Payments Disintermediation

Disintermediation in Payments, Disin’what Now?

An almost 50 year old concept is now all the rage in the payments space; disintermediation, which according to Wikipedia is; “…the removal of intermediaries in a supply chain, or “cutting out the middlemen.

It might be a cliché, and I hate any buzz-phrase not invented by me, but in the payments space this one makes perfect sense.

For example, to make a branded card payment you have not one, but several middlemen, all of whom add cost to the overall price of the goods you buy;

1. Terminal Manufacturers – those devices you slide / swipe your card into are a cost, If they are PTS and SRED compliant, a significant cost. Target, for example, spent $100 MILLION to replace theirs after their well publicised breach.

2. Acquiring Banks – The bank who authorises the payment charges roughly 0.02% of the total value of each transaction.

3. Issuing Banks – The institution who issued the card itself charges the lion’s share at a very rough average of 1.7% of the transaction value.

4. Card Schemes – The brands (Visa, MasterCard etc.) vary in the slice they take, but for the sake of argument, let’s say it’s around 0.1% of the transaction value.

5. Your Bank (in general) – May or may not charge you for the ‘privilege’ of having a card, mine does, but let’s ignore this for now.

According to the volume of credit card transactions in  2012 was around $6,000,000,000,000 (or 6 TRILLION USD), so let’s put that into perspective:

Terminal Manufactures – I cannot even begin to guess how many payment terminals there are worldwide. But I’m going to put my reputation on the line and say it’s a lot. Manufacturers have also received a very significant boost in the last year or so with the enforcement of EMV on our US brethren. For the sake of this blog, we’ll just assume many millions are spent by retail merchants on these devices.

Acquiring Banks – 0.2% of $6 trillion is $12 billion.

Issuing Banks – 1.7% of $6 trillion is $105 billion.

Card Schemes – 0.1% of $6 trillion is $6 billion.

In other words, the cost associated of using credit cards exceeds 120 billion USD!

This is actually not meant as a criticism. They provide a service, many services in fact (including paying for the inevitable fraud), and we are all very likely utilising the benefits of the non-cash services on a daily basis. My point is that we ALREADY have the ability to remove the majority of these middlemen sitting in our pockets; our mobile phones.

Your bank wants to be paid for storing, protecting, and providing access to your worth. The phone company wants to be paid for providing the bandwidth to get to your worth. That’s fair, but why should anyone else be paid? It certainly isn’t the retail merchant who’s absorbing the middleman costs, it’s us, the end consumer. And it’s about time we start demanding more options.

The disintermediation of the non-cash payments systems will be a slow process of disruptive innovation. One side will try desperately to hold on to what they have, and the other side is trying to move too fast to change everything. BOTH sides need to understand that things WILL change, but can only do so when the replacement mechanisms are truly fit for purpose. We simply aren’t there yet.

Card Schemes need time to turn their enormous ships onto a new course; banks need to take over the fraud loss liabilities; and biometrics companies need to shut the hell up about the death of password and the ridiculousness of their single factor solutions. Most of all, the consumers need to ask for something they don’t even know they need yet.

So yes, disintermediation in payments is coming, but likely not any time soon. Even with PSD2.

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3 thoughts on “Disintermediation in Payments, Disin’what Now?

  1. Good article David.

    The only addition I would make is that the cardbrands, now that most are public companies, continue to push the risk of fraud onto the merchants. This way they get to have their cake and eat it too.

    The payment solutions really ought to be provided by the payment industry with full end-to-end encryption with no involvement from the merchant. The merchant just needs an interface to connect to the equipment. Granted this is related to brick and mortar setting but that is the bulk of where the problems and compliance cost occur.

    • Many thanks for your comments Shad, and I agree.

      Buy our EMV terminals or you, Mr. Merchant, are liable for the fraud, is nonsense. And anyone who says that the merchants don’t HAVE to take payment cards, has completely missed the point.

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