Cloud Payments 311 Lesson 1: Landscape

by Tim Attinger

LESSON 1 DISCUSSION QUESTION: What was the biggest innovation in payments system information management before the Internet age? Why? Click here to respond.

In this course, we will explore the opportunities available to platform operators from synthesizing, analyzing and deploying the data generated from core platform transactions in ways that attract more participants and transactions to the network. We will also explore incremental revenue opportunities from bringing adjacent clients into the network ecosystem by providing information that informs their investment decisions in, and return from, core platform transaction data.

We’ll begin our discussion today with an overview of how platform businesses have built and use information systems to manage customer interactions and to grow participants, transactions, and value. We will review in particular how payments platform businesses have grown from using information to facilitate the basic business of managing and moving money to deploying systems and assets that build new capabilities and revenue streams that leverage that information to provide insights, intelligence, and knowledge to network participants.

Managing Information to Move Money. As we reviewed in our last class, payments network businesses began their lives as business propositions that helped banks connect merchants and consumers to facilitate purchases and sales between them. The business model was elegant in its simplicity — connect consumers and merchants who don’t know each other, facilitating financial interactions between them, managing the identities of each party to the central network business while not requiring the parties to know each other in the process. Certainly the consumers and merchants in every single transaction had rich profiles and histories that made their interactions unique and uniquely valuable to each other. Perhaps the financial institution that sponsored a consumer into the network had information about that consumer’s financial history and stage of life that gave the bank a more informed view of who that consumer was, what they did, and where they were in life. A different institution might have deep and rich information about the retailer where that consumer was shopping that day — what kind of business they were in, how long they’d been open, what was their ownership structure, what money were they had borrowed from the bank on what terms, how their cash flow looked, and so on.

And to make a payments business work, all of that rich detail about both of the participants to each and every transaction had to go right out the window. Sure, it might be fine to have all of that information exchange hands if both the consumer and the retailer had accounts at the same local bank. But the value at the core of a successful payments business is to make it possible for that consumer and merchant to be completely anonymous — to each other and to each other’s bank. The bank takes all of that rich detail into account as it decides how to sponsor a participant into the network, certainly. It might even have been possible to carry some of that information on the paper payment slips that were originally used to settle transactions between banks on behalf of consumers and merchants.

Reducing Everyone to Numbers. However, as we discussed in our last class, truly scaling a payments network business required getting all of the account books, phone calls, and paper transaction receipts into the computers of massive processing systems, connected by telephone lines, to truly scale and grow. Making this happen quickly and efficiently required carrying only the most important information. And to carry that information in a way that computers could understand, all the parties to the transaction became strings of numbers. (PYMNTS University: Cloud 310: Adding Value to Network Transactions)

Consumers with names, phone numbers, addresses, and financial histories (perhaps long ones) with their banks became 16-digit account numbers in the network that identified their bank, the kind of product they were using, and the account they were accessing. The merchants with whom they were doing business also became numbers with similar identifying characteristics. The date and time of the transaction, the amount, and so on were all expressed as numbers, assigned a particular position in a long digital stream making up the transaction message at the core of the network business. As the business evolved, more small bits of data were added to the transaction message — wedged into the transaction message or repurposed into places that were underused-to help drive new business initiatives. Networks learned that knowing the kind of retail business a merchant was in helped immensely in ascertaining the risk in a transaction, so codes were introduced in the transaction message to help with this.

Richer Data, but Richer Insights? Processing centers began storing and cataloging transaction history to create a record of traffic and interactions for audits and investigations into individual transactions or groups of transactions from particular banks or merchants. Eventually these transaction records were used to generate activity reports to the financial institutions that sponsored consumers and merchants into the network, providing some insights into the kind of participant portfolio the financial institution had in the network. Corporate clients of financial institutions came to the business with more requirements about knowing not just where (hotel) but how the company’s money was spent on payment cards by its employees (minibar, room service, room bill, etc.). This information was too detailed to carry in the transaction messages that moved money, so networks asked for additional detail from companies accepting corporate payment cards to be sent to the network after the fact.

As networks grew, so too did this storehouse of data held by the network. Data was held and used almost exclusively for the purposes of moving money, reporting on that movement, and checking to see that it was moved accurately. And yet, a funny thing happened on the way from moving that first transaction to moving the hundreds of millions that cross the globe today. All those little financial transactions, and the simple information within them, became a significant driver of the global economy. At the same time, market researchers and dot-com managers were learning another interesting thing about consumer demands — that one of the best predictors of what someone was going to do next was what they had just done before. If you could build a history of all those previous actions, you might just have one of the richest research profiles in the world.

In our next class, we’ll take a look at how network businesses began to use transactions to improve risk management, create rich reports, and begin managing rudimentary marketing applications. We will finish by taking a look at how the future of payments businesses may well lie in the veritable gold mine of information pouring into their systems as they move money around the world. But first, let’s discuss the origins of the information business.

LESSON 1 DISCUSSION QUESTION: What was the biggest innovation in payments system information management before the Internet age? Why? Click here to respond.

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