The last article laid the framework for the analysis around four pillars - authentication and authorisation, clearing and settlement, merchant discount rates and interchange (the revenue source) and interoperability. See the story titled 'The swift, silent change in consumer payments' published in Khaleej Times Business on April 17, 2017.
A Nilson Report indicates that in 2015, the total purchase volume from the card industry was in the region of $21.5 trillion with the bulk coming in from Asia.
Our focus shifts to the revenue base for card payments. In the existing four-party model, the general norm is for merchants (the first-party) to get paid a little less than the sticker price for the 'privilege' of receiving payments directly into their bank accounts. The discount that the merchant pays gets distributed via various mechanisms to the other three parties - the merchant's bank (the acquirer), the cardholder's bank (the card issuer) and network that enables the banks to connect with each other. This is a robust and stable business model and has been around for close to 60 years.
While there has naturally been pressure from merchants themselves and in some cases regulators to reduce the discount percentage, in general, this model continues because it makes logical sense.
However, like all good business models, this one too is being targeted for disruption.
Two variations of similar disruptive models are of immediate interest. One is based on WeChat Pay from the social networking behemoth WeChat and the other is from AliPay, the core financial services asset of the Alibaba ecosystem. Both these initiatives work on digital purses which are funded via bank cards issued in mainland China. What's interesting is that Peter Thiel and Elon Musk had come up with similar initiatives nearly two decades ago via Confinity and X.com which they merged to form PayPal.
The difference is that their cultural upbringing (German, South African, American) probably prevented them from truly disrupting the existing bank-led eco-system, even though they probably could have. However, digital purses are both the point of commonality as well as the point of departure between US entrepreneurship of two decades ago and what is happening in China and more recently, India.
Let's take the Alipay model. With a simple click on their apps, customers can choose to keep the spare change left over in their Alipay accounts in Yu'e Bao, a money market fund that offers five per cent per annum. It's super convenient and a no-brainer. The simplicity of this has made Yu'e Bao the largest Money Market Fund in the world in just four years with $165.6 billion under management. At the end of last week, it surpassed JP Morgan's US Government Money Market Fund which has $150 billion under management, according to the Financial Times.
This gives the Alibaba group the muscle to go out to make a bid for MoneyGram, take a 40 per cent stake in India's PayTM as well as a 14 per cent+ stake in Singapore Post among a slew of high-profile investments globally.
With WeChat, you never have to leave the app. It's WhatsApp, Snapchat, Facebook, Uber, PayPal, YouTube, Google and every other conceivable application rolled into one. The best introduction to this is a brilliant video by the New York Times called How China is Changing Your Internet. With 889 million active WeChat users, merchants are happy to pay advertising dollars to get hits. With merchants willing to pay to be discovered, theoretically WeChat Pay does not need to charge a merchant fee or discount rate. Coincidentally, American Express had initiated something similar with their closed loop a little less than two decades ago with getting merchants to fund rewards for cardmembers.
Although these two examples are highly successful, it is unlikely that the four-party revenue model will get disrupted in the near future. Adoption of payment wallets by consumers and merchants alike require significant changes in policy and regulation in most markets. Banks are well-funded and are likely to remain well-positioned in payments. However, there will be opportunities for entrants looking to bring in the long-tail of merchants for whom the capex, opex and fees required for accepting electronic transactions remain on the high side.
The inexorable rise of China and India will have a massive impact on many business models. In the next article in this series, the focus will shift to the clearing and settlement and how the India Payments Stack is essentially demonstrating that payments infrastructure is a vital and strategic national asset similar to highways and railroads.
When Alvin Toffler wrote Future Shock in the 1970s, much of it seemed unbelievable. Concepts like information overload, the Internet, telecommuting, the flattening of corporate organisational structures and the sharing economy (think AirBnB and Uber) are very much a part of our lives. A good read for anyone who wants to understand how the future will unfold.
The writer is a director at Bridge DFS (www.bridgeto.us). He's a digital banking and digital financial services evangelist, practitioner, advisor and consultant. Views expressed are his own and do not reflect the newspaper's policy. He can be reached at firstname.lastname@example.org.
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