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Hint: GMail P2P, Square Cash, PayPal aren't competitors

I had a call with an industry colleague earlier today talking the recent news on GMail Google Wallet integration, Dwolla's funding round and the "Square Cash" announcement. At large I'm seeing two broad industry responses to these moves.

The first, is to see this all as a distraction from mainstream banking and that essentially all these new players are just competing between themselves for marginal business, here's a few notable examples:

Alternately, you have Google, Square and Paypal taking aim not at each other, but at an industry mired in friction, process, and rules and regulations that appear to make a very simple task like sending money from Person A to Person or Business B, a lot harder than it would appear to be. This very friction, is for many in the industry, the reason why they think new P2P processors won't ever compete with the industry at large - quite simply, the barrier to entry and the workload and overhead from a regulatory/reporting/risk perspective means new players will always have to defer to the existing rails, particularly when you have to cash-in and cash-out.

Here is an interesting dialog on Y-Combinator's Hacker News which refers to this conundrum -

Dwolla's take on their service is very different to this - Dwolla are positioning themselves as a true alternative not only to ACH, but also to the merchant rails provided by Visa and Mastercard. In a recent interview with Ben Milne from Dwolla on Breaking Bank$, he made the following insightful comment on their role in the payments ecosystem:

"...because the internet is always available you should be able to access your money and exchange it with anyone else, and because all that money is essentially tracked as data, it shouldn't really be that expensive to exchange. What we ended up realizing was, that in order to do that we had to create an end-to-end solution. As the company started scaling up on the volume side we started to realize some of the limitations to ACH and things like that. So, one - our early kind of philosophy was 'we just want to solve this simple problem' and I don't think I realized exactly how big it actually was. To solve the problem we had to come up with an end-to-end solution that not only allowed us to communicate with financial institutions, but directly with consumers, developers and merchants... what we were left with is a solution that communicates directly with the financial institution core, right down to the end consumer."
- Ben Milne, Founder of Dwolla, Breaking Bank$ Radio Show, May 9th, 2013

The issue perhaps is one of philosophy. Banks are trying to reinforce the existing rails for two very simple reasons:

  1. They perceive existing rails as "less risky", and
  2. They make money off the existing rails and the surrounding friction/complexity, and don't want new entrants displacing that very large, but still essentially closed-loop mechanism (i.e. you need a banking license to be a part of the 'club')

So you have two competing goals here. One is simplification of the mechanism of sending money, and in doing so it is creating new closed-loop systems, but systems that are far more user friendly, offer lower or equivalent costs (both on fee and time) for consumers, and also are technically far more open and capable from a platform perspective. When was the last time your bank let you GMail your employees their salary? Ok, we're not there yet, but the day is coming.

While the bank SWIFT and ACH networks, and Visa/Mastercard/Amex/Discover rails are certainly massively dominant, by far the fastest growing payments modalities right now are the likes of PayPal, Square, Google and Dwolla. These players aren't competing against each other, they are solving the friction problem in moving money from one person to another. But here's the kicker...

Once enough people join the closed loop system of a PayPal, Google, Square or Dwolla, then the only remaining issue is getting cash in and out of that system. This is where proponents of the current system breath a huge collective sigh of relief. They'll point to the news around BitCoin's and Mt. Gox recent run in with the Fed around unregulated movements of cash, as Governments clearly want to monitor and regulate cash going in and out of the system due to concerns on money laundering, and the banks are the only players in town that have the license to do that right? Well, technical money transmitter licenses also allow non-bank players in this space.

The challenge is this - once enough people are using alternative P2P payment networks or mechanisms, then the utility of that system goes through the roof. Metcalfe's law is one of those nice little laws that govern the growth of closed loop systems that turn into these highly scalable networks, but probably Reed's law governing social network growth is more applicable. The beauty of a independent payments network can easily be shown by the success of PayPal and more recently iTunes and even Starbucks...

