You may recall never-realized mobile payments product, CurrentC. It was built by MCX, a consortium of large retailers that wanted their own mobile payments app that would work across their combined stores. The product failed to launched and it assets were gobbled up by JP Morgan Chase, an ending we could have predicted given how atrocious retailers are at anything resembling technology and innovation.
But the motivations behind CurrentC are inevitable.
CurrentC was conceived as a way to break retailers from the shackles of interchange. As it was originally conceived, customers would link their checking and debit accounts directly to the app. When a user reached the POS, the cashier would scan a QR code from the customer’s phone provided by the CurrentC app to authorize the payment. This would eliminate the 3%+ of every credit card swipe (interchange) that goes to the payments processor, card networks, and issuing banks. Retailers would argue the 3%+ that go to an effective mafia who do nothing, and they’re not wrong.
A great analogy can be found by looking no further than one of our favorite subjects: the POS dealer.
Before the days of the internet merchants had only one way to research and acquire POS solutions. If a merchant wanted a POS they dealt with a reseller of the POS system (or if they were large enough they might have the misfortune of dealing with the POS company directly). This distribution system came with its own costs: in exchange for reselling the POS system – and theoretically educating and supporting the merchant – the reseller would charge their toll.
Then the internet happened and companies like Square were able to acquire millions of merchants WITHOUT the need for an intermediary channel… in many cases serving merchants who could never afford a POS under the old model. Because without the intermediary toll POS costs came down for end users and the market had a new dimension of competition. (Do NOT nuance this example to death and just take it at face value for the sake of demonstration purposes).
Interchange has thus become an outdated and expensive distribution channel that makes zero sense in a modern economy.
Think about this for yourself:
When you go to transfer money from one bank account to another, what do you pay? If the answer isn’t $0 you need to find a new bank. That’s because the cost to move money is the cost of digitally pumping a bunch of 1’s and 0’s over the internet… nobody is getting in a horse-drawn carriage and moving your money across town.
Third world economies are beating the West to this inevitability by simply being in a position where they don’t have the first generations of financial infrastructure and their corresponding incumbent politics (i.e. no innovator’s dilemma); mobile payments spend in China was 50x greater than that of the US in 2016:
When I tried to pay at a Beijing McDonald’s on a late night, the only payment options were China’s Union Pay credit card system, Apple Pay or WeChat Pay and Alipay. As an American visitor without a Chinese bank account, I wasn’t able to find a way to use those systems and the store clerk wouldn’t take my cash.
The problem with the first generations – as continue to be made evident by the endless boondoggles with payments companies subsuming POS assets – is that they do not have the culture to innovate. As Upton Sinclair famously said,
It is difficult to get a man to understand something when his salary depends upon his not understanding it.
So long as the financial system makes money doing nothing, why would they be incentivized to undertake work and change? The inertia of complacency is a happy truth.
Meanwhile countries like China are showing that the cost of distributing a new payments methods to consumers can be relatively trivial. And businesses, following customer demand, are signing themselves up to accept payments from their customers using these new methods.
So looking at the interchange model below, we see that the issuing bank and acquiring bank have been entirely replaced in the distribution stack. If both “cardholders” and “merchants” are discovering and enrolling in a new payments program themselves, there’s no need for their cut of the fees
That lastly brings us to the “platform”, or card networks (Visa, AMEX, etc). If both merchants and cardholders have enrolled themselves on a mutual platform, what does that platform look like.
In our estimation that “platform” is nothing more than a bank, moving funds around to its different users for free. Users deposit and withdraw funds as needed, but there’s no need for a slice of interchange fees if the bank is smart enough. Many mobile payment systems do charge fees, but how do banks traditionally make money? They loan out their deposits and create financial instruments. In fact banks were successfully doing this long before the advent of card payments and they made plenty of money – just ask the Rothschilds.
So a true innovator would figure out how to use the deposits on their mobile banking platform to create a host of financial products. With distribution costs nearly eradicated, merchants and consumers would find much savings in using this method of commerce over conventional systems. The monopoly of the incumbent financial would crumble around them.
For the payments industry innovation is going to sweep in, seemingly out of nowhere, in a blinding wave. That’s because innovation is not trickling through organically: incumbents are still trying to protect their share of interchange no matter what they tell you, and anything that gets in the way of the golden goose is rejected immediately.
That behavior will be the death of them.
There’s a company lurking out there that will put all of them out of business. Keep your eyes open.
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