The Challenges of Digital Payments

Digital payments can feel inevitable, sweeping all before them. A range of recent news items suggest this isn’t true.

The risk of outages

Japan’s payment clearing network experienced severe problems, affecting 11 banks and 1.4 million transactions on one day in October. The Japanese Bankers Association said this was the first system problem that had affected customers since the network was launched, in 1973. The problem was detected after a system equipment update during the long weekend.

Such problems happen relatively frequently. In August 2023, Bank of Ireland customers were unable to transact online, using their mobile banking app, or to access cash from the bank’s ATMs.

This month in the UK, contactless card payments stopped working at Tesco, the nation’s largest supermarket. On the same day, two other supermarkets, Sainsbury and Aldi, experienced payment problems. Again in the UK, Barclays’ mobile and banking services went down for two hours in October due to technical issues.

Starting on the afternoon of 14 October, through to the following morning, DBS and Citibank in Singapore experienced outages that disrupted online and payment services. Some ATM services were affected as well. The Monetary Authority of Singapore (MAS) has ordered an investigation.

As is so often the case, the outage occurred when a planned upgrade went wrong. The data centre’s cooling system had a problem. Although the back-up data centre was activated, it missed the four hour recovery timeframe set by MAS.

Unfortunately for DBS, and its customers, it suffered a widespread outage in March, and again in May 2023.

The risk of crime

India’s United Payment Interface (UPI) has been a huge success. No wonder that between January 2020 and June 2023, a report by IIT-Kanpur-incubated start-up found that 47.25% of reported cybercrimes were UPI related.

The attackers exploit vulnerabilities in the system to conduct unauthorised transactions. Phishing, vishing, malware and using deceptive UPI handles are the most prevalent scams. The number of cases has risen from 77,299 cases in 2021 to 95,402 in financial year 2023.

The cost of payments

In California, a suit has been filed against PayPal claiming that anti-competitive ‘anti-steering’ rules mean consumers pay excess charges, stifling competition against lower cost payment platforms.

Merchants have no option other than to accept terms and conditions in their user agreements, which stop them offering customers discounts or inducements to use other payment options. They can’t even inform customers about relative payment costs.

Meanwhile, Visa and Mastercard are faced with the prospect of lower interchange fees in the US. The Federal Reserve Board published a notice of an open board meeting for which there was only one agenda item: the revised reduction in the interchange fee cap. It is expected to lower the fees charged by banks for processing debit card transactions.

The Durbin Amendment to the Dodd- Frank Act tasked the Federal Reserve with capping interchange fees for banks with over $10 billion in assets at a cost that is ‘reasonable and proportional to the cost incurred’ by the bank. In 2011, the Fed set the interchange-fee cap at 21 cents per transaction plus 0.05% of the transaction cost.

If the meeting decides to lower fees, the next step could be a public comment period on the proposed interchange fee cap change, where both merchants and banks could submit their reactions to the proposed change.

Singapore: Gojek, a ride hailing service, will introduce a transaction fee for cashless payments made by passengers, starting from 1 November 2023. The fee will vary based on the distance travelled by the customer, ranging from S$0.10 to S$0.60.

While passengers will pay more, the service fee for drivers in Singapore will drop from 15% to 10%. Gojek needs to make its service more attractive to drivers.

Canada: The 2023 Canada Retail Banking Satisfaction Study by JD Power has found that customer satisfaction with Canada’s largest five banks fell slightly, from 613 to 603 in the last year. Part of the reason given for this is unexpected or unexplained banking fees, including an increase in 12% of customers paying ATM fees. Unexpected fees appear to be as much of the issue as the fees themselves.

Final word

There are countless stories of payment cybercrime and digital outages, and frequent reporting of Visa and Mastercard being involved in court actions aimed at reducing their fees and charges. While digital payments are the main method of payment in much of the world and in many circumstances, we should not think they are fault free. No wonder payment choice is valued by so many people.