Where is Payments Innovation?

There are a bajillion players in payments. The stack reigns as follows.

  • consumers & merchants

  • fintechs (middleware, neobanks, etc.)

  • v/ma

  • issuers and acquirers (banks)

payments is a business about 1) risk management 2) trust and value management

banks' role

  • NOT the starting point for transactions / commerce

  • neutral player

  • legacy business in high fees, complexity. this is their play. high barriers to entry.

    • centuries of experience in building trust

    • but disruptors will find a way (bitcoin)

  • wants control of the network

v/ma role

  • more card volume = happier v/ma

merchants & consumers

  • merchants to accept any payment that consumers want (let consumers choose). not actually loyal to any payments service themselves.

banks' margins will be crushed if costs of managing risk and customer relationship go down. Differentiation justifying high costs here has greatly diminished. Some fintechs have come along and done it better, managing risk down to 3bps. Issuance and acquisition costs are basically 0. clearly banks stand the most to lose because they are slow moving and seek control where they don't really have it (consumer choice).

so who owns the consumer and choice? Companies we know today like Apple, Amazon, Google. They own consumer choice and the ecosystem and most importantly, the data. Everyone else just has to figure out how to work with them.

v/ma stand to win more if they support merchants more, not banks. that's not where the value is. support merchants more, maybe charge better tiered rates or lower rates, expect higher payment volume, ultimately have a fatter bottom line.

So core payments innovation is unlikely and high cost / time consuming. Focus on ecosystem builders and enablers.

Tbh value doesn't even pool with payments. It pools in what payments can enable. so better payments = whatever is built on top has the opportunity to be better.