Cash Replacement 101: Acceptance and Risk Management

The term cash-replacement typically refers to a myriad of products such as debit cards, prepaid cards, credit cards, etc., that effectively enable a transaction without cash or (almost) replace cash.

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What started as a card in 1950, supported by relatively simple issuance and clearance, has evolved into a highly sophisticated global network. The plastic card evolved into a smart card, which evolved into a virtual card, and which now seems to be evolving into an invisible card powering invisible payments across all kinds of connected devices from cell phones to washing machines.

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The physical, virtual and invisible card has retained its simplicity, enabling the basic payment transaction functionality between consumers and service providers – physical world retailers or virtual world e-tailers.

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That said, over the years, the network behind that simple card has consumed and compressed all the complexity to facilitate an increasing number of value-added services. Services such as bill payments, advertising, offers, promotions, discounts, and loyalty, all of which have been around for quite some time, have further evolved into fraud prevention, account aggregation, identity theft protection, personal financial management, and co-branding and cross-selling of all kinds of financial as well as non-financial products and services.

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If all the complexities are stripped away, every cash-replacement product or program’s sustainability and scalability come down to points of acceptance and risk management. In other words, how many service providers will accept the product in lieu of cash, and given that a certain amount of fraud is inevitable, what is the overall risk related to the usage of a particular cash-replacement product.

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We are trivializing the overall operations behind cash replacement. There is a lot more in play and at stake. Whether it is managing a continuously growing ecosystem of providers, or the constant innovation driving the evolution of products and services, or the underlying technology, or the regulatory oversight.

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That said, the essence of cash-replacement really comes down to acceptance and risk management, and effectively, its success is fundamentally driven by how well these two factors are managed. Acceptance is a function of branding and marketing. Risk management is a function of profiling and analytics. Both factors have two active participants – the consumer and the service provider. There are couple more players in the background, supported by several intermediaries. Effectively, every four-party model, as it is commonly referred to, involves an issuer of the product, an acquirer, the service provider or retailer, and the consumer. The sophisticated network, in essence, refers to the interconnection of all these parties, some on a real-time basis and others not so much, and the various technologies deployed in the background to ensure that these transactions can be completed as well as settled across the entire ecosystem in close to real-time.

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One can only start to imagine the complexity of ensuring that all these cards or products work every single time they are swiped, tapped, readout, entered in, or posted by a machine on behalf of a human or another machine.

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If not done already, it’s high time we started to show some respect for that piece of plastic in our wallet, or for that matter, stored in our cell phones.

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