Electronic Payment Systems Face Christmas CrunchElectronic Payment Systems Face Christmas Crunch

Facing skyrocketing transaction volumes and plummeting average values-per-transaction, payment processors, credit card companies, and financial institutions are scrambling to keep up while preserving margins. And the onslaught is about to get worse.

That was the conclusion of the panelists at an information Executive Breakfast Tuesday morning at New York's Palace Hotel. The need for new systems and new services to handle the rise of electronic transactions is more sharply apparent during the Christmas shopping season, said Paul Sutton, CEO of Kabira Technologies, a sponsor of the event.

"It's a computing paradigm problem," Sutton said, pointing out that the cost per transaction for many processors and retailers is rapidly approaching the value per transaction -- and at the point where those lines cross the margin becomes zero.

Like consumers in countries in Western Europe and East Asia, Americans are rapidly abandoning traditional paper-based forms of payment (i.e., cash and checks) for various kinds of electronic and plastic payment models, from credit cards to debit cards to online payments to "contactless payments" including modules embedded in mobile phones that are scanned by point-of-sale devices.

The result is overloaded networks and processing systems. According to Chase Paymentech Pulse Index, 1.9 million online shoppers made purchases worth $104.8 million at 10 major online retailers on "Cyber Monday," the first Monday after Thanksgiving. Those numbers are up 32.5% and 40.6%, respectively, over the same day last year, and the retailers are having trouble keeping up. Web-site performance tracker Keynote Systems, 10 of the top 30 online retailers suffered "significant slowdowns" on Cyber Monday.

The strain can also be seen in traffic on the major credit-card providers' systems. Visa USA, the world's largest credit card network, reports that transactions on its network are growing at better than 15% a year. Visa has completed a multi-year upgrade and modernization of its payment processing systems that included closing down its West Coast data center and moving those operations to the central United States. The new data center processes some $1 trillion in transactions annually.

Fueling that growth is not just traditional credit cards but debit cards and other forms of "pre-paid" methods, said payment and transaction analyst Penny Gillespie, head of Gillespie International. Debit and prepaid cards represented 56% of the volume of non-cash payments in 2006, and are growing at 19% a year.

"Consumers like the prepaid cards because they're more convenient and secure than carrying cash," said Gillespie, "...and they like knowing what they're spending money on. The like the reporting."

The advent of even faster and easier forms of "contactless" payment systems, where no physical swiping of the card is required, will only add to the volume of low-value transactions. MasterCard is running a trial in conjunction with Turkey's Garanti Bank that tests payment chips embedded in wristwatches. Other unexpected mechanisms will surely follow.

Payment industry sources predict that the major credit card systems could be looking at volumes in the 30,000-to-40,000 messages per second range in the next few years. That makes the speed with which payment processors can roll out new systems and new services critical in the new payments world.

"One Visa executive told me that 'Changing out software on our network is like changing the engine on a 747 while it's in flight,'" recounts Sutton.