Does Our Industry Need Defragmenting?

Does Our Industry Need Defragmenting?

Does Our Industry Need Defragmenting?

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James Cranfield

James Cranfield is a seasoned payments consultant, heading up Insight Consultancy, an international payments advisory firm with clients across the globe.

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Our industry has changed, and it almost appears that there is a paradox developing. From within, it is easy to see that the landscape has become more fragmented than ever. However, this isn't necessarily a bad thing – and the end user is arguably getting a more efficient and frictionless payment experience.

There are now more parties involved in the payments space than ever before, and while many new players fall at the first hurdle, there are countless others that have carved their own (often fresh) new ground. While some of this might relate to new players specializing in one particular field, it is also clear that multiple "form factors" and the breathtaking pace of innovation are also fueling this fragmentation.

In the 1950s, a BankAmericard credit card transaction would have taken a very different path from that of an Apple Pay transaction today. It would also have involved far fewer players aside from the issuer.

But this was in a pre-Internet, pre-ATM, plastic card world over which the bank had total control. Today, the bank cannot go it alone. But is this fragmentation good or bad?

Too many mouths to feed?

With the seemingly exponential growth in the number of stakeholders in the payments ecosystem comes increased complexity and new rules of interaction and engagement. But most importantly comes a need to share the value generated by payments amongst a larger community. This "carving up" of the business case is taking place against a background of increased regulation and eroding margins.

When BankAmericard launched in the 1950s, its merchant service fee (MSF) was 6 percent. Compare this with, for example, a new regime of interchange-plus pricing and EU credit card interchange capped at 0.3 percent. Of course, volumes are much greater, and with innovations like contactless and peer-to-peer payments, cash is being displaced like never before.

Too much choice?

It could be argued that our industry is going through a phase of over-supply of solutions. There has been much talk of convergence in technology, but if anything we are seeing the opposite happening with more ways of paying via different form factors and use of different providers.

This is being accelerated by the creation of competing innovation labs in the industry. Innovation should, of course, be encouraged, but the implementation of the resulting technologies could be carried out in a more collaborative manner to improve the chances of consumer adoption and minimize the confusion associated with a plethora of new solutions.

Today there are more than 50 fintech startups valued at more than $1 billion – so called "unicorns." History shows us that only a handful of new players will survive in the long term, as lack of demand will weed out those technologies that were designed and pushed by banks as "solutions looking for problems." This Darwinian effect should mean that in the long term, the industry will defragment itself.

What about those who thrive on fragmentation?

But for some players, industry fragmentation provides an interesting opportunity. The payment schemes (Visa and MasterCard) were born out of a need for connectivity between different players in different geographies. Their network and rules provide a platform for interaction between a wide range of players, both financial and non-financial.

With the growth in numbers and types of stakeholders in the industry, the schemes' role becomes increasingly important. We have seen a number of recent examples of growing pains in the industry as gaps develop in the infrastructure and are immediately exposed by the most cunning innovators of all – fraudsters. Data breaches are a good example of this. As important customer information is shared amongst a larger group of organisations, some of whom treat data with less security than banks typically do, points of weakness appear and are exploited.

There is still talk of disintermediation of the schemes, and this threat will persist and keep them on their toes for decades to come. However, the very same fragmentation that threatens them protects them too.

Mobile payments have often been cited as a potential source of disintermediation. In the early days, it was speculated that Mobile Network Operators (MNOs) might have the scale to take on this challenge, and lately it has been the handset manufacturers that have threatened to disrupt. However, the fragmentation of the payment solutions and the lack of dominance by one player could be key to survival for intermediaries like the payment schemes.

While Apple and Samsung have considerable weight and their respective iOS and Android platforms have carved out a significant piece of payments profits, neither of these technologies is dominant in all geographies. As a keen iPhone user, I was surprised to learn recently that iOS only has a 15-percent market share in my home country, Spain. This combined with the lack of a single Android solution and the development of separate handset solutions (Samsung Pay, LG Pay, etc.) means that the need for interoperability is still very important.

The need to collaborate and develop long-term partnerships between old and new stakeholders is becoming increasingly obvious, and we are seeing more of it in the industry. In short, the payments space is essentially being socialized. Schemes will elevate themselves from being intermediaries to become necessary platform providers. They will need to quickly recognize the "friendly fire" startups that use their infrastructure (Uber, for example) and distinguish those that are truly disruptive, and risk disintermediating them.

So where will this end?

It won't. The pace of innovation will increase, but the need for global interoperability will ultimately determine the survival of many of the new form factors that are being developed. Some new players will fail faster than others have and move on to more compelling consumer-driven solutions to the benefit of all. Those solutions that take friction out of payments will probably thrive best.

The statements and opinions of the writer do not necessarily reflect those of TSYS.

Other Articles by James

James Cranfield

James Cranfield is a seasoned payments consultant, heading up Insight Consultancy, an international payments advisory firm with clients across the globe. James' expertise lies in the areas of strategy, profit optimization, partnerships and simulation-based learning.

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