The Payments Powershift is Beginning to Hit Card Networks as Banks Join Hands to Build Common Tech Platforms
June 29, 2018
Decades ago, banks created card networks like Visa. The networks were eventually privatized and have now become the large FinTech companies (if I may call them that). Today, we find that history is repeating itself.
Starting with India, followed by the US and Australia, we have seen new payment systems that allow P2P & merchant payments directly from your bank account. Banks are working together in various capacities (consortiums or independent companies) to build networks/solutions to counter the threat of Tech turning them into dumb pipes like the telecom companies are always fearful of becoming.
Zelle, a payment platform backed by over 50 banks, was launched as the banks’ answer to Venmo. Similarly, UPI in India has been fairly successful in driving mobile payment volumes away from wallets – the growth in UPI volume is largely due to third-party payment apps in partnership with the leading banks.
There has been a gap in the market as customers are increasingly demanding domestic payments to go real-time. Wallet and mobile payment companies couldn’t quickly achieve scale outside China, and Apple/Samsung Pay haven’t seen mass adoption. With increasing regulatory intensity and operational costs, banks haven’t innovated fast enough.
The best option was to create separately run consortiums or private companies founded and owned by the banks. This would enable-shared, best-in-class technology, and use both public and private resources. Furthermore, it would help with network rationalization and enhanced long-term value propositions for all parties.
Surprised that we are talking about banks innovating? Don’t be mistaken. All of this is happening outside the banks but surely helping them. In August 2016, India launched UPI, which is an instant payments system, built on top of the IMPS infrastructure. UPI enables real-time payments between any two parties’ bank accounts using just their phone numbers. With 55 member banks and several large third-party players (e.g., Google, WhatsApp, etc.) offering payments using its platform, UPI is driving the growth of mobile payments in India. UPI recently hit 10 million UPI transactions in a single day.
Credit Suisse predicted that India’s digital payments industry, which is currently worth around $200 billion, is expected to grow five-fold to reach $1 trillion by 2023. It is expected that a lot of this will be driven by UPI and digital payment systems.
Australia’s NPP (New Payments Platform) is an industry-wide payments infrastructure for fast, flexible, data-rich payments, which went live on Feb. 13, 2018. The most notable feature of NPP is its real-time, bank-to-bank payments capability, which uses just the email address or phone number of the recipient.
In the US, Early Warning launched Zelle, a digital payments network supported by more than 50 US banks. In less than a year of its launch, Zelle has seen great traction as it moved over $75 billion in 2017. The biggest driver of Zelle’s growth is the access to a vast customer base – courtesy its partner banks.
As of today, Zelle has 114 partner banks and credit unions, 25 of whom have already integrated Zelle into their mobile apps. Out of the $25 billion which Zelle moved in Q1 2018, ~$9 billion was moved through Bank of America’s mobile app. For more than 95 million consumers, Zelle is already available from the convenience of their mobile banking app, with no additional downloads required.
Even when they don’t specifically seek to use Zelle, it’s already present in their own mobile banking app, and this has been a great boost to Zelle’s numbers. Another emergent benefit (and potential risk) from the partnership and consortium approach is the sharing of data to lower operational costs, reduce risk of fraud, and have more visibility into the ecosystem.
Each bank trying to maintain the safety, security, and standards of payments means each bank pays more, is competing for talent, and isn’t benefiting from the shared datasets. Early Warning, in this case, can identify issues across the system and use the vast dataset to feed better algorithms for fraud detection. Obviously, the flip side of centralization is getting closer to a single point of failure, but when presented a choice in the current system, a smaller attack vector seems preferable.
The most impactful effect is the way these platforms are driving digital adoption for consumers and merchants. Most of these platforms are real-time and enable lower cost of transactions. This means they work very well for daily transactions.
Some of these platforms provide SDK/APIs that can be integrated by banks and FinTechs.
Value-added services such as UPI 2.0 will have recurring payments such as monthly utility bills, insurance premiums, mutual funds as well as rich data attachments to the payments.
In the case of UPI, it is fully SDK/API driven – every big tech company is building apps on top of UPI such as Google Tez and Facebook WhatsApp payments.
To summarize, it’s pretty fascinating that instant payment systems that are as cheap as cash, but infinitely portable and scalable are being built by these new type of entities. It’s amazing that innovation can come from anywhere.
Whoever is able to accelerate and simplify the process of sending money will win!
How are you thinking about leveraging new payment systems to improve your customer’s experience? Reply to this email and let us know how. We’d love to hear from you.