With 128 million active accounts in 193 markets and 25 currencies around the world, PayPal enables global commerce, processing more than 7.6 million payments every day. Because PayPal helps people transact anytime, anywhere and in any way, the company is a driving force behind the growth of mobile commerce and expects to process $20 billion in mobile payments in 2013
PayPal Media 

While the banking industry might like to categorize these P2P initiatives as hemmed in by regulations, or limited in impact, the implications are far more reaching. Since the arrival of the internet we have seen an explosion of alternative payment schemes. While initially on top of the existing rails, these closed loop systems are now creating behavior that is far more efficient than the incumbent systems they've replaced, and are connecting payers and payees in whole new ways. Inject context, rich overlay, merchant deals and offers, interchange fee pushback, mobile modality, social context of payments (e.g. splitting a bill at a restaurant), etc then the current ACH network and card network rails just aren't robust enough to adapt.

P2P is the start of a whole slew of alternative payment modalities and use cases. Payment modalities that are being created by users on the move, and by networks that are much lower friction than the incumbent networks. The only thing stopping this from cutting out the back-end players, is volume and the cash-in/cash-out problem. Once you have enough utility in the network, however, as we have seen with the likes of M-PESA in Kenya, then the incumbents have to play by new rules or else they are simply circumvented.

Utility will trump the old rules. P2P is just the beginning and I'll let you in on a little secret ... they're not competing with each other.


Comments: (3)

A Finextra member
A Finextra member 22 May, 2013, 08:28Be the first to give this comment the thumbs up 0 likes

Are we talking about the Naked King here? (No pun intended, Brett).

Brett King
Brett King - Moven - New York 22 May, 2013, 08:37Be the first to give this comment the thumbs up 0 likes


I think you misunderstood. I can see that clearly from your follow up blog.

The issue is - are the current rails robust enough to cater for every payment instance, and to do so with maxiumum efficiency to the end consumer? No, not even close.

The issue is not about replacing the existing rails, and the costs of doing so, the issue is that the new payment modalities that are coming into creation require a fundamentally different approach. They won't replace the existing system, but neither can the existing system satisfy all of the modalities we now require - the primary mechanisms being simplicity, context and real-time responsiveness.

In this instance, it could indeed be said that the current system is like the Emperor with no clothes - no one wants to admit that the current system isn't adaptive to change and robust enough to fit all these new modalities, but the reality is there is too much activity going on in the payments space already borne out of pure and simple demand.

It's quite simple. If the existing system was good enough - PayPal, Square, Dwolla and GMail P2P would not exist today.

Get ready for a lot more complexity and payments variety. The incumbents are no longer the sole players in this game Alex!


A Finextra member
A Finextra member 29 May, 2013, 16:11Be the first to give this comment the thumbs up 0 likes

The interesting trend we see through the evolution of PayPal, Square and Dwolla clearly illustrates that the core networks that make up financial services today are broken for the digital economy.

Sure they worked when people were used to waiting days to hear of major events in other parts of the world, or waiting weeks to get responses to hand written postal mail. But today’s economy looks, feels and behaves very differently now. We live in a real-time digital age.

Traditional Financial Services Institutions rely of hierarchical organization, putting a few in ultimate power, the banks, the regulator and the government. This worked when organizational cycles were measured in quarters. Macro decisions could take their time to make their way up the hierarchy, a decision had months to find resolution, all before any measureable impact could occur. Today minutes can have huge impact in entire industries. Impacted by real-time factors like environment, politics, consumer choice and increasingly the real-time democratization of opinion through social media.

What does this all mean? It calls for new organizational structures. Ones where nodes can interact in real-time without going through a central control point. I’m referral to Neural Networks, the very model the Internet is based on. The very model that businesses like Dwolla, PayPal & Square are based on.

In that light, its reasonably foreseeable that Brett’s point is correct. These companies aren’t competing with each other. They are simply building new nodes in a new network.

The offerings of Square, PayPal and Dwolla actually fit nicely together. Think about it, a digital commerce network (PayPal), than enables all forms of commerce (Square + PayPal) in both the physical and digital world (Square + PayPal) linked by a real-time (real-time ACH), zero settlement risk core (Dwolla), which is open to developers to push the evolution of the network and its nodes (Dwolla + PayPal).

Sounds pretty good to me.

Sounds like a world where the traditional bank networks won't be needed

Brett King

Brett King

CEO & Founder


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This post is from a series of posts in the group:

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

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