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Are Payments Your Core Business? And, Should You Care?

Is payments your core business?

You know you are getting old(er) when you start reminiscing about the past, longing for better and simpler times. Are you thinking, with nostalgia, of those bygone days when payments were simple? With four party models, ‘digital’ meant card or wire transfers, banks and their processing partners provided secure but not-too-fast payments, and payment revenues accounted for 33 percent of banking revenues. If your answer is ‘yes’ to the previous question, then you are probably not a millennial.

Well sadly, that makes two of us! However, that doesn’t mean I am not hugely excited about change and it doesn’t mean I live as a technology Luddite. I never met with an adviser when I took my first ridiculous mortgage in London back in the early 2000s, opting for one of those insanely advantageous tracker rates from a phone bank; I don’t think I have used cash in the past two years in Singapore; I can’t remember walking into a banking branch since switching to internet services ‘way back when’ and I avoid shopping in malls as a rule…

 

Onwards, forwards, ever faster

However, it is only in the past decade that the pace of change in the payments industry has accelerated— not just in terms of the type of payment formats made available, but also in the infrastructures, business models, and competitive marketplace. I would argue that it is only in the past two years that the change is palpable, although many traditional participants are still doing their best to ignore it. Change is at times slow and subtle, and other times more like a slap in the face. At the moment, I am rather interested in a subtle change in the payments dynamics: payments have become both commoditized and highly strategic. Interestingly, it has become strategic for companies that weren’t really on the map just a few years ago.

 

Competition from the East

In 2014, the top three debit card brands generated 105.63 billion transactions at merchants worldwide. Although 2015 showed a healthy growth in the total number of transactions, up 16.1 percent to 227.08 billion, much of this was generated by China Union Pay (CUP), with a growth of 47 percent. If Visa and MasterCard still hold the lion’s share of all purchase transactions, growth is now firmly in the camp of emerging Asian networks.1

Competition within the card industry is getting stronger, and maintaining transaction growth is challenging despite a large percentage of the world population still categorized as completely unbanked, or at least underbanked. Increasingly, the challenge is that it is not all about cash or cards, but potentially about account-to-account transactions, whether in real-time with immediate payments infrastructures (e.g. UK Faster Payments, SEPA Inst, or Singapore FAST), through OPEN collaboration (e.g. PSD2 in Europe, or Government-led initiatives such as in the UK or Singapore), or simply through alternative business models and network effects.

 

Breaking banks?

Banks won’t disappear. The oldest bank in the world, in continuous operation, was after all founded in 1472! The payment card networks aren’t going anywhere either, at least not in the immediate future. Alternative networks, however, are gaining momentum and global reach. This trend is nicely illustrated by the recent global expansion strategy of the Alibaba Group. But how do we categorize this platform player? Payment processor, eCommerce platform, bank, payment network, or PSP? Do they view payments as a core business? Should we even care, or try to put them in a neat little box?

Ecosystem Building

Country

Reach

Investment in Paytm

India

Extends share of ownership in the eCommerce platform

Investment in Mynt

Philippines

Equity stake in mobile money firm

Investment in Kakao Pay

Korea

Equity stake in mobile money firm

Investment in Ascend Money

Thailand

Acquired stake in Thai remittance company

Acquisition of MoneyGram

U.S.

Remittance to over 200 countries

Partnership with BNP Paribas

France

Mobile wallet acceptance for Chinese tourists

Partnership with Barclays

UK

Mobile wallet acceptance for Chinese tourists

Partnership with UniCredit

Italy

Mobile wallet acceptance for Chinese tourists

Partnership with SIX Group

Switzerland

Mobile wallet acceptance for Chinese tourists

Partnership with Ingenico

France

Mobile wallet acceptance for Chinese tourists

 

Currently the group has 450 million users of its mobile payment service, processes about 250 million transactions a day, and aims to have 60 percent of its transaction volumes originating outside of China, growing the number of its users to 2 billion, over the next decade.

 

Move along, nothing to see, no cards here…

Just trying to put this in perspective of the world I know: First Data, one of the largest card processors globally, processes 2,500 transactions per second, or roughly 216 million per day…

Before I get accused of working for the Alibaba Group PR office, this is not the only alternative payment provider expanding its reach. Tencent is making inroads in Australia by making its WeChat wallet available to tourists there; Airbnb recently acquired the social payments start-up Tilt, and Amazon Payment volumes nearly doubled in 2016, with around 33 million customers.

Disruption is coming to payments, whether it is your core business or not. So whether you care or not, it will still require you to adapt, engage, and embrace this new payments ecosystem. The next phase of the alternative payment network is delivering real-time, cross-border, and secure payments that compete with our existing card rails… as you can see.

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