By Brandes Elitch
Occasionally, people will ask me about the future of payments. I might be considered an expert on the subject, based on the more than 30 years I've worked in the field of corporate cash management. But for this article, I was fortunate to interview a real futurist, someone who spends most of his time thinking about the future by analyzing current events and drawing conclusions about where they could lead. His name is Chris Skinner.
Skinner writes a daily blog at www.thefinanser.com. His posts are read worldwide daily by many of the most senior people in banking and payments, where he also has a thriving consulting business. The Wall Street Journal named him one of the top 40 most influential people in fintech. He also appears on a top five list of information security leaders, and has been voted one of the most influential people in banking worldwide.
Skinner's new book, Digital Human, analyzes such current developments as digital identity; new forms of currency; the dominance of Alipay, the world's largest third-party mobile and online payment platform; and the interface of banking and technology. He is also a compelling speaker. I heard his talk at Money 20/20 2018, and this caused me to think about the future of merchant acquiring. I am concerned about the ISOs and merchant level salespeople (MLSs) prospecting every day for new merchant accounts.
For ISOs, MLSs and their processors, revenue is derived from markup of interchange, as set by the card brands, and associated fees. Hence, revenue is dependent on signing up merchants and running their transactions on the card brand rails. This also requires a close relationship with the banking industry, which provides settlement of funds to merchants.
Changes in the world of banks and card brands will impact revenue and profitability for our readers. In addition, the list of eligible employers is shrinking. Today, only six legacy acquirers remain, and some analysts predict this will shrink even further in the near future.
Skinner sees big changes coming in banking. The back office is being affected by the cloud and data analytics; the middle office by APIs and plug & play software; and the front office by mobile devices and the Internet of Things. But the big banks are driven by legacy core systems that run on COBOL (43 percent) and use batch processing, so that is going to have to change.
Skinner sees the United States as a legacy economy with a legacy infrastructure. This has implications for our ISOs and MLSs, as it tends to reinforce our system of acquiring banks, processors, resellers and ISOs because it is so fragmented. He quoteed a statistic from Citibank that in the next seven years, a third of all bank jobs will be eliminated, and a similar one from Deutsche Bank that half of all bank jobs will be eliminated. This should give pause to people working for banks ‒ or processors, which share numerous similarities to banks.
Skinner said financial institutions aren't prepared for the digital revolution. "Digital revolution is upon us … changing the way we talk, trade and transact, and changing the way we make business and relationships," he said. "It is a massively important moment and represents the fourth revolution of humankind, where for the first time in history every person on earth can connect in real-time with every other human on earth, through a digital network."
In the future, we will create data as currency. Dealing with technology is different from dealing with money, and dealing with money through technology is different from dealing with technology through money, Skinner added. For example, with the latter, we use Square, Stripe, PayPal, Venmo, Alipay and WeChat Pay ‒ payment systems that shut out the ISO from revenue.
"Those approaching technology from finance will be firmly grounded in rules and regulations, safety and security, resilience and reliability; those approaching finance from technology will be firmly grounded in innovation and change, adaptability and flexibility, obsolescence and upgrade," he said. What a great quote from Skinner to summarize the world of fintech.
This makes me wonder whether we need an overhaul of our banking rules and regulations. A recent analysis by Matt Swinehart, a senior counsel at the Treasury Department, suggests not. He showed that moving a payment from one party to another can include as many as seven types of services, but government oversight is concerned with only two: account services (who has control of the money) and what rules they follow; and settlement services, which makes sure funds are properly accounted for when they are transferred from one party to another.
Account services can range from bank demand deposit accounts to fintechs like PayPal and Venmo. Funds typically settle either through the Federal Reserve or The Clearing House. Fintech must follow the same rules that brick-and-mortar banks do. For the time being, it seems nonbanks won't displace a bank-centric payments model. And for the record, I don't see Amazon opening a bank; there is no reason for Amazon to do that.
Today ISOs and MLSs sell credit card services, also known as merchant services, and are bound not so much by banking rules and regulations as by card brand rules and regulations. One fundamental reality is that the cost to the merchant of taking cards, particularly high-value rewards cards, is becoming a real concern, and merchants are actively seeking alternatives.
This is evident in the interest in surcharging and cash discounting. A merchant with card-present transactions would pay close to a 3 percent effective rate, and some card-not-present merchants might pay as much as 4 percent, which takes a big bite out of their gross margins. This is not so important for small-dollar payments, but when the transaction amount is over, say, $500, it gets meaningful.
It is also an issue in businesses with low margins, such as grocery stores and gas stations which have margins of 1 percent. Even a new car dealer typically has a gross margin of less than 2 percent. The very largest enterprises, such as Walmart and Costco, negotiate directly with the card brands, and you can pretty well figure they pay what they want to pay.
Skinner reminded me that in Europe, the rates for credit card interchange are capped. A study by the Kansas City Federal Reserve found that on average, North American merchants paid 83 percent more in fees than their counterparts in Europe.
I asked him how American merchants could lower their fees for taking credit cards. He responded that a new payments upstart could roll out a quick response (QR) code-based payment system, like Alipay and WeChat Pay, and link settlement to bank accounts, rather than ride the card brand rails. He mentioned the American payments system is large, fragmented, lacking significant regulation in the payment processing space, and not likely to change anytime soon. But a new player with a new settlement system could offer an alternative.
The next day I saw an article about Kroger Pay, which could point to where larger enterprises might go. It is a QR code-based mobile-payment service. Consumers receive additional loyalty points when they use the Kroger rewards debit card.
Kroger Pay doesn't lock out the big four card brands, but it offers strong incentives to use its own card. It generates a one-time QR code in the app that sends payment information to the POS system via a scan. The QR code is scanned, followed by scans of the items to purchase. Merchants choose QR-code technology for their mobile-payments services because its integration into the checkout process is easier, and it may enable some transactions to sidestep the payment networks.
Skinner stated that MLSs should ask questions, understand as much as possible about each merchant's business and focus on an overall solution that doesn't focus only on lowering credit card processing rates. You must take a consultative approach. Then merchants will see you are on their side and are sincerely trying to help, and you can build a long-term relationships while advising your merchants on new developments of interest
Thanks to Chris Skinner for taking the time to speak with me. You can see him again at Money 20/20 2019.
Brandes Elitch, director of partner acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A certified cash manager and accredited ACH professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at firstname.lastname@example.org.
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