The payments industry, like Las Vegas, is a classic case of something being conjured from nothing. The Las Vegas that we know – the turbo-charged cluster of hotels and casinos – has been in existence for about 80 years. It was established on the strength of an idea, and is now the 31st most populous city in the United States. It’s a testament to the resilience of the financial services world that a whole city can be conjured up on nothing less than the sanctity of the transaction – the payment, the wager, and the tip – and funded by all the associated value that is bundled with those most simple of commercial exchanges.
The Payments Game
Money2020 is a meeting of the financial institutions and the wider payments ecosystem that has sprung up around them, and which in some cases aims to displace them. And like a poker tournament, the representatives and hustlers from the financial world bluff and boast, tip their hands and there’s an overriding sense that – although they’re enjoying the game and there’s a lot of mutual respect – it’s really about winner takes all.
The banks and financial service providers want nothing less than to control as much of the payments process as they can. When commerce evolved from coins to paper money to plastic and now digital money, this whole industry sprung into existence. They’re all eager to move to the next phase, and want to make sure they’ve made enough of an intellectual and technical investment to be players in the game. The bigger institutions are trying everything, while the smaller players are innovating quickly and nimbly and trying to nip chunks off the whales where they’ve failed to innovate fast enough or well enough. There’s a lot of different facets to whatever the next phase is – near-field communication, digital wallets, loyalty plans, and even the QR code albatross – all under discussion, and some or all of these, we are told, will be a part of whatever comes next. Meanwhile, the consumer is still happy enough to pay with cash or swipe their cards, and these titans and guppies are scratching their heads trying to figure out how to make their payments products a more compelling proposition so that consumers actually use them. Lots of insights about how it has to be ubiquitous and how it has to have added value – but no real demonstrable evidence that this will or could take place. Time will tell.
Retailers Rise Up
Although we saw innovation after innovation – the one real idea that was truly disruptive was one where the retailers control the payment network – like they’ve always done in the case of cash. Walmart, Best Buy, Gap and other major US retailers have got together to explore the idea of the Merchant Customer Exchange – a mobile commerce platform that, if it goes ahead, you will be able to use at all the major stores in the US, potentially without the participation of the foundational payment players. If it happens, it could be huge – and either way, it looks like the MCX will at least use the threat of the disintermediation of financial institutions and issuers to drive payment fees down. Walmart spent $1.2 billion dollars on credit card fees last year alone – what’s a few hundred million to set up a new payment network that might do away with that cost altogether?
And the response? What worries me is that I heard more than one bank talk about how they were being innovative, and yet saying that “we are innovative, and we are doing so by tackling the sorts of things that you’d expect.” Personally – I think banks need to take more of infrastructural perspective – not “how can we innovate”, but “how can we encourage innovation” – how can they encourage an ecosystem which they and others profit from?
The ghost at the feast is Apple – everyone’s talking about them and what they’re about to or not about to do, but in an afternoon panel I think it was Mike Boush of Discover that pointed out that the margins on software and hardware are massive, and payments is actually a very low margin industry. Perhaps while everyone’s waiting for Apple to make their play – with 400 million credit cards stored in the iTunes Store, it’s the single biggest depository of payment details in the world – they’ve looked at the numbers, and the hassle (2+ years to get a compliance program in place, needing to get money transfer licensed in 48 states) and decided that it simply isn’t worth the bother. It’s not like they actually need the cash.
What’s In It For You?
As a small business, whether you’re a retailer, or a consumer service provider, or an accountant in practice, money flows in and out, and all of these companies are trying to figure out ways to make that transfer of money easier, and in making it easier and more timely, it hopefully becomes more valuable for you and you’ll let them take a greater bite of the total transaction value – a few cents here, a few score basis points there. And when you’re paid via plastic or online, there’s a bunch of other players that get paid too. With mobile and the next generation payment options, they’re wanting to grow the pie, or at least their share of the pie. If you’re collecting payment, you are both a merchant and a potential customer to those providers. And if their methods get you paid faster, more reliably, and make a customer more likely to shop with you and be loyal to you, then that is the value that the next generation of payment solutions offer.
One of Xero’s missions is to make it easier for you to manage your business’s finances and to help cashflow – and cashflow tends to work better when two things happen – when you get real-time insight into your balances and transactions, and when you get paid faster and more reliably – hence our attendance at the Money2020. We wanted to see what was on offer. We’ve begun reaching out to people in the banking and payments world that might be able to help our customers stay informed about their current financial position through data, and those who can help them get paid and make payments. Ultimately though – it needs to be of demonstrable benefit to the small businesses that use us and be cost effective for our customers before we’d consider a partnership. It’s a pleasure to have met so many interesting individuals and companies, and I am going to have a lot of follow-up to do over the next few days.
And though this whole space is exciting, the proliferation of mobile payment services and value-added payments products is a sign of a very young industry, and they won’t all last. So place your bets. We live in exciting times.