Booze Allan have come up with some numbers on just how big a threat to banks is posed by the new non-bank payment systems players. And they are interesting indeed. For the UK:
- there were 310 million online payments in 2005, accounting for some 21 Billion pounds.
- default payment mechanisms, such as credit cards and bank transfers currently make up around 90% of this volume
- and their estimate: by 2008, issuers and acquirers could lose up to 20% of this volume, rising to 30% in the long term
20% is obviously serious money. And that's just for online transactions conducted over the Internet. The report goes further to say that the non-bank players - they identify Google and Paypal - will achieve sufficient critical mass that they will become as attractive to retailers as plastic is today.
That's an interesting angle on my previous suggestion that the big threat to banks comes when Paypal and/or Google choose to issue plastic themselves (read here), which ultimately, would have strengthened the value proposition of the card networks. Imagine if, instead, merchants started to integrate PayPal directly into the Point of Sale system. It's not so far fetched: as I mentioned some time ago, you can use PayPal on your mobile phone, and PayPal transactions are instantaneous, even across borders.
I'll be speaking at CLAB the week after next, the premiere banking event for Latin America. One of the things I'm going to suggest to the 800 or so bankers that will be there is that the threat to their payment systems business is very real, and not just a 30% drop in volume "long term". That's for online volume only, and it's my view that payments to merchants in shops are only a matter of time.
And consider this: both Checkout and Paypal are closed systems. Money that goes in, tends to stay in. Ever time it moves, there is a transaction fee against a marginal cost which is going to be pretty insignificant, if it exists at all. And just how much revenue, I wonder, is being made on the burgeoning balances being held behind the scenes in this closed loop economy? Remember, if it were a bank holding funds, there'd be an interest expense. Not so in this case.
Those are compelling economics when you have to power a fight against an entrenched incumbent.
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