing number of applications leveraging the PayPal X platform. We will see in the coming weeks and months how far they will help transform the application of payments.

Patrick Gauthier is a payment industry executive with 20 years of experience in developing, selling, and deploying around the world new technologies for payment and commerce. Patrick is currently Head of Market Intelligence at PayPal. The views expressed in this column are that of the author only and do not necessarily reflect that of PayPal or eBay Inc. Patrick can be reached via LinkedIn (http://www.linkedin.com/in/prxgauthier) or Twitter (PRGauthier).

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