Google Pay, Buy Now Pay Later, Crypto Paint Beginning of the End for Payment Acquirers

Moving money with a credit card brings about a huge tax for everyone involved. If you don’t see this as a threat to the incumbent acquiring models look no further than the explosion of neobanks whose success can be summed up with a simple – yet obvious – sentence:

Customers hate bank fees.

ATM fee.

Checking fee.

Overdraft fee.

Account minimum fee.

Money transfer fee.

Monthly fees for who knows what.

But we’d argue that none of these bank fees amount to three percent of an account holder’s annual deposits. Yet for merchants that accept cards, that’s precisely what’s happening. Oh, and that three percent is compounding at a rate of 10 percent a year with the parties in the “value” chain being public.

Niiiice.

Markets seek to avoid taxes, and that’s precisely what we expect to happen with the traditional merchant acquiring model. What does a disruptor need to pull it off? Both sides of the network, which are:

1. Consumers
2. Merchants

• Facebook has a boatload of consumers and merchants that use Facebook to advertise their businesses
• Amazon has a boatload of consumers and merchants that use Amazon to sell their goods
• Apple has a boatload of consumers and, over the past decade, a very respectable footprint of merchants who accept Apple Pay
• Google has a boatload of consumers and merchant merchants that both use Google to advertise as well as accept Google Pay.

Don’t sleep on Paypal, Stripe, or any of the buy now pay later (BNPL) companies either.

Why?

As these companies get closer to the consumer they can become a bank. In becoming a bank they can ACH money directly from the consumer’s account to the merchant’s account, obviating the need for the payment rails. This is literally what the BNPL are already doing, and the BNPL CAGR is projected to be over 35%. Moreover, younger generations are adopting BNPL in high numbers – see the below research.

We think Stripe and Shopify have the most to gain here considering they power the eCommerce layer for a lot of the internet. All they need to do is offer a BNPL button, become the underwriting bank for the consumer and the merchant, and poof: there goes interchange. Yes, the consumer doesn’t earn any rewards points, but if given a lower ultimate cost or a more flexible payment structure this probably won’t matter to a lot of the market.

Even more interesting is what Google’s doing with their revamped Google Pay.

Google is building its own two-sided payment network like Alipay, which doesn’t need any intermediaries to move money because it has both sides of the market. Google already tried this in India with TEZ, and it worked better than good.

You can read a bit more on this model from a fintech analyst but it’s coming, and it will be incredibly popular when merchants realize that they can keep 3% of their revenues and receive a number of true value-add services from Google. What value are traditional acquirers doing for merchants?

Oh yea, fake fees.

Then you’ve got crypto, which is coming in hot. Consumers have eyed it as a mostly speculative bet, but it’s starting to make its way to merchants as a real form of tender. Square has been a big crypto backer (ie it will become an accepted form of payment for Square merchants at some point) and there are emerging crypto wallets like Coin Payments that are already accepted at 70K merchants – that’s roughly twice the number of merchants that Toast supports – and they’ve done it with raising less than $1M. Oh, and there are a number of Coin Payments competitors out there, with Flexa being one that we’re watching.

When you’re a trillion dollar company becoming a bank is one of the only ways you can keep the public market happy with a 10% CAGR. All the bank and network partnerships are just for show and they will be disintermediated by the technology companies (we bet Apple boots Mastercard within the next 5 years to support its own payments rail). The legacy acquirers are staring down their days until irrelevance, whether they realize it or not.