I was scanning Finextra and came across an interesting statement from Alex Mifsud on Paypal - Can banks compete
with PayPal?
Specifically Alex's comment "As online payments gather momentum and PayPal spreads its reach, financial institutions are starting to take this seriously as a threat but do not yet know how to prevent PayPal's seemingly unstoppable capture of the online
payments world." and "... its business was now not only derived from online retailers and merchants but also offline"
This is interesting - The problem with PayPal is in its credibility to be something greater than a low end retail provider of small transaction high volume. Now while that is a viable business model for internet junkies buying trinkets online, the
process is not that versatile for the more serious transaction further up the economic value chain, why?
Well in short, the remittance party and the beneficiary have to be part of the PayPal network or use credit/debit cards, perhaps the largest retail remittance channel of them all. Let's take a look at our local PayPal "branch" and for me that is in Singapore,
Singapore PayPal; where do I find Remit Funds into any bank account in the world?
If PayPal moves up the pyramid away from the online sphere and into the supply chain realm of business-to-business, this model will need to change. In reality the marketing, support and fiduciary perception of this whole operation is going to need to change
but let's stay transactionally focused here. Funds transfer needs some functional requirements to be successful at all layers of the economy. These requirements come down to three things:
- Transactionally Secure,
- Fit within standard terms of trade and
- The transaction must be Indiscriminate or Fiat Money like
Fiat Money Is Fully Fungible
PayPal does the first two but is weaker on the third, what it does provide is payer-to-payee facilitated via the credit and debit card networks. What it doesn't do is open account functionality for if it did, it would offer the channel for legal tender anywhere
and become the facilitator of Fiat Money.
Secondly the banks or banking network per say holds the key to PayPals' success with this endeavour as the banking network controls both the issuing and beneficiary party. More succinctly if banks are threatened by PayPals true intentions, they are unlikely
to give it the space it needs to develop and enable "good channel for legal tender anywhere", that's the banks space surely.
There is a more imminent threat to banks
The real player in this space who already has a grip over the banking market, the market PayPal wants to enter, is SWIFT. SWIFT has (1) Security (2) Standard Terms of Trade and (3) Control of the channel for legal tender anywhere.
SWIFT has been the common protocol for bank-to-bank open account transactions for sometime and as a company it facilitates this role in an omnipresence for all banks, commercial, retail and investment.
SWIFT is also adapting, it is now reaching down the food chain in the opposite direction to PayPal, where PayPal is trying to reach up the economic value chain.
Over the last couple of years SWIFT has launched its
SWIFT Alliance Lite product which allows any member anywhere to place any currency into any bank account and for the account holder to have a nostro relationship with it. Succinctly someone using SWIFT Alliance could post USD $100 into nearly any beneficiary
account with any financial institution anywhere in the world. This payment could actually be denominated in any currency and because SWIFT is a push network the transaction is available for clearing immediately. Additionally as SWIFT is a messaging protocol,
an invoice can be sent back to a paying party in reverse flow of the funds but the semantics of this process are for another discussion.
SWIFT is also pricing its Alliance Lite Product as a flat fee, pay as you go program and that is something that would appeal to the small or medium business owner's transactional needs however, SWIFT has a small issue.
SWITFT has always been deemed the bank-to-bank protocol not the facilitator of the single small transaction.
What would be ideal for PayPal and SWIFT for what its worth, is if they were to align their needs, solutions and channels. SWIFT has the protocol and messaging network, PayPal has the market. If PayPal was to offer an interface in and out of SWIFT or if
the two companies entertained a joint venture then Alex Mifsud's comment "PayPal spreads its reach, financial institutions are starting to take this seriously as a threat" could become a reality.
How Does PayPal Work