Tuesday, December 13, 2011

Final Insights on the Payment Processing Industry


The payment processing industry has slowly adapted available technology to combat fraud and streamline the experience for consumers. If the incumbents wish to remain so they must accelerate the implementation of new technologies or face the loss of marketshare and revenue to the likes of Google. As Paypal transformed the industry a few years ago Google is poised to repeat. Discover and American Express are in a unique position in the industry as not just network providers but also issuing banks. For Discover to continue to compete it must leverage customer data, like purchase and credit history to reduce bad debt and to increase revenues through savings and loan products.


Digital technologies have greatly impacted the payment processing industry, digital and mobile technologies have changed the way in which the industry works and will continue to do so in the future. The industry´s main players, like Visa and Mastercard, have had to develop digital capabilities most of them by acquisitions and partnering with companies that specialized in this areas. These technologies have opened up the industry to new players like Google which has led to a highly fragmented industry. It will be interesting to see how the industry consolidates and which players manage to gain leadership in the industry based on the development of their capabilities.


The credit card companies dominant positions in the payment industry is extremely vulnerable to the latest advances in digital technology. What’s to stop an Apple or Google from moving to the edge of payment processing and relegating a Visa or MasterCard to simply a back-end credit house? Paypal is also threatened by a new player called Dwolla, which provides an easy electronic payment solution at much cheaper rates. Dwolla is sure to spark imitators, and the whole industry could soon become commoditized.

Verifone is in good position with it’s industry-leading payment encryption technology, but the rest of their value-drivers (hardware, consulting, support) is really just complimentary. Verifone would be wise to week out strategic partnerships to ensure it’s place at the head of payment security providers.


I see there are three distinct trends regarding payments.

One is the most obvious and very visible now - digital wallet, a now-common concept but used interchangeably with, but is different from, mobile payment. NFC is the enabling technology of this capability. Person-to-Person payment is an additional value driver.

Second, payment in virtual currency is a rapidly increasing trend. Coupons and reward points are familiar to us but with the advent of Facebook, Zynga, Groupon is really pushing this trend forward because you can now buy things with FB credit or use a virtual currency to make in-app purchase. This transaction does not require credit card networks and thus is taking significant value out of payment processing ecosystem. In my opinion, this is a big emerging threat to this industry which may be fundamentally disrupted by entities like Facebook.

Third, the concepts of network effects and platform strategy is so commonplace now that almost every single initiative taken by any player, big or small, has a kind of platform story to it. Google Wallet, American Express Serve, or Visa’s V.me - all these products blur the distinction between product, services and platform.The race to win the network effect is truly on among big players and it will take 3-4 years to know the winner. With ecommerce growing across the globe, the credit card networks may see a big change depending on who wins the global race of digital payment platform.

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