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assistant winemaker some-
where. All of this takes about To be a payments expert, no formal education,
seven or eight years, if you're
lucky. training or experience is required. You just come up
with a new product idea and try to get a pilot going
To be a payments expert, no
formal education, training somewhere, anywhere, and get enough traction to
or experience is required.
You just come up with a new get funding. Here's the tricky part: not only does
product idea and try to get a it have to work, but it has to present a real value
pilot going somewhere, any-
where, and get enough trac- proposition to the user, something that people will
tion to get funding. Here's
the tricky part: not only does feel compelled to use.
it have to work, but it has to
present a real value proposi-
tion to the user, something
that people will feel compelled to use. For example, in cy- risk, the optimal tollbooth. This is why their stocks trade
bersecurity, there are all sorts of products: APIs, big data at 22 times forward expectations. Analysts are predicting
tools, employee tools, artificial intelligence, biometrics earnings growth in the area of 13 percent or more, and
and the Internet of Things. How many companies work- earnings per share growth at 15 percent annually for the
ing in this space will get funding and stay in business five next five years.
years from now? Answer: very few.
Look at the business model for the handful of major card
Any new product is going to have a long gestation period, issuing banks: half of their consumers revolve their card
certainly not a year or two. Remember, the first website balances. The bank's cost of funds is around 2 percent, and
was put up in August 1991, 26 years ago. Amazon and they charge anywhere from 14 to 22 percent on revolving
eBay launched in 1995, Google in 1998, and PayPal in 1999. balances, with a 4 percent credit loss. Total credit card debt
Facebook came out in 2004, and YouTube in 2005 – 12 now is around $779 billion. The issuing banks collecting
years ago. It takes a long, long time for a product to reach interest on this debt control over 80 percent of all checking
commercial success. accounts in the country, so they have the ability and
wherewithal to promote any new product that makes
Rude awakening for fintech sense to their customer base. This makes it daunting for a
new entrant to provide significant incremental value to a
The fintech entrants are now finding that rather than financial institution, except in a marginal way.
compete with banks (their original idea), their best bet is to
have a bank buy or license their technology, because banks To me, the real opportunity is to offer a lower cost
have the numbers of business clients and consumers to get alternative for the merchants who pay the freight for this
critical mass in a short time. whole system. It's useful to remember that merchants
always pay the bill for payment processing, not consumers
Finally, since ultimately somebody has to fund and pay (except indirectly). The opportunity for innovators in
for these fintech initiatives, it's always useful to follow the acquiring business is to lower the merchants' cost of
the money and see who has access to the stream of future processing from 2 or 3 percent of sales to perhaps 50 basis
earnings from the innovators. Here's where it gets tricky, points.
because when it comes to consumer payments, there is
only one tollbooth, and it is jointly managed by the card The innovators who figure out how to do this will give
brands and the 10 or so major card issuing banks. the tollbooth operators a run for their money, and while it
won't happen overnight, it will happen eventually.
While we live on what is called the "acquiring side," be
aware that it's the five or six major issuing banks that Then you will see some real innovation in the payment
call the shots in this world, and issuing cards will always system.
have a higher priority than the acquiring side for these
banks. This will continue to be the case because of the Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has
numbers, specifically, the card brands' operating margins. been a cash management practitioner for several Fortune 500 com-
For February, it was 53 percent for both brands. The profit panies, sold cash management services for major banks and served
margin was 38 percent for both brands. as a consultant to bankcard acquirers. A Certified Cash Manager
and Accredited ACH Professional, Brandes has a Master's in Business
Now ask yourself, what other business has margins like Administration from New York University and a Juris Doctor from Santa
this? Further, they are basically free of credit or operating Clara University. He can be reached at brandese@cross-check.com.

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