October 4, 2019
Americans spend about $4 trillion per year on their credit cards. That’s more than the GDP of both the UK and France. Yet, when it comes to payments infrastructure, we have not seen much improvement for decades. You may argue that if it ain’t broke, why fix it? Read on.
The most significant innovation in payments happened in the early 1970s when the card associations established their interbank network and the complementary messaging protocols. That infrastructure paved the path for instant purchases, instant credit issuance, and cross-border commerce. As long as I had a relationship with a bank that was willing to issue me a card, I could take advantage of the plumbing.
Since then, most of the payments innovation has happened at the edges (I’m unfairly discounting the efforts to implement ISO 20022 standards). Focusing on the last mile of the transaction is understandable because that is the core of the user experience, and improving infrastructure is hard and costly (for more on that, you can read my piece on payments standardization and modernization). The problem is that user experience optimization is forever hindered by the limitations of the infrastructure. At some point, an infrastructure lift is required to push the user experience to a level that is orders of magnitude better. We are at that point now.
Having a relationship with a bank is just the accepted reality of how we use card products today. In the current model, each card is provided by a single issuer. That means my card issuer has a monopoly on every transaction I make. Merchants have little control over what they are charged, and the fees they pay vary depending on which card is used at the point-of-sale. The fancier cards cost merchants more than the basic ones. As a consumer, the banks have taken for granted my limitations to go elsewhere for a robust offering, and my inability to diversify, who holds my credit for each transaction.
Enter a new way of thinking: an improvement to infrastructure. Rather than having cards issued by a single bank, what if each card had multiple issuers? A different bank could provide credit for each transaction. In this scenario, various banks would ingest the parameters of a transaction, assess risk, and provide a cost decision in real-time to the merchant. The cheapest provider wins and is rewarded with holding the credit on that transaction. This is an oversimplification, but not far from a potential reality.
The implementation of this type of platform requires a new frame of thinking for how money moves. It requires a brand new infrastructure to be built, but it enables a whole new paradigm of customer experience. It’s on this point where the tech giants have a role to play in financial services. The tech-focused consumer brands are well-positioned to deepen their relationship with customers by offering a simplified financial services experience. Apple Card exists for this reason. A tech-focused company has been inserted at the center of the payments experience with a plan to win your relationship away from the retail banks.
While Apple has a reputation for flipping entire industries on their head – they did it with computers, music, and mobile phones – other contenders could take on this mission too: PayPal, Google, Facebook, or Amazon. It would require deep integrations into a set of willing bank partners who buy into the premise that Apple should own the customer relationship and not them. Goldman Sachs has already raised their hand.
From there, it would be a steady evolution to implementing other financial products that would push banks further behind the scenes. When Apple did this to mobile carriers with the iPhone, it was highly contentious, but it has since been accepted because it drew in more customers and more traffic.
It is certainly conceivable that Apple (or any of the other contenders) becomes a more centric player in our day-to-day financial lives. They have the potential to be an intermediary in front of the banks that build new infrastructure, enabling a fresh user experience for merchants and consumers.
To those who are operating from a traditional bank, don’t blink.