I’m back to blogging after a 5 year hiatus… The CEO thing is rather all consuming. Glad to have an exit so I can get back to my fellow payment geeks.
What to blog about first? Given we are in new decade I thought about writing some grand predictions. But rather than look forward, we must spend a little time in the past, as the past 10 years have been JUST AMAZING in payments. I’m calling this blog series “payment growth vectors” where I hope to recap what has transpired in payments (history) to provide a trajectory for evaluation of the future course.
First a question: What is the top performing industry group?
FAANG? .. NOPE!
Payments? … YES!!
In fact MVPs (Mastercard, Visa, Paypal) have outperformed FAANG by 34 percentage points!! (see WSJ April 2019). The biggest question on the minds of investors is: will this trend continue?
Payment growth vectors will be a bit if a mish mash of Network Dynamics, Issuer Politics, Fin Tech, Consumer Behavior Trends, Technology, Bundling, and Success Stories. This blog is an update on my Feb 2016 blog – Transformation of Commercial Networks: Unlocking $2T in Value.
Network Effects – and TCE
As stated previously, effective networks are wonders of business and social interaction that largely re-inforce an existing pattern, product, or social structure. Networks are resilient to change as they create value to all those connected… and this value expands as the network grows (network effects). The reinforcing nature of networks has proven effective in insulating participants from being impacted by change and keeping disruptive forces at bay. Profitable companies are seldomly drawn to models that circumvent them or operate at a different margin/scale (ex innovators dilemma). New networks have reshaped how every entity can both consume and create services; thus resetting the forces that shape the design of a company (ie outsourcing/specialists). A sample of Network Success stories in last 10 yrs.
- Wechat Pay
As most of you know, my view is that networks have traditionally been viewed as UNICORNS. My hypothesis is that we will be seeing MANY more networks form as the energy required to participate in many networks decreases (due to mobile, curated networks, identity, channel orchestration, …etc) AND the power (or value creation) required to “expand” shifts away from the center and moves toward a federated (ie nodal) model.
For example, today Google has indexed the world’s public information by allowing users to select and re-inforce the “best match” within the Page rank algorithm. In this model.. Google creates, captures and monetizes all value. A new federated search would allow you and your 20k best “friend of friends” network to do the same, only on your mobile phone in a way that the information is not shared (my team has a patent pending on this one).
As I discussed in Small Wins, economists have been far ahead of us in this view. Nobel prize winner Oliver Williamson outlined in the Nature of the Firm, how Transaction Cost Economics (TCE) impact the design of an organization. Organizations are internal networks within themselves. Decreasing transaction costs, distributed intelligence and “standardization” of interfaces increases the number of networks INCLUDING those within a company.. Impacting the very structure of what roles a company takes on as “core”.
MVP – Current State
Network Payment Volumes are rising at 9.5% clip in the US (from a great McKinsey Report), while network revenue growth moves along at 12-15%. 4Q19 earnings began to show a break out performance between networks, particularly internationally where V is growing ROW GDV at 9% where as MA is growing at over 15%.
#1 eCommerce and the China Model
Much of the domestic growth is powered by cash replacement (toward debit) and how consumers shop (eCommerce). eCommerce not only provides a more favorable credit based payment mix, there are also many more services that MVP can offer. The move toward eCom over last 10 yrs is amazing, while general retail sales progressed at a ~4% clip, eCommerce sales went from $164B in 2010 to around $600B in 2019 (from 4% of retail sales to almost 12% – Statistica). These changes in consumer behavior were the top driver of network growth for V/MA broadly (10% GDV), and 20% for eCommerce focused players (like PYPL).
Internationally the brilliant disruptive force of Alipay (and Ant Financial) and Wechat pay is upending commerce, payments, lending and banking (with 1B active users). As I’ve stated many times, payments is a SUPPORTING value proposition to commerce. Consumers “want stuff” and payment is the easiest part of the services bundle. While payment people see alipay as a payment innovation, consumers don’t even think about the payment innovation.. They think about the commerce/purchase experience innovation.
