Generational Conflicts Within the Payments Industry
Banks may best use blockchain and mobile techs directly, on their own, which might make all current payment technology layers above banks obsolete.
Payments are a mess. Technical retardation in essential components, the lack of transparency in pricing, and the fuzziness of public relations are all the result of an unchecked conservatism which allows older iterations to remain in play for so long that newer layers pile up on top in a nasty way. To be sure, “newer stuff” is not necessarily any better than older counterparts but different generations of payments are all now cramped together and it would be prudent to have a look at the pro and cons of each, regardless of age.
Three generations live under one roof at the Payments House: grandfathers, fathers, and children.
(1) grandfathers: banks and paper-based payment systems
(2) fathers: centralized networks, e.g. cards and non-bank payment services providers; for the illustrative purposes of this article we would include RTNS here but exclude RTGS because Fed-centered channels have no alternatives and because this talk is mostly about small payments
(3) children: blockchain fintech; both pure crypto and hybrid blockchain and legacy assets test systems.
This “classification” might look technically artificial to a payments professional. And it is to some extent. But it is precise enough for our illustrative purposes when we focus mainly on “relationships”:
- Grandfathers are still noble and wealthy but starting to show signs of senility, grumpiness, and forgetfulness.
- Fathers still rule the house in practical terms. They try hard to look respectable while cynically reaping off their aging parents and silently resenting their youthful children.
- Youngest generation is represented by naively arrogant teenagers who don’t care about older generations’ values. They might look technically savvy but they are lagging behind their classmates.
Banks Win Again
Many experts argue that the status quo is in danger and some even hurry to predict the “end of the banking era”. We suppose that, short of unforeseen fundamental changes capable of overthrowing the existing political system, banks will outlive most current technologies and remain strong at both the start and the end of the service cycle.
- Banks are still the only legal link back into the money supply needed by all payment methods.
Another important source of banks’ power is…
Card payments — second generation’s main domain — are widely considered as heritage mutually held with “grandfathers” due to having equity co-owned, profits shared, and co-branding set. The degree of interconnection may be different, however. Some card and non-card tools are deeply controlled by banks, some — less. In some cases profit may be generated both at banks and processing institutions, in others only at one end. Anyway, the ecosystem has been growing for decades; it is supposed to be a mostly partnership-oriented system.
However, things have become more complicated and — in many cases — complication verges on “betrayal”. What was long long thought to be a source of strategic advantage has turned into a weak element in the generational chain.
Elders don’t fully realize who their sons and daughters hobnob with (see the “War Cry to Revenge!” section below), what deals they are engaged in, and what risks the entire family is exposed to due to middle generation’s greed, desperation, and limited vision. Things were developing for a long time, and many may have happened out of single person’s scope of consciousness but what centralized networks eventually did to the market qualifies as a professional transgression.
More importantly now, as Bitcoin demonstrated, cards and other centralized payment networks did a very poor engineering job. Overnight we understood that the emperor wears no clothes! Thousands of professionals did not use the time before the Internet well enough, neither were they right in their ways of using the Internet — which was not designed explicitly for financial solutions. Having unlimited resources, instead of building up a normal scientific research to future-proof themselves like many other industries — much less important than banking — they wasted fortunes and lives of entire generations and built the monstrous infrastructure to patch millions of holes in the wrong technology. People paid trillions of dollars in losses, insurance fees, extra wages of unneeded personnel, and other unnecessary costs.
What have they been doing? The proposed solution (blockchain) isn’t any more brilliant. Two or three generations of people came and passed. It was always there, right on the surface. It is very logically-driven and anyone who would truly try to do the payments job well, would come to this conclusion — to use some kind of decentralized “blockchain” for transparency and security. So, either they purposefully hid the solution when it was earlier discovered, are just incompetent, or even more greedy than we can tell on the surface.
As for Bitcoin and blockchain themselves: years go by but apart from mere demos, new technology firms have failed to show any significant progress so banks may yet relax. It is becoming more and more difficult to take the present version of blockchain technology seriously. Currently, there are three types of offers from the blockchain camp. Interestingly, each type includes a core component that just cannot exist.
- New monetary system and currency offers. Represented by bitcoin mostly. Impossible/nonexistent component: payment system that can’t serve merchants due to extra low capacity and system’s currency being an extremely speculative asset. Add here endless consolations and support that current Bitcoin needs to function, tiny market cap, never-ending civil wars among development teams, few users if considered on global scale, even fewer new users, almost no merchants, absolutely no brick and mortar merchants, and the non-speculative usage stall after all. There’s just nothing to talk about, at least before unlimited block size is implemented.
- Fiat money “traveling” over public blockchains. Represented by a number of firms offering “tokenization” of assets on top of Bitcoin, Ethereum or less prominent public blockchains. Impossible/nonexistent component: digital tokens whose value is somehow guaranteed in regular money. Various “crypto cash”, “digital IOUs” imply that some licensed institution will lock reserves taking the entire amount of funds in the system out of actual circulation and then guarantee the value of tokens with no legislation in hand. These guys experiment with “Barbados dollars”, “Liverpool pounds” and other marginal and weird stuff. They misuse the term “peg”. They seem not to understand what is fiat money and that, regarding payments, law has precedent — not technology.
