This is the first part of a four episodes sequel introducing why iPiD was born.
The upcoming push payment revolution
If you are looking for a meaningful problem to solve, look no further than payments
Global payments were a 2 trillion USD revenue opportunity in 2019.
That means that corporations and individuals paid 2 trillion USD in a year to solve their payment problems. To put things in perspective, the FAANGs (Facebook, Amazon, Apple, Netflix and Google) “only” delivered 791 billion USD in revenue in 2019.
And, this payment problem (opportunity) is not getting smaller. Take a look at the growth rates.
Global payment revenue have grown at 7.4% CAGR between 2010 and 2019, significantly outperforming the world GDP growth of 3% in that period. Comparing the growth in public companies’ valuations tells us who the markets think has been successfully working on the most meaningful problems.
Payment Companies significantly outperform banks with a shareholder return 5 times bigger than banks (retail, corporate and investment banking).
These numbers do not even factor in the billions of venture capital invested in private payment companies and the impressive growth in multiples in that space. Even though Plaid is not a pure payment company, they are definitely relevant for payments and they are now valued at 13 billion USD after their Series D funding round, for an annual revenue reaching about 170 billion USD in December 2020 according to Forbes.
The ability to pull funds is essential in a digital economy.
One may argue that there is one big new “job to be done” behind the growth numbers quoted previously: enabling merchants and platforms to get paid digitally.
Pulling funds from customers for online e-commerce transactions has created a new problem to solve for the industry. This was a quite existential problem for merchants and platforms – without a payment, there is no transaction. And the problem comes in multiple dimensions:
- How can I have certainty on the payment outcome whilst avoiding adding friction to customers?
- How do I offer the payment methods that my customers need without spending a fortune on integration and reconciliation?
- How do I protect myself from fraudulent payments?
- How do I leverage the data across online, offline and the various payment methods?
Payment companies like Stripe, Adyen and others have been focusing on solving for that much more successfully than banks. There are good reasons for that. At the core, banks are the custodian of our money, acting as an intermediary between those who want to save and others who want to borrow.
Pulling funds from other financial institutions seems like a natural extension of banks’ core mission but this is primarily a technology problem and these tech native, pure-play payment firms were better positioned to address it. Banks also face restrictions in terms of what they can do with the data whereas those payment companies have more room to manoeuvre.
We have not reached the end of the story yet for pull-payments
There is still a lot to accomplish in to help businesses pull payments from customers.
Banks have not completely missed out on the e-commerce payment opportunity. They are still earning fees on Credit Card transactions facilitated by the Adyen and Stripe of this world for instance. There is nonetheless a source of concern for them. Payment companies entered the market to solve a C2B payments problem but the ripple effects are felt in other segments. Just think of two examples:
- More than 50% of e-commerce transactions will be paid by mobile/digital wallets in the coming years according to WorldPay Sixth Global Payments Report. These digital wallets can also be used to push payments to other wallet users. Some wallets are linked to bank accounts and hence banks remain the custodian of money but they are disintermediated.
- For the payment company working with, say Uber, to pull funds from customers, the logical extension is to help Uber to pay drivers. Hence, entering the push payments for businesses.
Push payments – a new expectation
It is only natural that pushing payments starts with banks. They hold our funds and they are connected to the domestic and cross-border payment rails.
It can work beautifully when the industry invests in Real-Time Retail Payment Systems like AU NPP in Australia, Zelle in the US, or PayNow/Fast in Singapore. In a growing number of countries, it is – or will be possible soon – to pay someone’s phone number on a real-time basis, often free of charge.
The benefits of Real-Time Retail Payment Systems exceed the consumer-to-consumer payments.
For business-to-consumer, the typical benefits are for:
- Refunds: businesses can pay using mobile phone number as a proxy, bringing convenience and certainty;
- Pay-outs of winnings (e.g. lottery) or earnings (e.g. gig economy workers). Businesses have typically already collected the mobile phone number and hence the pay out is frictionless.
For consumer-to-business, push payments are becoming a true alternative to card payments thanks to:
- Merchant QR codes that consumers can scan to pay for in-store transactions;
- Request-to-Pay when the Real-Time Retail Payment System has rolled-out that functionality;
- Open-banking will make it easier for third parties to initiate bank transfers from the consumer accounts.
The success of push payments in the domestic space is setting the expectation for cross-border payments.
Business history tells us that when there is a meaningful problem to solve, money and entrepreneurs will go at it. Wise (formerly Transferwise) gave it a first stab by addressing a specific issue: cross-border C2C (Customer-to-Customer) payments between developed economies with a model based on matching inbound and outbound flows in corridors that are more or less in balance.
Remittance start-ups like Wise have certainly captured flows away from banks. But, it is not easy to make a living out of fees and FX when your customer proposition is no fee and limited FX spread. Don’t forget that when banks look at the customer profitability, they can also rely on the Net Interest Margin from deposits and cross-selling other financial products. In this context, it is not a surprise that Wise is growing out of C2C payments. They now evolve towards becoming a digital bank in some markets and selling their capabilities to corporations and financial institutions.
Banks have also fought back. SWIFT gpi made a significant difference by speeding up cross-border payments and enabling end-to-end payment tracking.
Despite all that, we are not yet at the stage where you can have a similar “Pay Now” experience domestically and cross-border. We will explain in the next episodes how history is being written in that space, and how iPiD is an important chapter in that story!