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Alternative Payment Networks: Fact or Fiction?

Even though credit cards existed before the payment networks (MasterCard, Visa etc), their acceptability was very limited. Bank of America started the first network which later became Visa. Merchants who joined the network could accept credit cards from any issuer on the network and get paid for the transactions done by their customers using the cards. The networks charged a fee for facilitating this universal acceptance and they still do to this day. This network fee is the second highest operational cost for small merchants after labor costs.

The payment networks started in the pre-internet era for connecting merchants to the card issuers and did a good job performing those services. Since the development and evolution of internet in 1960s and 1970s, many business models have been disrupted and services have been made available at a very low cost or totally free. Some examples that touch our daily lives are mail, voice communication, retail, news, books, content sharing, surveys, online education, video conferencing, banking etc. But the payment networks’ business model has stubbornly stayed in place and has been very profitable. In fact, the payment networks are among the most profitable stocks of our times. Visa and MasterCard stocks outperform Bank of America, JP Morgan Chase and the S&P500 as well. Even the mighty oil company, Exxon Mobile, does not fare well compared to Visa and MasterCard.

The last 20 years have seen minnows challenging the established players and threatening their business models using the power of internet. Amazon almost killed Barnes & Nobles, Netflix delivered significant blows to BlockBuster, eBay (with Amazon) threatened the whole retail industry, and Dell at one point successfully challenged the might of the likes of H.P.

Can the business model of the payment networks ever be disrupted? In my opinion, yes, it can be! After all a credit card transaction consists of just a message (and non-real time movement of funds in the background) that goes from the merchant to the acquirer and then to the issuer and back. Such a message can travel freely over the internet like so many others do. Banks can identify each other and transfer real funds using their swift codes or IBAN codes. I agree that there will be numerous complexities, challenges and roadblocks in doing so, but they can be conquered just as the challenges in transmitting mail or voice- over- the- internet have been.

Payment methods (such as Dwolla, Billtomobile, M-pesa, Bill Me Later, Bitcoin and Facebook credits) that have cropped up recently might be the harbinger of the change but whether they can become the Amazon, eBay and Netflix of the future is still a big question. I am hopeful.

I understand that the networks play a very important role in enabling secure financial transactions but so did Morse code in communications once. All arguments in agreement or disagreement are welcome!

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