CORRESPONDENCE FROM NEW YORK The Digital Payments Revolution: What Next?

The payments landscape is undergoing a technological revolution, transforming how consumers and businesses exchange value. While cards and conventional digital payments are becoming increasingly dominant worldwide, they still face persistent challenges such as fraud , mostly driven by the sharing of user credentials and high costs.

A promising new solution has emerged: tokenized payments using ephemeral tokens-digital "envelopes" containing value identified by single-use codes that eliminate the need for credential sharing. This innovative approach, pioneered by companies such as Vaiu Global, could fundamentally reshape the payments ecosystem by combining the advantages of cash with the convenience of digital transactions.

• The Evolution of Payment Methods

• Cash (Notes and Coins)

While convenient for users, cash carries significant hidden costs, including minting, safekeeping, counting, and maintaining ATM networks for distribution. However, cash offers unique advantages: instant settlement, anonymity between transacting parties, and no requirement to share personal credentials, which preserves privacy within the boundaries of Know-Your-Customer and Anti-Money Laundering regulations. The main drawback of cash: it can be stolen.

• Cards

The card payment ecosystem, dominated by the Visa/Mastercard/Amex, imposes substantial costs, around 1.5% to 3% of the transaction value. These fees include payments to card networks as well as various rebates and commissions to issuing banks, merchant banks, VISA/MC/AMEX and other intermediaries.

This expense represents a significant economic burden, particularly for retailers. For retailers, the "cost of getting paid” often ranks as their second-largest expense after the cost-of-goods sold. Cards also require credential sharing between payor and payee, making them prime targets for hackers and fraudsters; however, they do offer consumers the benefit of payment dispute mechanisms.

The flowcharts below illustrate the process and economics for a credit card transaction :

and for a debit card transaction

• Digital Payments

Digital payments-transactions conducted via smartphones, tablets, or laptops-have consistently shown global growth for over a decade. They provide advantages over traditional methods: faster processing than cash, near-instant merchant settlement, and significantly lower costs.

Most banks now offer payment capabilities through their mobile banking applications. In many countries, major banks have collaborated to create common instant payment platforms like Zelle and Venmo in the US. Similar initiatives in Europe include the TARGET Instant Payment Settlement (TIPS) service, the European Payments Initiative WERO , Sweden's Swish, and the UK's Faster Payments.

In emerging economies with large unbanked populations, initiatives from governments or central banks have accelerated the adoption of digital payment platforms, as seen with China's WeChat Pay, India's UPI, and Brazil's PIX.

• The Fraud Challenge

Both card and digital payments face a critical vulnerability: payment fraud. This problem has reached alarming proportions globally, affecting platforms like Zelle in the US, where users reported over $440 million in fraud losses in 2021.

The root cause lies in their account-to-account transaction structure, which necessitates sharing "precious credentials"-names, account numbers, national IDs, phone numbers, email addresses, and passwords. Once compromised, replacing these credentials and updating payment instructions involves significant effort for the victims.

In these payment systems, credential information is stored across multiple databases and transmitted through various internet servers, resulting in numerous points of vulnerability for increasingly sophisticated hackers.

• A Promising Solution: Tokenized Payments

Vaiu Global, a U.S. fintech startup, has developed an elegant technological solution that enables "cash-like digital payments" without credential sharing.

• How Vaiu Works

Instead of conducting account-to-account transactions, Vaiu creates one-time, single-use or "ephemeral tokens" representing payments-conceptually like envelopes containing cash, identified by single-use alphanumeric codes (e.g., ABC123).

• The Vaiu software integrates with banks' retail applications:

1.To send $100, a user accesses their Vaiu-enabled banking app and selects the Vaiu payment function

2.After entering $100, the bank immediately withdraws this amount and holds it in a segregated account, guaranteeing payment

3.The app generates a single-use code (6-character alphanumeric or QR code) representing the token

4.The user communicates this code to the recipient through any channel: paper, phone, in-person, email, or SMS

5.The recipient deposits the token into their Vaiu-enabled account

6.Funds transfer via existing banking infrastructure (e.g., national clearinghouse)

The fleeting nature of these tokens fundamentally deters hackers-stealing a Vaiu token yields minimal reward since each token is single-use and "ephemeral”. Additionally, Vaiu payments are highly cost-effective (pennies per transaction) and allow banks to circumvent the VISA/MC/AmEx card networks. In addition, Vaiu payments are settled using existing or "legacy” banking payment systems: no need for major new systems development. They are a "pay-by-bank” solution which enhances the competitive position of banks vs. the card networks. The Vaiu technology can easily be embedded into existing bank retail, smartphone applications.

• Enhanced Token Capabilities

Vaiu tokens also are programmable and can include additional features:

1.Geolocation restrictions: Limiting token use to specified locations (e.g., postal codes)

2.Validity periods: Customizable expiration timeframes other than the default setting

3.Merchant loyalty integration: Tokens can facilitate loyalty programs and promotional communications (with user permission)

These features make Vaiu particularly attractive to retailers. Vaiu offers much lower payment processing costs than cards and supports a streamlined, automated loyalty program management. Such programs, offered by Vaiu-equipped banks will enhance the banks' value added to retailer clients.

• Market Reception and Future Prospects

Vaiu recently showcased its innovation at Money 2020 in Las Vegas, the payments industry's premier event, receiving enthusiastic responses from attendees. The company is now engaging with leading financial institutions worldwide.

Romania is one of Vaiu's target markets, where its token technology could either be adopted by banks or be integrated into developing instant payment systems like RoPay.