The golden rule of payments: convenience, convenience, convenience
1994 was an important year for pop culture. The movie industry saw the release of classics such as The Lion King, Forrest Gump, Shawshank Redemption, and Pulp Fiction. 1994 also brought us the O.J. Simpson car chase and the launch of Amazon. But most importantly, 1994 brought us the first ever online transaction. Now, there is some dispute around the first online transaction, but many credit the purchase of a pepperoni and mushroom pizza from Pizza Hut as the world’s first, and quite frankly, I wouldn’t have it any other way.
In real estate, there are three rules to determining the desirability of a property: location, location, location. Similarly, there are three rules determining the desirability of payments: convenience, convenience, convenience. Over 27 years have passed since that Pizza Hut purchase, which have brought more innovation to the payments industry than the previous 270 years.
The payments revolution
E-commerce, mobile payments, digital wallets, cryptocurrency, and soon, central bank digital currency (CBDC) have all been introduced in a remarkably short period of time, and have all shaped how the world transacts. Mobile payments were introduced in 1999, and in just 4 short years, 95 million people had made a purchase using their phone. Today, many of us have some form of digital wallet (Apple Pay, Google Pay, etc.) on our phone to make mobile purchases, but the popularity of digital wallets in North America pales in comparison to the use of mobile wallets in Asia. In fact, in China, 85% of all payments in 2018 were made via mobile. Mobile payments also revolutionized the East African economy, where today, there are millions of people making mobile purchases without access to the internet, or even a bank account!
B2B payments: inconvenient, inconvenient, inconvenient
The same revolution that started with simple online purchases has spread to all aspects of our digital lives. People can now access loans digitally, trade stocks digitally, and many services, such as online food delivery services like Doordash and UberEats, have introduced nearly invisible payment options. However, business-to-business payments have not kept up with the times.
The vast majority of businesses are still forced to use expensive, outdated, and cumbersome payment methods to function, such as checks and wire transfers. In 2018, North American businesses processed over $18 trillion in checks, and it’s estimated to have cost them an unbelievable $550 billion in profits due to delays, labor, and errors. At the same time, there were nearly $135 trillion in cross-border payments made, almost all through wire payments, costing businesses more than $240 billion in transaction fees alone (not including, delays, labor, errors, etc.). More than 80% of businesses say that they’re willing to move away from checks and more than 70% of businesses say that they’re willing to consider alternatives to wire payments (and correspondent banking in general).
Additionally, while the majority of cross-border payments are made by large, global companies, it’s the small business that suffers the most. Many small businesses have thin margins, and should not be forced to spend their profits processing payments. Instead, those profits should be used to improve and expand the business, which would not just benefit the business themselves, but the economy as a whole. Small businesses continue to be the backbone of the economy, employing more than 90% of people, and representing more than half the GDP.
The need for change
Business payments are not as simple and straightforward as consumer payments, and require a lot of time, money and manpower to perform the necessary payment reconciliation. However, this reinforces the need to create a cheaper, more efficient, and convenient method of transacting. Why should businesses settle for a paper check, or a cross-border payment that takes 2–5 business days to clear, at a cost of $25–80 per payment, with no visibility for the duration of the transaction? There is no doubt that as the primary beneficiaries, banks are not currently incentivized to introduce new options for businesses, but the payment revolution has never been led by banks, but rather, by the FinTech industry. Technology providers must continue to introduce solutions that solve for the pain that businesses face, similar to what we’ve seen in the consumer space. The last 27 years have seen unbelievable advancement, but the revolution is incomplete so long as businesses continue to accept the costs and inconvenience that come with traditional B2B payments. Business leaders — the choice is yours. Here’s to hoping 2020 becomes the new 1994.
