In my previous post about this topic I touched upon why the current trends in the payments market are not sustainable, nor are they really exciting. We know that the payments market is highly fragmented, and new players are introduced at an even growing pace, making it even more fragmented than ever. Over the years, the setup for how payments are made both online and offline allowed for a very details set of roles: issuers, acquirers, gateways, POS companies and so on. There’s one level, though, at which there is very little fragmentation: the underlying one.

Card networks are huge behemoths controlling a large piece of payments in the world. Before becoming public these companies were spawned and controlled by banks; and though retail banking is somewhat divided between a few large players, it is still not as nearly so as the payments market is. What do these players have that others don’t that makes them so special? One thing: the financial relationship with the consumer. When you have that relationship, one of two things (or both) happens: consumers loan money from you; consumers give you their money in the form of deposits. It’s a very straightforward litmus test, you either have it or you don’t. That trust relationship is what counts, and everything else is just UX. Every cent you move pays interchange or another fee to a player that owns this relationship with merchants and consumers; all they have to do is sit back and enjoy the ride (and in the case of online payments, without any risk).

Asking who’s going to win payments, therefore, is the wrong question*. Visa and Mastercard are, and retail banks along with them. The rest of the companies are (arguably) making money off of peripherals, from foreign exchange fees to (again, arguably, I don’t believe it’s catching on) coupons and loyalty programs. If you want to win in payments, substantially, you need to displace that trust relationship; you need to circumvent banks and card networks. This is what’s interesting, and this is the Holy Grail.

The good news is that it’s possible, and since Visa and MC are public it is even more doable than it used to be due to the separation between their incentives and the banks’. The bad news is that this is the real difficult problem to solve. You’re basically setting off to build a new type of banking. In the next post we’ll look at a few examples of why just building another layer on top of existing partners doesn’t work, and then explore a few ways to get there.

* Unless you actually mean “who’s going to get access to consumers’ data in POS, while treating money movement as a loss leader?”. In that case, your question is valid.