Tonight, I went to a talk put on by the Economics department. Coming in a few minutes early, I had a feeling of coming full circle as I talked to one of my former teachers, Dorothy Petersen (Dottie, if you’re reading this, you rock!). Her Introduction to Macroeconomics class was the first economics course I took at WashU, and here I was tonight, a senior with my major completed, telling her about the job I’ll start after graduation.
The talk, titled “The Importance of Banking Payment Systems to Growth: Perspectives from an Economist, CEO and Entrepreneur,” was given by Sydney Smith Hicks, who earned her Ph.D in Economics at WashU. The talk was awesome. I loved getting to see someone who had studied what I had and gone on to be wildly successful. She described her career as a great adventure, going on from interesting role to more interesting role when she felt like moving. I’ve never felt so hopeful and optimistic about my upcoming career.
Dr. Hicks began the talk by explaining that an economics major allows you to see a decision-making framework that gives you a big-picture view of things, enabling you to make the best decisions you can. She then went on to give us some career advice: If you’re ever afraid of asking questions, don’t be. She told us:”when you get your first job, please ask every question you can, because to not do so is wrong.” Not only that, but we should do choose the jobs we love, because those jobs open more doors, giving us better careers.
*Author’s note: From this point on, the article gets quite a bit more in-depth, so prepare yourself. If you’re not in the mood for too much thinking, skip to the second-last paragraph for the conclusion.
The next part of the presentation outlined why our financial system is so important. If not for our financial system, which allows for loans and the growth of businesses, small and large, our GDP would be far lower. The talk focused on card payments specifically, which are 66% of total payments made by number of transactions.
Some important background about card payments: the merchants have to give fees to banks, which make their already small margins even smaller. This disincentivizes them to pour resources into updated card payment systems unless they need to, since they have so little extra money to spend, and no reason to do so unless they have to (from regulation or pressure of competition).
Card fraud has been happening for decades, and costs both banks and customers billions of dollar per year. The recent Target and Home Depot card scandals show that this is a current and active issue. When you factor in the amount of total hours spent dealing with card fraud (an average of 12 hours per customer) and the average amount of money lost per fraud incident (around $350), that is a day and a half of work on top of $350 for a customer. When millions of customers are victims of fraud every year, this adds up to a sizable inefficiency in the economy. Essentially, huge amounts of resources are wasted because of card fraud.
To prevent fraud, the industry has been working on refining security. Two examples Dr. Hicks gave are the signature on the back and the picture that some cards have of the cardholder. Yet even with those, there have still been problems. Data continued to get stolen from both consumers and banks. Something more was needed.
The networks adapted. In 1999, EMV (Europay/MasterCard/Visa) created chips that attach to cards and verify. These were a step in the right direction, but fraudsters are still able to get around them. In 2005, Near Field Communication (NFC) standards for cards were created. NFC is safer than EMV cards, but still not ideal.
The next step forward came in 2010, when NFC capabilities were combined with Secure Elements (a Sim-card chip; Google it) with a phone to combine a more secure, password protected, less fraud-prone card payment system. This makes for a quicker process for retailers and consumers. It has added features like balance access and coupon features. You can add other non-payment secure process like identification (building and ID cards), encrypted voice communications, and encrypted email processes. Yet not everyone uses this, or even EMV cards yet because not all stores have the infrastructure. However, that will change soon. In October 2015, all stores in the US will have to have EMV (Secure Elements) readers, and by 2017 all gas pumps will have to.
Now, in the past year, especially with Apple Pay and Google Wallet, the whole field got more complicated. These services verify data in the cloud, and the issue here is that clouds have been breached for years, so it still isn’t an ideal situation. Card security still has a ways to go. Yet the future is very bright. Once we can get a system that can secure our identity, technology will completely change the consumer experience. The technology is already here, but the industry players need to come together and make it happen.
When I say industry players, I mean consumers, merchants, banks, and the government. The consumers bear the biggest costs from fraud and they are clueless about the issues and what can be done. When Dr. Hicks said this, it came clear to me how much of a tragedy this situation is. We, the consumers, are paying hundreds of dollars and hours of our precious time when we have to deal with fraud, yet we aren’t doing anything about it. We aren’t organized, and most of us probably didn’t realize that we could be. Hopefully people will start to understand this and act upon it. Not only are consumers not well-informed, but merchants are not technology experts and have narrow margins, so they tend to be followers. They’re waiting for the bigger stores to adopt new payment systems before they jump in. Banks see no customer demands; most do not use technology as a competitive strength to gain more customers. Government does not know what to do and does not guard the data well. Therefore, a good healthy payment system is a public good, yet it isn’t clear if the government will step in.
As Dr. Hicks pointed out at the end of the talk, this is a problem for our generation to solve. Once we do, imagine the possibilities and convenience. Perhaps, instead of a wallet, car keys, room key, drivers license, ID card, and phone, we will just have a phone that does all of that. A phone with GPS and some form of un-hackable identity verification, making it impossible to be stolen. Wouldn’t that be cool?
*Author’s note: There may be a few omitted details in this article relating to the specifics of individual card systems, due to the author’s inability to record the talk or absorb every bit of information during the hour-long talk. However, the main points are still valid.