One of the important lessons of the Internet is, how easy it is to get things done completely shapes what gets created. For that reason, technologies like Amazon’s cloud service are very important. Even if they aren’t technically impressive, they make things easy to do — Patrick Collison, Founder of Stripe (stripe.com)
As per McKinsey global research institute, the global payments industry is expected to grow at a Compound Annual Growth Rate (CAGR) of 7% to reach approximately $2 Trillion in size by 2021. On March 5 2018, the Wall Street Journal published an article about Amazon in talks with banks to offer a checking account like product to its customers.
It is not surprising then that everyone wants to be a part of the global payments industry. That is because payments are so intrinsic to everyday life that any single company or group of companies that occupies the wallets of consumers becomes intractable from that consumers’ life.
Today, the payments landscape has become symbolic of vertical integration where vendors or e-commerce platforms want to own the pipelines that supply money. With a plethora of players (such as Amazon, Alipay, WeChat, Venmo, Ripple and others) and new technologies such as the SWIFT gpi and the Blockchain vying to upend incumbents, it is too early to predict winners.
The cross border remittance market is also another hotly contested marketplace.
This article is intended to help the reader make sense of the rapidly evolving global payments industry. It also provides a glimpse into the likely future of this industry.Ultimately, simplicity and network effects will help separate the leaders from the dinosaurs. We are all along for a fascinating ride.
What is A Payment?
As the name suggests, its not hard to imagine what a payment is. In simple terms, it is the transfer of money from one person to another. A payment for one party will be a receipt for the other party. Payments can also be viewed as an exchange of value ie money paid for goods and services.
Payments can however be categorized based on various criteria:
On the basis of players involved: Business to Business (B2B), Business to Consumer (B2C) and Consumer to Consumer(C2C)
On the basis of mode of payment: cash, cards (credit cards, debit cards etc.) or mobile payments (wallets, Apple Pay, AliPay, Samsung Pay etc.)
On the basis of geography i.e. domestic and cross border.
Over the years, the payment industry has become more open, fragmented and spread across a variety of devices.
How Big Is The Payments Industry?
The global payments industry is expected to grow rapidly with Latin America (9%) and Asia Pacific (8%) leading the growth. These geographies benefit from the fastest growing population, cell phone adoption and leapfrogging on the innovations already launched in the developed world. Roughly 86% of millennials live in Asia.
In China, for instance, AliPay, WeChat Pay and China Union Pay dominate the payments landscape. As per CNBC: Rather than, “Do you take credit cards?” the question was often “Do you take Alipay? WeChat Pay?” The running joke was that street beggars would rather take a mobile donation than cash.China ranks 6th on a ranking of the top 10 cashless countries with Canada, Sweden and the UK making the top 3 and the US ranked 5th.
What Factors Fueled The Growth & Evolution of Payments?
The growth of internet and e-commerce coupled with growth of debit and credit cards accounted for the initial boom in the payments industry. In 1984, Compuserve became the first company to launch an electronic mall in USA and Canada. However, it wasn’t until 1994 when Amazon was setup and security protocols were developed in 2000 that ecommerce began to flourish.
Overseas remittances accounted for another important factor. India ($70 bn), China($60 bn) Philippines ($25 bn) and Mexico ($22 bn) account for the majority.
Today, at the center of virtually all payments are banks and card networks (Visa and MasterCard). However, the landscape is rapidly changing. These developments are fueled by Open API’s and the Blockchain. Also, new players such as Amazon, Ripple, Klarna and a slew of FinTech players are fueling innovation.
Open API’s (Application Programming Interfaces), which are essentially bits of software code that allow different applications or software programs to talk to each other and share data, are fueling the present growth of the FinTech landscape and the entry of new players into the payments industry.
PSD2 is another game changer in Europe. FinTech startups can now access client data residing on bank servers subject to certain compliance requirements. PSD2 or Payments Service Directive 2 will herald another era of open banking according to many.
Blockchain and players such as Ripple are taking innovation further by creating an Internet of Value where anything of value i.e. fiat currency, commodity, cryptocurrencies can be exchanged cheaply and securely using the Blockchain.
Smart contracts and developments in KYC (Know Your Client) and AML (anti money laundering) initiatives will form the backbone of growth in the future. Online payment fraud is a significant area of growth for many tech companies.
With the introduction of smart phones, a slew of apps such as Paypal, Venmo, Square Cash, PayTM (India), ecommerce entrants — WeChat Pay and Alipay, Linepay (Japan) and perhaps the most striking — mPesa from Kenya took control of payments from the laptops to smart phones.
Banks have formed consortiums such as Zelle Pay to battle new FinTech players. Digital wallets such as Google pay, Apple Pay and Samsung pay have also built their network around their devices.
On a side note, this article is a very simplified version that explains payments to readers not so familiar with this industry. I will be writing a more detailed explanation of the payments landscape in subsequent articles.
Jarvis, Get Me An Ice Cream!!
Ultimately, in a universe that includes Venmo, Apple Pay, Square Cash, Zellepay, WeChat, Alipay and countless others, the victor will be the network/platform that will be the most deeply embedded into consumers’ lives.
If you have seen Iron Man (the movie) where Robert Downey Jr. summons Jarvis (his Artificial Intelligence AI assistant) to handle practically everything for him, you know what the future of personal AI powered assistants can look like. Everything from food, banking, communications, knowledge could be accessed by a chip in the brain. This means human intellect receives a giant force multiplier and becomes capable of combatting any threat posed by Artificial General Intelligence that goes rogue.
Now, the important thing to think about is: will banks, e-commerce, search and tech companies essentially become backend utilities? Yes,it’s a very likely outcome. Money will be completely digitized and so will all the data needed to interact with humans as another human can. A highly advanced Turing complete computer that interfaces with human via speech and even possibly an Artificial avatar that can be seen. Brain Machine Interfaces (BMI) will be able to convert humans into another node on the Internet of Everything with the personal assistant being another node. This would mean a parallel universe where humans can enter and go off the grid simply by thinking of it.
The company or companies that are able to create this “Jarvis” will be the new gold miners where data will be the gold and the AI that uses this data to become human will be the ultimate creation that humanity can conceive of. So, the next time someone asks Jarvis for an ice cream, it will pay electronically in tokens (with the transaction recorded on an advanced blockchain) to the nearest ice cream vendor (based on location) who knows his preferences and will use an automated vehicle (drones even) and send the ice cream to the destination. With such a seamless experience, does the user care to know who the bank was or which company provided his data (as long he has authorized that company)? No.
Everyone wants the simplest possible experience that requires the least bit of effort. They just want their favorite ice cream delivered fast.
However, the first emotion that such scenarios produce in the human mind is fear of the unknown. Understandably, people don’t like mad men because they don’t know what these men will cook up next.
Remember, the future is the domain of dreams and not conventional wisdom. If it were, it would not be the future.
Whatever the future may look like, payments will be transformed into a process of exchange of value. Will any single entity control the pipelines which transfers this value or will different entities interface with each other? Again, think about the end user and what his experience should look like. Ultimately, the most likely scenario is one which could be thought of as ahead of time now but which was always preordained because we prefer the simplest way to get our ice cream.