For financial institution payments service providers, the past five years has been a near-perfect storm of obstacles and frustrations. The economic downturn effectively dried up payments investment resources, forestalling efficiency improvements, new product rollouts, and system upgrades. Congress, reacting to the concerns of consumers and corporations alike, rolled out three troubling pieces of legislation (the Card Act, overdraft regulations, and Dodd-Frank, including the Durbin Amendment) which immediately reduced revenues, further aggravating the revenue picture while simultaneously increasing compliance costs. As banks hunkered down in defensive mode, non-bank third parties sporting new payments technologies and products, filled the market void and rapidly grew their customer bases.
The list of revolutionary third parties includes marketplace giant PayPal and its cohort Bill Me Later, Amazon Payments, Boku, Dwolla, Google Wallet, Square, Green Dot, and Popmoney, as well as a dozen or more mobile payments start-ups. The biggest mobile payment merchant is, of all things, a coffee house (Starbucks), whose card acceptance business is now run by Square!
The reasons behind this shift in market leadership (and ownership) are many, and certainly number the perfect storm issues discussed above. But there are some other factors at play here that signal a permanent change may be in the wind. Banks historically built their longtime payments business on the back of account ownership, loyalty, issuance of payment instruments, and operation of payments engines. Little customer care was necessary when the banks were the only game in town, technology moved slowly, their customer bases were fundamentally conservative, and their management team was seldom filled with entrepreneurial spirits.
As a result, over the last decade, non-banks have entered the picture by developing new technologies that appeal to today’s emerging computer-savvy consumer base, the sons and daughters of the Baby Boomer generation. These firms are unburdened by history and tradition, rich in technology resources that swarm daily in Silicon Valley and many other regions of the country, and are fully aware of the needs and fancies of the new generation of payments users. Moreover, they are frequently founded by executives who left the old banking world full of frustration at their former employers whose conservative nature and financial troubles caused them to turn their backs on new ideas.
These entrepreneurs have been able to find investment funding from venture capitalists also looking for new age ideas and, now— free from the shackles of their prior employers—have been able to turn their passion into new payments products and ideas that are taking hold around the globe. These ideas span the payments horizon, though they have been heavily focused on both sides of consumer-to-business (C2B) payments, as well as person-to-person (P2P) payments. According to a Federal Reserve survey, nearly 10 billion checks were written in 2009 for these two categories of payments.
But the real future for third parties may lie in the Holy Grail of business-to-business (B2B) payments, where 6-7 billion checks are still written annually and major corporations are levying criticism on their bank service providers and the card brands for lack of progress in electronification, as well as perceived abuses in fees and services. The answer to this dilemma might well be non-bank third party B2B payments providers, such as Traxpay, a company that clearly defines and prescribes to the model of ‘new age’ success mentioned above.