At the retail level payments have changed beyond all recognition since 1930. In 1930, we had cash, current accounts, cheques, wire transfers and closed-loop cards whereas now we have cash, current accounts, cheques, wire transfers and open-loop cards. Between the white fiver and M-PESA, we’ve enhanced wire transfers through ACH at the national level and SWIFT at the international level and introduced cross-border clearing and settlement at the wholesale level. The pound in your pocket, though, hasn’t changed since 1930. Well, technically, since September 1931 when the then Chancellor of the Exchequer, Philip 1st Viscount Snowden, took Britain off of the gold standard.
Listening to Gill speak — as those of you attending the 15th annual Digital Money Forum will be able to on Wednesday morning — made me reflect on that pace of change. Surely we’ll have done something more radical with money a generation from now?
Gill’s analysis is specifically concerned with financial services, so when she noted that one of her assumptions is continued technological progress I couldn’t help but wonder about the complex inter-relationship between finance and technology. Finance doesn’t seem to progress in the same way as technology. Technological progress, while not “directional”, is certainly cumulative. Engineers and scientists don’t forget about building bridges or the Theory of Relativity and start all over again. But in contrast, finance goes round and round (as it must do, according to the Austrians) from boom to bust.
So are payments going to follow the cumulative progress of technology or the cyclical non-progress of finance? I’d argue for the former. Payments is separating from banking and becoming more linked to the curve of technology.
This would bring us to a period of utility banking. Boring. Just like buying water, and electricity. But it is there for those that prefer the security of those basic services, which I would suggest are likely the majority of people.[From Real banking innovation requires separation of basic banking from the rest of financial services « The Bankwatch]
This immediately leads to another debate in my mind, one that I am sure will break out more than once at this year’s Forum: are payments are utility banking service or just a utility service? The evidence, it seems to me, points to the latter. When you consider the number and range of non-bank players in the payments value network, you can see how they will become the focus for innovation. So what is the bank perspective on all this?
Non-bank payment specialists are cropping up all over the world, using technological advancements to steal a march on the banking industry. But are these companies a threat to the more traditional providers of payments, or do these largely niche businesses present partnership opportunities to banks?[From Are non-bank specialists challengers or partners to banks? – Reports – The Banker]
Isn’t this a rather limited world view? It depends on the existence of a regulatory moat around the payments keep, because (to coin a phrase) the barbarians are at the gate.
The EC has opened an antitrust investigation into whether the European Payments Council (EPC) is blocking new, non-bank, players from entering the online payments market.[From Finextra: EC launches antitrust investigation into EPC and e-payments market]
I doubt the conspiracy theory, and given that there are more than a thousand Payment Institution (PI) licences already granted in Europe, it’s only a matter of time before players such as O2 Money are up and running without bank partners. But what would they do that is different to banks? I’d hope that one answer might be more innovation, and I think it is possible to point to a specific area — one that was discussed at the London BarCampBank earlier this year — which is opening up APIs so that utility payments can then by integrated into more complex applications.
Learning from such open source processing PayPal launched X, a developer based service for PayPal processes as APIs, Application Program Interfaces. APIs allow anyone to pick up and drop PayPal into their systems and, like banking products as apps, allow PayPal to be reintegrated by third parties into any code and operation desired.
The result is that PayPal’s relevance increased massively overnight and led to Citi following a similar approach, when they announced that their transaction services would be offered as APIs at SIBOS this year.[From The Financial Services Club’s Blog: The future competitive battleground]
I think this is a realistic interpretation of what Gill’s most likely 2050 scenarios turn into at the retail payments level: non-bank utility companies providing standard APIs and competing on quality of service and grade of service, smart pipes just like the telecommunications operators are going to be. Surely some synergy?
These are personal opinions and should not be misunderstood as representing the opinions of
Consult Hyperion or any of its clients or suppliers
Banking organisations , ie those holding government authorised licences are fundamentally different from payment clearing organisations. Banks are required to comply with specific (inter)national legislation on many fronts not least the requirement for liquidity, whereas a payment entity like paypal has no such requirement. It is reasonable to assume that technology will deliver platforms for payments that are unbanked. Users should be aware of the different risk profile that each attracts. See paypals dispute resolution service. And technology advances are fully capable of delivering all manner of payment and monetary systems but are not banks. Banks will be able to utilise any technology they choose but have a fundamentally different business model.The consumer wuill have to take an assessment of the risk they are prepared to undertake when using a payment organisation that is in effect dis-intermediating the bank.
zero because it is not a retiecflon of your personal bank account, just what someone has paid you. It only shows what people have sent you to that paypal account, not your bank. If the bank account is linked to it, the bank account is just a back up. You could still use it then if it says $0, because it would then take it out of your bank. You can request money from your bank to be put into paypal. takes 4 or 5 business days. And you can also take the money out of paypal and send it to your bank, takes 4 or 5 days. You can also get the paypal debit card and use it like a regular master card from the money in your paypal account. It is free to get and if your bank is connected to your paypal you can use it with the funds in your bank.
Differentiation needs to be made between holding retail deposits and offering payment facilities(paypal, visa debit etc etc). Retail banking is unlikely to attract many (if any) new entrants, since the business model, as is now, and as will be circumscribed by new (inter)national legislation and is of low/nil profitability. This will continue to make the business of retail banking unattractive, however, any API on any platform at some point will need to reference a retail bank account where the cleared funds reside. Banks will charge for access to their retail account data sets, why, when they are disintermedated would it be otherwise. Therefore whether payment platforms are independent or utility like will depend on access charges from banks and their type of API. There are low barriers to entry for the creation of payment platforms (eg,off the shelf visa cash from Cardbase), Therefore the major cost will be in marketing and customer acquisition, the platform cost, transmission network cost is negligible. The singular major points to consider will be Bank API charges and Customer acquisition. If any entity intends to take retail deposits then the Legal requirement will be/continue to be to have a banking licence.