There have been a number of interesting pieces on payments in the last few days. Farhad Manjoo wrote a thought-provoking piece on PandoDaily about how new innovations in payments are really just a thin veneer on top of the global credit card infrastructure. The front-end might be changing but the pipes are still the same. Erik Hersman piled on pointing out that while things may be business as usual in the US and Europe, those parts of the world without credit card infrastructure (especially Kenya) are seeing real innovation. And Tim Harford one-upped them both by reminding us that cash is still around and won’t go peacefully into the night on an ice floe.
These pieces serve as an opportunity to step back, to take a look at where payments are today and where they might be going.
First I would like to take a look at Manjoo’s post. His core premise is that credit cards are incredibly efficient and ubiquitous today and that supposedly-new payment technologies are really just new customer experiences built on top of the existing credit card infrastructure. Fair enough. But let’s break this down – first, what value exactly does the credit card infrastructure provide? Why is it a platform that has become so ubiquitous?
- For Purchasers:
- Security – carrying less cash leaves less to be stolen.
- Short-term loan – credit lines enables you to spend money you don’t yet have.
- Convenience – carrying less small change is nice and you don’t have to worry about carrying sufficient cash for large purchases.
- Rewards – credit cards can earn you miles, cash back, points, etc.
- For Merchants:
- Security – having less cash in the till to be stolen.
- Agency – less cash handled by employees results in less internal loss; with credit cards there are receipts and records to track each payment.
- Data – rich customer and sales data, probably not very well leveraged today.
- Basket size – credit cards might encourage customers to spend more.
- Parity with other merchants – very few merchants are willing to lose a sale because the customer wants to pay with credit, so they feel compelled to offer it as an option.
- For Banks:
- Scale – credit card networks eliminate the need for bi-lateral agreements between banks everywhere.
- Settlement guarantee – credit card networks provide certainty that the merchant bank will receive payment.
That’s a lot of value that credit cards bring to the main 3 constituents in a purchase transaction. And each of those items is probably worthy of a post on their own.
But for now, let’s move to the main point of Manjoo’s article – that new payment innovations are mostly just superficial front-ends on top of the credit card infrastructure. That’s true – today. But it doesn’t mean that will necessarily be the case tomorrow. The big question here comes down to: where will the store of value exist? Today, it’s largely in two places – bank accounts and credit cards. Bank accounts we’re all familiar with, but they’re not optimized for payments – they’re optimized more for savings. Credit cards, on the other hand, are really just post-paid stores of value – Visa gives me $2500 of value to spend with my commitment that I’ll pay it back at some point. The big question is whether there is room for a new store of value in our lives. Paypal has tried and succeeded to an extent – but I’m not aware of data showing how much money people actually load into their Paypal account for easy (and cheaper) spending elsewhere. Dwolla is trying to do essentially that same thing – by encouraging you to load your money into their store of value account from your other store of value account (bank account) so that you can use it to pay for things (with more security). Likewise, Square (Card Case) could do this as well. Same with Apple (iTunes), Amazon (Amazon Payments) and Google (Google Wallet).
Interestingly, in the US, Starbucks may be the farthest along in creating a new store of value account.
Looking outside the US, M-Pesa in Kenya is perhaps the most successful new stored value account the world has seen since credit cards. It’s enormous: 14.9 million registered users out of a population of roughly 40 million people. To put that in perspective, that level of penetration would represent 115+ million people in the US, more than Paypal and probably in the neighborhood of Apple and Amazon – but as an entirely new stored value account, not as a simple credit card front-end. That’s massive.
All this to say, Manjoo’s right that credit cards are by far the biggest source of stored value for payments in the US today (next to cash that is). And he’s right that today’s payment innovations are more about new front-ends that leverage that credit card store of value – which is a valuable thing on its own.
But I’m more optimistic than Manjoo that there’s potential for change and innovation in stored value accounts in the future. M-Pesa has showed us that it can be done. Getting to critical mass is definitely a major challenge and so riding the credit card infrastructure until you have good penetration is an efficient approach – and one that most of the major players are taking today. Once that critical mass is obtained, the potential for bigger disruption is ripe – but they’ll have to deliver more value than the trusty credit card infrastructure does today.
 Pretty genius, actually. Instead of making me load my credit card with value from my bank account, credit cards let me spend, spend, spend and then have me transfer value from my bank account after the fact.
 A lot of Paypal’s payments are just facilitated credit card payments, as Manjoo points out.
 Latest official statistic as of November, 2011 has 14.9 million registered users (http://www.safaricom.co.ke/fileadmin/About_Us/Documents/Half%20Year%20Results%20September%202011.pdf).
 Credit cards leave a lot of untapped value on the table. Information is perhaps the biggest – it took a service like Mint for us to be able to get that information into a format amenable to analysis and visualization.