- Private blockchain with limited access for inner bank circles’ use. Offered by a number of initiatives funded by prominent traditional financial firms. Impossible/nonexistent component: there’s no such thing as a “private blockchain”. Despite hundreds of banks subscribed to R3CEV it is nothing more than a clever and expensive database. The thing might even complicate liquidity management: anything more complicated than a single overnight batch is a risk. Also, taking a social part out of a social engineering object such as blockchain is one red flag. Another, is seeing which banks participate in such initiatives: there are all too big and global to be called “banks”, at least in senses of this article. They are the institutions that get bailed out by governments but we just haven’t come up with the right term for that yet. It is strange that an instrument of maximum thinkable democracy — blockchain — doesn’t attract smaller banks into such associations. Update: Goldman Sachs and Banco Santander left R3 CEV.
Thus, we consider the niche for a real-world-possible blockchain project is still vacant. Risks are minimal too. There are zero chances of cryptocurrency becoming a national one in any country with a healthy economy. Let us repeat: the actual threat from blockchains towards banks is none.
At the current stage, banks may best use blockchain and mobile techs directly, on their own, which might make all current payment technology layers above banks obsolete.
That includes card networks and online services. Banks can kill two birds with one stone: get rid of or at least punish the annoying younger “partner” and bring some reason to the post-infancy blockchain world. The blockchain fintech is so lost in its innovation endeavours that it is eager to follow the lead. It will either do what elders’ tell it or it will be simply be disinherited in favour of even younger and more accommodating “kids”.
Calling for a Crusade of Banks against Cards
For most of you reading this, imagining a world without credit cards may be difficult. But the industry is already weakening. Let’s make some accounting of the damages and see why cards should be discarded with no pity felt. The second generation of payments should tremble in fear.
Cards Made It Worse for Customers: Client Relationships Damage
Second generation payment providers such as VISA or PayPal have destroyed a good deal of connection between people with financial needs and providers of relevant services. Making payments speedier does not justify the intervention into relationships that are truly important. Slow payments are ok, not having someone to support your business when a need comes — isn’t.
Banks’ brands were moved down deep in people’s wallets. People think they pay with Dwolla, Venmo or Apple Pay. The good ole’ bank is still in the mix somewhere though, down the tech stack, but the relationship is gone. Losing relationships involves losing data about consumers which affects quality of services. Of course, new services may handle the big data better and create some value but that isn’t an addition but rather re-distribution. People shouldn’t have to pay more just because they got a cool touchscreen app to search for stuff and are able to send money to buy it.
Cards Made It Worse for Banks: Revenue Loss
The problem is that by offering insignificant second-tier services, new providers pushed banks away from their traditional position in people’s minds. And now companies like Square or PayPal offer lending. Smaller local banks lost revenue and sometime even business.
All card balances have to be paid off sooner or later. That happens through bank transfers that are typically settled via bank accounts held at the central bank. So being an incomplete technology, card networks and other centralized provides are forced to share profits. That changes too. Before, only banks could be acquirers for card transactions. Now this function is also performed by non-banks such as First Data, Ingenico, Vantiv, Worldpay, Global Collect, Cybersource, Adyen, Stripe, Braintree, and many others. Some transaction revenue is lost due to aggregation by services such as Starbucks or iTunes, some — due to PayPal drawing funds from current accounts via ACH.
The threat is growing. The new regulation in Europe mandates banks to “open up the bank account” to external parties. These third parties can connect to bank accounts and retrieve information from them and also initiate payment transactions. Banks have been relegated to the role of “pipes” and forced to lose more customer relationships. This type of regulation may come to the US too. Retailers are set to steal the show with mobile wallets. Starbucks, Taco Bell, and MCX (a consortium of large merchants in the US) is only the beginning. Appetites of Apple Pay, Samsung Pay, and alikes will also grow so they may try to go around today’s partnership arrangements.
Cards Made It Worse for Market: Oligopoly Instead of Healthy Competition
Card networks created a specific oligopoly and spoiled the competitiveness of the market. Projects like Apple Pay deepen the problem by further removing banks’ brands and by making banks sell their souls trying hard to get their card as the number one position within user wallets.
What’s Next? All New is Well Forgotten Old!
Banks might change but they won’t disappear. This might be VISA’s Kodak moment but not banks’. Unlike what many say, banks don’t need to struggle or unite to survive. They just need to take a sober look at the current state of all available tech stacks.
History develops not in lines but in spirals. Now, it is time to jump from one loop to the one above it, leaving behind the card and online payment technologies (as well as the previous forty to fifty years of potential advancement they took from us). Their time has gone. Long live local banks and clear approaches to blockchains! Here’s our proposition: