Sorry for typos
My good friend Dave Birch wrote a piece in Forbes today on Account to Account transfer threat to V/MA. I wanted to provide an alternate view. This will likely be a multi part blog.. today I’m starting with the consumer and the merchant (from a US perspective).
My key rules of thumb in consumer payments:
- What problem will this solve and for whom? Get anyone advocating A2A to answer this question.
- There is no consumer value proposition in real time payments. Paying a merchant faster is not something consumers want. As part of the Feds effort to assess market needs (see blog), the only consumer use case they could identify was “emergency bill payment”.
- The economic model in payment is the key to success. This is the V/MA innovation. Parties that own risk must be compensated for it. Successful payment networks revolve around a shared and enforceable definition of roles, standards, counterparties, trust and risk. These attributes and the operating model drive participant investment and scale. Regulatory driven initiatives like SEPA, PSD2 (open banking) have failed because of this dynamic.
- A 20% improvement in consumer value is required to change behavior. Commerce has been the key driver of change (Alipay, Wechat pay, PayPal/eBay, …).
- Customer experience. Today your card information is stored in mobile wallets, in your browser, integrated into your PC’s operating system. Consumers know how this works. Why on earth would they change? Affirm and credit access does provide a great example of why a consumer would change. A2A? Not even close.
- Payments is the easiest part of commerce, and is becoming embedded infrastructure (like water/electricity). They are the ONLY ubiquitous payment method in US/EU. As such, V/MA are at the heart of 85%+ of all FinTech innovation because there are economics and rules. Companies like Stripe, Shopify and Adyen have made payments easy. 75%-85% of their revenue is from software services, payments are becoming a loss leader in a larger bundle. The model for success in US is Target RedCard (see blog).
- TAM. Merchants care MUCH MUCH MORE about acquisition and conversion than a 100bps payment cost savings (blog). eCommerce is “lumpy” with Amazon, Walmart and others accounting for over 50% of total $430B of retail eCommerce. The success of merchant initiated payment schemes is why V/MA will make Amazon happy (V is confident that it will resolve their dispute). TAM for A2A is diminished by 1) removing the threat posed by a retailer initiated A2A adoption and 2) subtracting PayPal’s eCommerce TPV (ie non Venmo/b2b/xoom) leaves ~$40B competitive opportunity for A2A across 1000s of small online retailers. Sure Stripe and Shopify can offer it.. But why would a retailer turn it on?
- Wallet wars are largely over and it centers around the mobile phone. ApplePay gets 15bps from each card used, but prefers its own AppleCard. Why would it ever let another payment instrument in the wallet? Where there is a unique domestic need (India, China, Canada, …). In the US today, only 6% of iPhone owners use ApplePay.. Demonstrating the difficulty in changing consumer behavior, behind the #1 brand and #1 consumer experience.
- Everything in A2A today has been tried before. PayPal has done it since 1998.. And built a unique risk infrastructure to drive electronic payments in eCommerce where there was none (ie greenfield competition). Today consumers in the US pay bills in A2A through bank bill pay. The are presented with electronic remittance in formation (request to pay) and submit their payments.
- Fraud, Protections and Customer Service. Instant payments schemes have historically been regulatory driven. As part of CNP, merchants own the fraud risk and have developed tools to manage this fraud. Because of their investment, they are well placed to manage risk in a transaction. Within A2A, who manages the risk? What are the operating rules when there is a fraud claim? What regulatory responsibilities do banks have to research? What about rebates and returns? How is a “hold” placed on an account pending shipment and delivery of the merchandise? The head of treasury for a top 3 retailer said it this way “V/MA is the devil we know.. There is risk in any new scheme where retailers can’t define rules”. None of this rule definition has taken place.
