This post is written by Ryan Falvey, SBI’s ADC Strategy & Design Group Manager.
Recently, I found myself in a heated discussion with a Silicon Valley-based venture capitalist. The catalyst of the conversation was a question put to me: “Who is going to disrupt payments?” Given that we were in San Francisco, the question had an obvious “good” answer (Square) and several “great” answers that showed real knowledge of the “disruptive” and “innovative” “future of payments” (Dwolla, WePay, Google, Apple). Naming any of these firms would have made everyone feel good – that they knew how the future would unfold.
It was, however, shockingly controversial to say that none of these companies were going to “disrupt” payments. Instead, I argued that the disruptive solution would come (as Banking Beyond Branches readers know) from emerging markets. As such, while we typically focus our writings on these markets where we work, I thought it made sense to take a stab at explaining why the real disruption is coming from abroad for our Silicon Valley readers.
First, the status quo: most payments in the world are in cash. However, in the U.S., when people say “payments” they tend to think of the status quo as using card-based solutions – Visa, Mastercard, etc. In this context the “innovation” is to eliminate the card, preferably by replacing it with smart phones. As such, most of the action involves companies that deploy data-based “mobile wallet” plays where you store your payment information with a third party and they use this to facilitate a payment. PayPal, Square, Google, Apple and others all have solutions based on this basic mechanism.
The firms that are in this space compete on cost (how much they charge to process a transaction), convenience (how fast and easy), and/or by providing users with helpful features (such as the ability to receive your money quickly or peace of mind that you’ll actually get the product you bought).
However, to sign up for any of these solutions you still have to provide something: your credit card or bank account information. As such, these firms are some of the largest customers of the credit card processors. In short, these “disruptions” actually strengthen the power and position of the incumbent credit card firms. The customers of the credit card firms are the banks. At the end of the day, it’s still the payment firms passing money between banks and collecting a commission. The real money is still being made where it’s been made for the last few decades – at Visa, Mastercard, American Express and, of course, the banks.
So where is the disruption? It is happening outside of Silicon Valley. It is happening in the 110 or more countries where mobile payment solutions are bypassing incumbent payment networks. It’s being led by UBL and Telenor in Pakistan: two companies in heated competition to create and expand national payments networks which serve areas of the country that the government barely reaches; bKash in Bangladesh which, in less than a year of full operation, serves hundreds of thousands of clients, Bee in Egypt which launched on the day the Egyptian revolution started and still managed to become the go-to portal for internet-based purchases for thousands of Egyptian consumers who have access to the internet, but not banks. These firms, and dozens of others, actually offer revolutionary products to consumers: they allow individuals to send money to one another, pay for goods, receive salary payments and store money safely. These solutions take advantage of the massive chink in the armor of the global payments firms – despite the well known motto, companies like Visa are actually NOT where most of the people in the world are. Emerging market companies are not disruptive – they are revolutionary.
In developing markets, the real opportunity is not in finding ways to acquire more payments customers for the incumbent payment providers or to improve the current experience, as it is in the U.S. In emerging markets, the opportunity is to build a better, cheaper, payment solution. A solution that works in rural Pakistan or Bangladesh is not only going to have to be bank-agnostic (meaning it can plug into any bank and work without a bank, if necessary), but it’s also going to have to be pretty cheap as it will need to find a way to make money off of significantly smaller transaction sizes than exist in richer markets. I personally believe that such a solution, introduced into the U.S. market, would be able to “disrupt” the payments industry the good old-fashioned way: by being a cheaper middle man than the current middle man.