An industry has built up due to the inability of banks to work together directly.
PayPal ($70.7B) first came into existence to add a layer of ease and security to the card schemes because the card schemes don’t provide the banks the flexibility to provide it for themselves. At that stage PayPal was eating the crumbs from under the banks'
table. But now they dwarf many of the big banks.
TransferWise (£1.1B) exists partly to provide lower fees and rates but also because banks are unable to reliably tell customers how much a transaction will cost or when the money will arrive due to the way SWIFT works. The receiving bank, and any intermediary
banks, can charge what they like and do not need to tell anyone what the charges will be until after the fact. Any bank compliance department may hold up the transaction for as long as it takes to ensure it is not suspect and need not tell anyone they have
stopped it. Since this is the only way most banks have of sending money across borders TransferWise has a huge advantage.
Stripe (9.2B) describes itself as “the best way to accept payments online and in mobile apps”. It exists to make developers’ lives easier and extract the bane of everyone's life that is the PCI DSS. It provides a RESTful API, which developers like and tokenises
the card numbers so that the whole application is “out of scope” for PCI DSS.
Square ($10.5B) provides specialist hardware and software to allow merchants to accept cards at the point of sale. To be able to process a physical card transaction as a card-present transaction you will need a secure pin pad and may need to be able to process
Visa ($230B) and MasterCard ($140B) exist to enable card transactions to be completed between financial institutions because banks cannot talk to each other directly.
That’s without beginning to shine a light of the whole PCI DSS industry but who’s next? Will it be Facebook or Amazon who next takes a bite from the banks’ table?
Don’t get me wrong. I have no argument with any of the companies listed above. I have accounts with at least two of them. They provide an excellent service in an environment where the banks can’t because the banks are all individual companies connected only
through some very rudimentary networks that were designed in the 60’s.
But what would happen if the banks were actually connected? With a rich, immediate communication and payment network that would allow the banks to act as an industry instead of a group of individual institutions.
- There would be no need of cards or card schemes or the PCI DSS. Transactions would go directly from account to account instigated from the Web or a phone/watch/smart device etc. This wouldn’t require any specialist hardware beyond a mobile phone or similar
from either the merchant or the customer.
- Realtime payments from account to account anywhere in the world would become the norm. And prices would be clear and competitive.
But once you expand the ability for banks to work together it doesn’t have to stop there:
- Banks could introduce new services like KYC checking because there would be a mechanism to charge for it. And customers could control the access be approving, or otherwise, any request to access their KYC details.
- Open banking / PSD2 could be implemented in weeks rather than months or years because the basic communication protocols would already be in place and banks could charge for access to the data because this is a payment network as well as a messaging network.
- Proper KYC and AML standards would be normalised internationally because the bank’s reputation would be relying on it and you can’t tell who’s checking.
- Banks could share smart contracts such as letters of credit and the purchase and settlement of securities
- Customers could receive receipt with transaction. Stored forever on their bank statement.
- FinTech’s could introduce new tools to show people what they are spending their money on (or the banks could do that for themselves)
- Banks could check that the account holder is old enough when buying age-controlled items like cigarettes and alcohol.
…and the whole thing could be built on RESTful APIs so that all developers, bank and merchant alike, could benefit from the ease of integration.
It’s an intriguing thought wouldn’t you say?