- Future pricing (new) – Riding on the “devil we know” comment, retailers also have certainty in future costs. PayPal has been offering ACH payment to users for 20 yrs, they have been charging retailers for this service. If retailers begin to roll out pay with ACH, what certainty do they have over future pricing? There are no agreements in place with the Consumer’s bank, processor, ODFI, gateway, … the economic model, agreement construct, and compliance regime are all very grey. The cost of debit acceptance.. is VERY SMALL.
- Ubiquity and infrastructure investment. Systems complexity and dependencies on card processing (just to name a few): Customer Service, POS/Checkout, Fraud, Advertising (audience creation), Advertising measurement, data warehouse/customer data platform (CDP), treasury/cash management, processor integration, compliance, Info Sec PCI/DSS, Vendor management and DD, third party vendors. All of these costs are incurred assuming you have created a compelling value proposition and customer experience. I’m painting a picture of investment required to make this work. The costs here create a 4-10yr payback on realizing a 100bps interchange savings.
- Will banks support it? There is a VERY big difference between making something operational and getting all parties to agree to actively support it. For example today I can log into Bank of America and provision my payment instruments to PayPal. Banks are well positioned to hamper anything they don’t support. This means there must be an economic case for them ABOVE what they would incur from cannibalizing existing products. See blog.
- Banks are not aligned. The Top 20 banks are heavily invested in TCH’s RTP, which is built on tokenization and Vocalink. It is 10 yrs ahead of FedNow, with Venmo and Zelle volume (disbursements) already flowing through. These banks don’t want to see FedNow move. My view is that if Banks want to play in instant payments in eCom, they have a play ready to go: Zelle. Why aren’t banks moving? They don’t want to cannibalize existing streams. If consumers demand instant payments? They have the answer ready.. Zelle has many many advantages over FedNow and A2A, being integrated into a shared fraud service AND integrated directly into banks (online and fraud case management).
- Visa and Mastercard are VERY EFFICIENT NETWORKS operating on just 3-8bps. Just to restate their advantages: Ubiquitous, efficient, well defined operating model, defined economic model, enforceable standards and certification regimes, integrated into back end systems of all parties, … top 10 brands across all companies. Consumers TRUST these brands, this trust was earned over 35 yrs..
Will there be successful uses of FedNow? I’m sure there will be, but remember wire transfers are available today through most banks. Where we have seen most successful real time payment systems develop is where there is either: 1) a “greenfield” environment (India, China, Indonesia, … 2) Unique domestic market dynamic and V/MA card penetration was below average (Germany, Sweden, …etc) 3) recurring payments between trusted parties
What are the key litmus tests to assess trajectory and the validity of this view?
- Large eCommerce Retailers. If Amazon or WalMart moves to enable alternatives (with incentives) this changes substantially. Venmo acceptance is a first shot across the bow.
- Consumer wallet. Will another PayPal or ApplePay develop?
- Bank “support” of FedNow.
The hype around Fed Now, A2A, RTP just makes me laugh.. “nothing new under the sun”. A good metaphor for this “innovation” may be the Airline industry. Think about the investment in airports, planes, maintenance hubs. Southwest airlines celebrated its 50th anniversary this summer (see Dallas News Article) it focused on serving specific segments (that were underserved). Delivering speed and quality at a different price point. They operated from different airports to resolve gate availability issues. Southwest found a niche and focused on it.. today it has 17% market share. The opportunity for improvement in payments is MUCH smaller… and the onramps and off ramps are all controlled by competition with no economic incentive. I’m open to a contrary view.. but I don’t see it happening.
- A2A will flourish where there is high trust with beneficiary (Venmo/Zelle and recurring payments.
- There is NO EXAMPLE of consumers moving away from V/MA in a geography where it is established.
- V/MA are very efficient networks with deep investment by all parties.
- Domestic network success like UPI/India, Pix/Brazil, iDEAL/NE are broad, but the environments are unique and shouldn’t be seen as a V/MA threat.
- Change within consumer payments is a complex function of: trust, value, ubiquity, customer experience, barriers and economics of all parties.
Also see these blogs for further reading on real time payments