Quick Take
Discover has been looking for a buyer for some time. Back in 2012 they were the launch partner for the Google Plastic card and positioned the opportunity with Google. While Google was interested in the network, there was no interest in taking on banking licenses and credit risk. Finding a buyer for the BUNDLE of Discover was their ongoing problem, with many BigTechs interested in the network only.
I’m usually just a cynic. Today, I’m constructive with specific suggestions for PayPal’s new executive team. Note that about 80% of your large institutional investors will read this..
New consumer terms rolled out at several banks this week. As the former head of online and payment services at Wachvoai (40%+ of Wells) I had managed these agreements. Changes are a very big deal, usually less than once per year. Given my history with Wachovia I chose to review the Wells Fargo below agreement (JPM, BAC, and COF all have similar).
https://www.wellsfargo.com/online-banking/online-access-agreement/
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Given that 80% of my payments thoughts over the last month have been on identity it is time to move on to settlement. Understanding the process of settlement is key to understanding both payments and banking.
Today’s blog hopes to address 4 questions
Nobel economists Coase/Williamson demonstrated how transaction costs shaped the Nature of the Firm. Settlement systems define the transaction costs of finance. Thus settlement system design shapes the organization of financial services. Settlement is in the midst of a revolution as many parties seek to remake settlement as the “base” platform capable of unbundling financial services.
Settlement provides the legal structures and operating rules required to clear $USD Trillions per day are 95% across multiple parties. Banking is a connected business, if the world was in a single account there would be no settlement issues as everyone would be on the same ledger.
As with all networks increasing scale results in increased network rigidity and existing participants consider how changes impact the value they receive and their unique competitive dynamics. For example, many of the proposed changes to settlement will impact correspondent banking. While some see opportunities to reduce the “cost” of correspondent banking, others providing the correspondent services see change as a reduction in revenue. While the tech of settlement is fascinating, at the end of the day one counterparty has to trust the netting process to permit funds to flow from their account.
While there is no near-term cliff, settlement innovations may result in a dramatic shift of payment volume. Today V, MA, SWIFT, EFT, … ALL run on the same settlement process. As most of you know, there is over $4T of market cap driven by networks residing on TOP OF settlement. For example, card networks do not move funds, but rather are messaging networks. While the legal and operational structure of settlement may not change, a change in technology can have significant implications for how messages operate between trusted parties and the DIRECT ACCESS of non-banks (ex PSPs, non-banks, …etc.).
This is a HIGHLY POLITICAL undertaking, with many change advocates working to reduce the power of US/EU banks and sanctions controls. Changes in settlement have the potential to unbundle banking, payments drive changes to central bank power and FCY reserves. Where open banking breaks open the FRONT END, settlement remakes the back end. For example, if risk in settlement can be managed by specialists commercial/retail banking (and payments) could move toward a model which resembles modern financial markets (clearing process is a commodity).
6 Page Blog
Top of mind today are Wallets, Identity and Application Program Interfaces (APIs). APIs are the core concept behind many new business models investors must decipher:
Previously, I’ve covered this topic in Open Banking and Open Payments and Trust Networks (2020) Part 3 – Internet 2.5 (2022), Modularity and Trust (2022) and Evolution of V/MA – Moving Beyond Cards (2021). Summary points from these previous blogs:
Continue readingThis is the last of my 5 part blog series that started over 6 months ago. As a pragmatist, my views will likely be unpopular (and perhaps incorrect), but they are informed. Most of this blog will be obvious to US Retail Bankers and payment teams; the more interesting parts may be around Fintech and Asia. The exec summary captures the entire blog, it’s a new format.. I’m going to break down the detail of these points in separate posts. Today is Part A
For quick reference, I’ve listed the links to the previous blogs.
The reason for this blog is to interact and challenge… please feel free to do so.
Bill Pay in the US
Given that Bill Pay is a RTP/FedNow opportunity I thought I’d provide an update into the chaos that is US Bill Pay.
Continue readingAssessing the Environment and Setting the Focus (part 2 – Power of Bank Networks)
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Must read FT article “How JPMC’s plan to kill credit cards split the bank”. The article discusses Jamie Dimon’s internal mandate to drive a new payment network. I was shocked with the level of internal org quotes here. In my view, Jamie is the best bank CEOs in history (based on performance and talent coming out of JPMC). As a former banker, I know how hard it is to move the ship. However, FT is wrong. Chase’s efforts ARE NOT about killing credit cards, but rather creating something much bigger.
This is a long blog..
Continue readingBig picture thoughts on a key service where banks will lead in the future
© Starpoint LLP, 2022. No part of this site, blog.starpointllp.com, may be reproduced in whole or in part in any manner without the permission of the copyright owner.
Existing businesses spend significant energy on remaking things that work. Moore’s law has justified this investment in chipmaking, as has Tesla’s investments in batteries and manufacturing processes. These area of focus are where products performance is critical to the customer and incremental capability provides differentiation. But what about banking and payments? What provides differentiation? Which investments are driving performance critical to the customer? or operational efficiencies? (see Changing Economics of Payments)
Bloomberg beat me to the punch with their great article last night on Apple Pay Later and Apple Finance LLC (must read). Well, I was certainly wrong about one big thing in my Project Breakout blog “Apple doesn’t want to be a bank”. Quite frankly I believe even Goldman Sachs was surprised by the scale of what Apple is building. Last night I outlined the key points: