CrossCheck Blog

CrossCheck Blog

Check Processing & Payments Information

What is FinTech and how is it affecting the payments industry?

Posted by Brandes Elitch | Fri, Nov 04, 2016 @ 03:30 PM

FinTechWe get calls from our ISOs and MSPs — the people who mainly sell credit card processing services — asking: “What is FinTech, and why am I hearing so much about it?”

Salespeople working for ISOs (independent sales organizations) are focused on the here and now, how many merchants they can close this month, and how much gross margin they can produce for their company in each quarter. They are, as entrepreneur/coach Michael Gerber says, “Doin’ it … Doin’ it … Doin’ it.”

For the moment, FinTech (financial technology) is outside their scope, but the future is worth considering because it will ultimately impact them sooner rather than later.

Earlier Card Payments

We start with the proposition that the basic model of card brands goes back to the 1970s and that there hasn’t been much change during the intervening years for the brands or their resellers. To place it in perspective, this is an industry where “the last big thing” was the introduction of the magnetic stripe on the back of the card as well as card terminals such as the Zon Jr and Tranz 330; everything else after that including EMV has been incremental.

The three key features of the card brands were the “honor all cards” rule, the rules against “cross-border” transactions, and the sharp distinction between “card-present” and “card-not-present” transactions.

Brands were dominated by less than 10 large bank-card issuers that made enormous profits on consumers whose revolving balances were priced at prime plus 10% or today at prime plus 20%. Losses were predictable (around 4% of outstanding balances) and the client list could be grown by attracting new users who were “credit challenged.” To make this work, the issuers needed merchants to accept card payments and a processor who would “acquire the transactions” and hand them off to the issuing banks for settlement.

Since everybody knows banks don’t know how or want to sell, this task fell to a vast army of ISOs who even today walk the streets, knock on doors and tell merchant that they can get them a better rate on their credit-card processing fees.

What has changed is that years ago the issuing banks got out of the acquiring business (payment aggregation and separation) and now have re-entered. Thus, if one looks at a list of the top 10 acquirers, they will find a lot of very large banks. The other big trend is the consolidation of ISOs and processors because this is a business of scale where banks and card brands operate on a very large scale. 

Introducing a new product or experiment into this megalithic industry would involve months of study and a couple of years to launch, and meanwhile the market might have moved elsewhere. The card brands envision a world of continual growth and stable margins as payments migrate from cash, check and ACH to an interchange based realm, but my hunch is that this is just notgonnahappen.com. Now, the card brands are re-branding themselve as FinTech companies to help retain their existing market share.

Payment Disruption

Financial technology is not about a stable business model and incremental change — it’s about very fast change, and most the players are start-ups, not mature firms.

As someone pointed out, the large banks have about $15 trillion in assets while last year the total financial technology venture capital investment was $12.4 billion, a mere rounding error in the scope of things. Nevertheless, there is ample opportunity for large banks to control the acceptance of new technologies and solutions in their marketplace, including buying FinTechs that will give the bank a leg up in their market or niche business.

Here is a quote from an advertiser who shall remain anonymous which captures the spirit of the times:

“2016 is a watershed year for the payments industry! Payment companies are improving security, expanding their mobile offerings, and building e-commerce capabilities that will motivate consumers to make purchases from their digital devices. Alternative technologies could disrupt the processing ecosystem. The Internet of Things will change consumer behavior and Blockchain could change how payments are verified, accounted for, and settled.”

Money 20/20

I just returned from the Money 20/20 show, held in Las Vegas — natch! — and there were over 11,000 attendees, all trying to figure out two things:

  1. What will their current business model look like in the future world of payments, or will it even be relevant? I learned that new entrants never get it right the first time round, and sometimes never get it right the second time, but the nature of financial technology is to keep trying or “fail fast” as they say.
  2. Who will be the market leaders for each segment of payments in this brave new world, and what will be their characteristics and unique selling proposition?

