The battle for control of how consumers make payments has become a war of almost biblical proportions. With nimble new entrants and traditional large incumbents, a modern day David versus Goliath is being played out right in front of our very eyes. But who will win and who will lose the battle for the ‘Holy Rail’? Have the players learned from tales of history?
For decades, taking payments was as stable an income stream as imaginable. For little to no work banks and card schemes made money from moving money. It was the perfect commodity. Encourage consumers to store money on a plastic card and then take a small interchange fee every time it was used. The more transactions you funnelled, the more those tiny fractions added up to millions in revenue.
This revenue model went largely uninterrupted for decades. There was minimal competition and the payment rails implemented across the globe simply kept churning. The focus was simple; volume, volume and more volume. Grow the pie, not the slice, was always the strategy. Banks and the card schemes made millions and everybody was happy. But then something happened - new technology and big data came and expectations changed.
If fifteen years ago someone told you PayPal would be the world’s biggest bank (with more than 150m account holders), Starbucks – a coffee chain - would process the most mobile payments and that Apple would have over 400 million debit and credit card details stored on its platform – you wouldn’t have believed it. But it’s happened. Times changed and so did the payments industry.
It started off with the Retailers. They got frustrated with the ‘tax’ of taking card payments from the oligopoly. For big Retailers it could account for millions of pounds in cost and little to nothing in return. Taking a payment isn’t a true service they felt – it’s just data transfer. Retailers want access to more - customer insight, trends, and feedback – so that could then be used to drive additional sales. They soon had the means.
Once there is frustration, there is opportunity. New entrants quickly began to emerge. With better technology and cheaper prices some retailers began to move. On top of this, there was a debate about the need to charge interchange fees altogether. The ‘Interchange Zero’ view emerged and argued that basic payments should be free. The age old income streams started to be put at risk for the first time, in almost, ever.
Moving bytes of information from A to B was no longer a compelling proposition. Who controls the payment networks of the future will be about the value payment service providers can add before, during and after the payment. At the moment, payments are a cost to a merchant. Everyone is currently competing on price, and once that becomes zero (or as close to zero as possible), it will be about the other services providers can deliver.
Square is an excellent example of a payment company, focused on everything other than payments. Square is a payment platform that is focused on analytics and insight rather than money transfer. Banks and card schemes could learn a lot from this philosophy. By being good at analytics Square aims to help its merchants increase sales. Square is now processing over £6 billion in payments a year.
The volume versus value story has been played out in another industry in recent times. Banks run the risk of becoming ‘dumb pipes’, the term initially coined to describe the role of network operators. MNO’s became dumb pipes because they all essentially offer the same services and have become pipes in the fact that all they do is transfer bytes of data. Their attempts to add value came too late and everyone else stepped up in between.
So where can banks and card schemes add value? Both still have a huge opportunity in this space. They have the brand equity, customer trust and global networks to pull off a compelling proposition. Visa is launching V.Me with promises to provider greater customer insight to retailers. Banks continue to evolve their Internet and Mobile banking payment offerings. The challenge for both will be changing cultural norms and bringing in the right people.
The battle for the ‘Holy Rail’ is going to be one of the most compelling areas to watch in banking over the next few years. It is difficult to predict who will win and who will suffer, as both the incumbents and new entrants have advantages they can exploit. As price gets lower and lower, and potentially nothing, the key differentiator will become about better services. Ultimately, the winners might just be Retailers and customers.