The usual ‘cut’ taken by traditional banks when processing payments could be under threat by fintech companies that offer clients more effective banking services, mobile payments and cashless banking services.
How People Pay for Goods and Services Around the World
Payments systems in many first-world countries are lagging behind the convenience offered by Fintech companies in several third-worlds countries.
It’s not that there aren’t any mobile payments services on offer in countries like the United States, it’s that consumers are entrenched in a payments system provided by traditional banks and are resistant to change.
Kenya is an ideal example of a well-developed, robust mobile payments system. M-Pesa, is a mobile banking solution which allows users transfer funds, pay for goods and services and even have access to credit products via mobile phone. Consumers can ‘top-up’ their mobile wallets at any of the thousands of dealer locations around the country. As there is no barrier to entry (minimum balance, credit history etc.), consumers can completely circumvent the traditional banking system with its rigorous checks and often limited infrastructure.
It is NOT a Bank, it is a Product
Systems like M-Pesa in Kenya and WeChat Pay in China are not owned by traditional banks. M-Pesa is owned by Kenya’s largest telecom company, Safaricom and WeChat Pay is owned by a China’s largest social network. This means that innovation is driven by competition and consumer needs rather than traditional banking structures.
How Payment Systems Currently work:
The reason why credit cards are so popular in the United States is the amount of money that is made by several different parties that each take their ‘cut’ along the payment chain. The issuing bank and the receiving bank both charge a small fee, the payment processor charges a small fee, the POS system company charges a small fee. All these ‘small fees’ add up, and while most of them are absorbed by the merchants (store owners etc.) some are paid for by the consumer for the convenience of having a credit card. Those promised credit card perks? Mostly paid for in fees and service charges in the end.
Mobile banking offered by fintech solutions like WeChat Pay in China have a simpler chain of payment: WeChat Pay acts as an escrow for both consumers and merchant, and because the payment system is based on proprietary fintech software there is no need for the additional POS, banking and processing fees.
Why Are Modern Payment Systems Are Not Popular in The United States?
The answer is really one of complacency. Consumers are used to the perks that come with credit cards, as well as having trust in a system that is in effect, hundreds of years-old. For example, while 88% of consumers in the United States have been exposed to non-traditional payment systems like Google Wallet, only 14% have ever tried the product.
Why Banks Need to Take Notice
Banks have also been complacent in this market because when they started out, mobile payments and cashless mobile wallets did not offer credit solutions, which is where traditional banks make most of their money. That is changing fast though, companies like WeChat Pay have started to offer credit to consumers and it is not inconceivable that social giants like Facebook or online stores like Amazon could roll out financial services to their consumers and challenge the dominance of traditional banks. In fact, they have started the process already with Amazon rolling out Amazon Pay in India and Amazon Cash in Mexico.
Banks will have to adapt-or-die in the face of fintech innovation and market-driven consumer needs.