There was a focus on “RegTech” (regulatory and compliance issues revolving around knowing the customer); big data analytics; managing authentication, security and a reliable digital identity; open source; Blockchain/distributed ledger technology; and machine learning/artificial intelligence.

A lot of attention is now given to financial APIs (application program interface) for developers and users. Apps and the cloud make it easier for integration of separate systems such as PayPal-Facebook Messenger, Android-Visa Checkout/Mastercard Masterpass. Mobile payment applications were everywhere even though consumer adoption has ranged from nil to sluggish, but the market will ultimately figure out what works once the right mix of coupons, loyalty and rewards is there.

FinTech Buzz

A lot of work is centered around “killing the password” via biometric solutions. There are also a dozen or so providers focused on offering a better way for people to pay their friends in the B2B space — how many of these things do we actually need? Banks view P2P as a loss leader. Even PayPal has not made much money at it, nor is it clear that anyone can make money at it.

There is also a lot of noise and light about “same day ACH” and “faster payments” which in my opinion will be of limited benefit to consumers but of some merit to B2B. Today, you can take a photo of a check and send it to your bank, and you will likely get same day credit if the receiver uses the same bank. In no case will it not clear by the next business day. Thus, given the fact that the earnings credit rate is close to zero and prime is about 2%, there is not much financial benefit there either.

Certainly we will be reading about Blockchain in the coming year. Don’t confuse this with Bitcoin, which is a speculative commodity. Blockchain is an accounting system using a distributed ledger so that every party to the transaction has complete real-time visibility into everything that has happened. Industries using an escrow form of settlement — such as mortgage closings, the stock exchange, foreign exchange settlements, etc. — will find a distributed ledger cheaper and more efficient than current time-honored practices.

I think there will be a massive push for non-interchange, non-card based solutions as merchants look for ways to increase their gross margin by eliminating the two or even three percent interchange charge by the card brands. In industries such as grocery and medical, this is equivalent to the entire gross margin of the enterprise!

Other seminar tracks at Money 20/20 included:

  • Alternative lending and credit
  • Data and algorithm-based innovation
  • Digital banking and personal finance
  • Entrepreneurship and investing
  • Insurance tech
  • Issuing innovations: credit, debit and prepaid
  • Legal and regulatory business issues
  • Risk and compliance
  • Marketing and customer experience
  • Market research
  • Next-generation retail and commerce
  • POS, processing and open platforms

Final Thoughts

The sum of all these topics raises the question: how will ISOs be impacted by disruptive technologies and start-ups? This is the “million dollar question” for those in financial services, and I will save my response for another column.

Meanwhile, I think you will see a concentrated and accelerated focus by not just large retailers, but by SMEs on how to reduce their cost of accepting payments. Merchant acquiring is the only business service that I can think of where, despite increasing electronification and volume, the cost of processing just keeps going up, when it probably should have been reduced by half.

Check Processing Is Still the Best Value

Of course, CrossCheck merchants already enjoy substantial savings since the cost of processing checks with our services is one half to one third what credit card companies charge in interchange fees for a comparable sale.

Even better, CrossCheck stands in at the point of sale with our Multiple Check service when the consumer doesn’t have enough money to make a purchase. We guarantee up to four check payments to be deposited over a 30-day period without the need for the consumer to apply for credit or pay interest. Multiple Check makes it easy for consumers to make a down payment on a new car, pay for a funeral or major vet bill, or buy building supply items. Increasingly, we see a need for this kind of service, and we are optimistic about the future of payments happening on our watch. Learn more by downloading our free webinar.

 

hold check, payment flexibility, increase sales

Topics: Brandes Elitch

Written by Brandes Elitch

Brandes Elitch is Director of Partner Acquisition for CrossCheck Inc. A certified cash manager and accredited ACH professional, he garnered a Master of Business Administration from New York University and a Juris Doctor from Santa Clara University.