The Alipay success story shows HOW QUICKLY new networks can form. US entrepreneurs and VCs are seeking to model this success.. For small businesses I like examples of Square, Poynt and Samsung’s efforts to make every phone both a payment terminal and a wallet. What power to bank (issuers) have in this world? Target, Amazon and Apple have both proved the ability to brand payments. Issuers have no power in this future.. Banks are dumb pipes unless they can deliver a value beyond payment. The best bank success story here is last month’s launch of the SRC/W3C standard..
#2 P2P, B2B and FX
In the last 5 years P2P has exploded (in the US) with Venmo processing $102B, and Bank owned Zelle processing $187B. There remains MUCH growth ahead, with Venmo moving toward merchant acceptance (monetization), Paypal’s hyperWALLET acquisition driving B2B (internationally) and Zelle is moving to US B2B. Network volumes are also starting to take off here, with Visa Direct (formerly Visa Money Transfer) powering things like AppleCash as well as many cross border payment start ups – growing to over 700M transactions. Note that FX revenue growth associated with these items above will be key for MVP in next 5 yrs.
#3 Network Services and New Bundles
Payments are the last (and easiest) consumer experience across a complex supply chain. MVP have begun making significant investments in data, services and other “bundles” over last 10 years. These services are designed to take ownership of rails to issuer, consumer, merchant and expand into data, risk, fraud, and other services. For example, Visa’s IR call last week, tokenized transactions plus CNP totaled $1T (750M tokens, across 107 countries).
Growth in services is at the heart of the acquisitions made by MVP over the last decade:
- Mastercard (acquisition overview from Forbes)
- Nets – $3.19B
- APT – $600M heart of driving a $600M+ data business
- Vocalink – Heart of UK BACS and TCH plans
- Vyze – Point of Sale Financing (ie compete with Affirm)
- Transfast – International Wire Transfer
- Session M – Merchant Loyalty
- Plaid – $5.3B – Enabling 1000s of start ups to build value on Visa Network
- Earthport – $257M – International Leader in B2B and Wire Transfers
- Rambus/Bell ID – Heart of TCH and Canada’s domestic payment schemes/token engines
- Verifi – Merchant Fraud analytics
- Cybersource – $2B – 2010
- Honey – $4B
- hyperWALLET – $400M – Leader in international B2B and disbursements
- iZettle – $2.2B – EU based micro POS (Competes with Square)
- Xoom – $890M – Remittance
- Paydiant – $280M – MCX tech provider
- Braintree – $800M – one of the best acquisitions ever
This blog is getting a little long so I’m going to break threats out in to my next part 2. Just a few quick thoughts here. The 2 keys to bank profitability in payments are IDENTITY AND RISK. These areas are undergoing foundational change, as platforms gain a much richer understanding of who you are and how you behave. eCommerce greatly expands that payment supply chain, and many NEW INTERMEDIARIES are able to take part.
7 years ago I was quite far off in my prediction that Visa’s Golden Goose is Now on the Menu. All of the efforts by US banks and EU regulators to establish an alternative were for naught. No competitors materialized, and more importantly no competing business models developed where parties would make an investment to establish merchant/consumer adoption. Today we see Visa and Mastercard at their Zenith. They have become the connective tissue between banks, consumers and merchants. They work reliably and efficiently.
In the last 10 years we have seen tremendous success of domestic payment schemes (think debit):
- China Union Pay (CUP)
- RuPay (India)
- Sepa (EU)
- Interact (Canada)
- BPAY/Cardlink (Australia)
- Mir (Russia)
- … and the beginning of TCH/Faster Payments in US
These domestic schemes present a clear hurdle for debit growth. On the credit side the top threats are instant lending or point of sale financing… which is just starting to take off.
- Vyze (now owned by MA)
- PayPal/Bill Me Later
I plan on expanding on threats in my next blog. For MVP, there are both opportunities and threats ahead in the next decade. While a see no threats to continued growth in core payments over the next 3 years, investors should significantly discount any “new” services revenue for Visa and Mastercard. Why discount? Rule #1 in networks is that they are resistant to both competition and to change (see blog). While growth of core payment rails (ie MA/Vocalink) will likely be successful, expansion to new services (ex loyalty/data) have proven to be challenging.
Paypal is uniquely situated to capture growth in many vectors, as they have the advantage of “owning the rules” and focus, and MOST IMPORTANTLY direct relationships to both Consumer and Merchant. Their top challenge is building a software platform culture and team.