The Naked King

Alexander,

I think you misunderstood. I can see that clearly from your follow up blog.

The issue is - are the current rails robust enough to cater for every payment instance or use case, and to do so with maxiumum efficiency to the end consumer? No, not even close.

The issue is not about replacing the existing rails, or a justification of whether PayPal (for example) is better than SWIFT. Nor is it an argument about the costs of doing so, the issue is that the new payment modalities that are coming into creation today demonstrate a fundamentally different approach to the simple issue of getting a payment from one party to another digitally. They won't replace the existing system, but neither can the existing system satisfy all of the modalities we now require - the primary mechanisms being simplicity, context and real-time responsiveness.

In this instance, it could indeed be said that the current system is like the Emperor with no clothes - no one wants to admit that the current system isn't adaptive to change and robust enough to fit all these new modalities, but the reality is there is too much activity going on in the payments space already borne out of pure and simple demand.

It's quite simple. If the existing system was good enough (as you suggest) - then PayPal, Square, Dwolla and GMail P2P would not exist today. This is not solving a problem that doesn't exist, you've got that wrong.

Get ready for a lot more complexity and payments variety. The incumbents are no longer the sole players in this game Alex! The incumbents had their chance to do things differently when the web first appeared, and then when smartphones came along and they missed the opportunity.

BK 

I agree with your notion in principle, Brett. However, how many payment solutions are truly autonomous, i.e. do not entail a bank account or a card scheme? M-Pesa is a good example (to a large degree), and that's one of the reasons for their success.

I agree that PayPal does offer a more convenient way to pay (and I use it a lot), and so do Amazon and iTunes, using the same principle. They are (great) niche products, but comparing them to the banks and the card scheme is incorrect, in my view. They are in a totally different league and game.

It's all about perspective. Let's take Starbucks.

You would argue a very niche provider of 'payments' as a closed loop system, with little impact to the overall bank payments market. If you are a major bank, you might have a point. However, with 35% of their in-store payments handled by mobile app in the last 12 months, Starbucks generated more than $2 Billion in deposits on their niche app (digital gift card).

To put that in perspective, Starbucks garnered more in deposits last year than 70% of the 7,500 financial institutions in the US, all of whom hold $1 Billion in deposits or less.

Sure, Starbucks isn't going to replace ACH just yet, but that's hardly the point. They're far more effective at deposit taking than 70% of the US banks, and have very efficiently created an entirely new payment mechanism that circumvents interchange. Arguing that "They are in a totally different league and game" from ACH or Visa/Mastercard is missing the point. 

It works because the current system isn't as effective. Increasingly we're find a ton of use cases where this is evident and P2P is the most glaring. When taken in isolation, new payment modalities like Starbucks could be argued as being small, but when you take all these new plays on the whole - they are eating away at the core of the business and you'll be left with a heavily fragmented payments architecture, built outside the traditional rails. 

Great for consumers, not much good for the industry who loses access and revenue over time.

Brett, can Starbucks loads be compared to "deposits" (http://www.investopedia.com/terms/b/bank-deposits.asp)? Interesting statistics, nevertheless - in fact, in Q1 this year alone, card loads exceeded $1bn.

...Starbucks provides a useful "niche" closed loop stored value mobile payment app....

...as a consumer, how many of these closed loop schemes will I actually sign up for? - a handful, no doubt, at my favourite retailers - if they offer sufficiently attractive loyalty schemes to justify my downloading their app and loading value....

...but will I load value by card (and keep the card schemes in business) or directly from my bank account?

...and where do Starbucks keep their $2bn in float?  Correct.  In a bank account...

...niche stored value accounts and/or wallets may take a small proportion of my spend, but the vast majority will be from my bank account - facilitated by card, or directly from bank account, courtesy of mobile, ACH and Faster Payments (in the UK at least)...

Philip,

The issue is not that Starbucks keeps its deposits in a bank. The issue is that as utility of payments is freed up from the existing rails, that these new players act as a new payments layer on top, capturing deposits, and creating new payment use cases that the banks, card issuers and networks are not playing in - except for very limited cash-in/cash-out interactions.

Think of it this way. iTunes has 400 million accounts. By you way of thinking we should be celebrating that Apple has a bank account with a bank somewhere, but what about the fact that Apple has 400 customers transaction outside of the bank rails on iTunes? How long before they don't need the rails at all?

Banks won't disappear from the interactions, their role will just be minimized.

"Apple has 400 customers transaction outside of the bank rails on iTunes": can you elaborate on that, please, Brett as to pay via iTunes you do need bank rails at both ends of the transaction - every iTunes transaction I do clearly says "Billed To: American Express .... XXXXX". Am I missing something here?..

Alexander,

The majority of iTunes users actually use iTunes vouchers, or fund their accounts via debit card. Then they make multiple payments off of their existing iTunes balance (not through the rails) - this means their iTunes account is in effect acting just like a pre-paid debit or gift card. Yes, they have to cash-in to the iTunes store to have a balance, but once they have a balance those transactions are all internal on the iTunes account.

You guys are getting all excited about that one transaction where I top up my iTunes account and saying "look a bank is involved". However, I'm more excited about the 20 transactions I do on the iTunes platform based on my iTunes balance that happens completely outside of the rails of the traditional payments system.

The same for Starbucks, PayPal, GMail P2P, etc. 

I know that for now there is a dependency on the rails for topping up, etc. But the far more interesting trend is the increase in systems that allow commerce without regular bank interaction. 

This is a trend that can only logically end in large scale commerce systems that have only occasional interaction with the traditional rails.

BK 

Much like iTunes vouchers, I can get vouchers from machines here that I can spend in multiple purchases in almost any shop. I also have a mobile device that I store these vouchers in, and it even works in areas with poor or no internet connection.

I call them "cash" and "wallet"!

After putting through some 20 transactions and finding my iTunes balance nearly depleted, I have to go back to a bank / card product like credit card to topup my iTunes balance. Bank / card networks get back into the act. If I were a bank, I'd prefer this one big ticket transaction - and interchange revenue - to 20 small value transactions. On the other hand, if I topup my iTunes balance with iTunes gift card purchased with cash, banks might not be involved but iTunes would become a cash based method of payment and lose relevance in this discussion about electronic payments.