Many of us get excited about new and different toys in the payments world.
From Jack Dorsey’s twittering Square to PayPal’s billions of payments, we think the world is changing dramatically. SMS texting payments in Africa and credit exchanges on Facebook add weight to our arguments for change in the core of bank processing.
We then use these illustrations of small change to make allegations about big change. We speculate that everyone will be using twitter for payments via PayPal’s core system within the next few years, for example.
I do it myself because it’s nice to see a bit of concern in a banker’s eye; a slightly less confident swagger in a global transaction processor; a jitter of confidence in a commercial banker’s pricing.
But it’s all just a bit of noise when you look at the reality of these systems. It’s just cream on the cake.
In fact, I would say that all of the online P2P consumer developments in payments are nothing more than a wart on the backside of the flea attached to the hairs on the backside of the cat, which purrs in the lap of the banker who operates just a small piece of the parts of the whole, that comprise today’s global payments industry.
Oh yes, and that backside’s wart includes PayPal.
Shock, horror, heresy but yes, it is nothing special.
PayPal, Facebook Credits, Square … even prepaid cards and mobile payments, it’s all just a little bit of froth or cream on the layers of the cake of the core banking industry, and its heart of payments processing.
Let me illustrate it best by picking on PayPal (sorry mates).
Today, PayPal deals with around $80 billion worth of transactions per annum – they broke $20 billion in transactions processed for the first time in Q4 2009, processing $21.4 billion in transactions for a revenue of $795.6 million.
That sounds significant, doesn’t it?
For them, it is as PayPal is a major growth machine that has eaten its parent, eBay, by becoming the de facto standard for online payments. PayPal's revenues hit a billion per year in 2005 – now they do that per quarter.
The thing is that it is major for them but, in the scheme of the overall payments world, it’s not major at all.
First, their revenues are peanuts.
Assuming PayPal generates around $3 billion per annum in revenues this year, it’s still a long way off the largest banks that make $3 billion in pure profit in a typical year.
Second, PayPal sits on top of the core banking infrastructure. It hasn’t created anything new. It’s just added a layer of cream to the cake of payments. It sits on top of Visa and MasterCard which, in turn, sit on top of bank accounts.
So nothing has changed.
This is why PayPal is cream on the cake, but not a core ingredient.
The core ingredients are the infrastructures of clearing houses and banks, of counterparty systems and SWIFT messaging, of Real-Time Gross Settlement and Card Processing systems. PayPal is just a little bit of cream on those layers of cake.
For this reason, although I love PayPal as a model of providing payments for new internet and mobile services, from a payments context it is nothing serious.
As for Facebook Credits or other add-on services like Twitpay, which all use PayPal as their underlying service, these are just froth on the cream.
Third, even if you take them seriously, what are they actually doing? They’re providing a bit of payment functionality on top of the card and bank account functionality.
Actually no, they’re not even providing that. What they’re actually providing is a bit of account aggregation of payments for a small fee.
In other words, because banks and payments processors aren’t interested in sub-$10 payments processing, someone had to do it and that someone was PayPal.
So PayPal scooped up all of these P2P small payments online, and that’s their core business.
It’s not high value payments processing. It’s peanuts processing.
OK, so PayPal does the odd airline ticket for $1,000 but, for every airline ticket, they process $1,000’s of more dollars for buying cables, DVDs, mobile phone covers and similar goods at $10 or less.
Bring on Facebook credits and Twitpay and they’re processing $100s of more dollars for sharing a note, reading a page or downloading a song for $0.99 or less.
In other words, they are just payments aggregation services.
Like a telephone billing service, PayPal and its gang of payments aggregators offer small payments processing on a massively scalable platform. By doing this, it enables them to generate enough to warrant a worthwhile bank payment per month.
But they are not payments processing, just aggregating payments like a telephone service.
A telephone service provider processes 100s of transactions a month to generate a single worthwhile monthly payment through the banking system.
PayPal, Facebook and Twitpay are doing the same thing for online services.
This is why they are actually irrelevant, in terms of core payments processing.
Core payments processing represents $4 trillion of debit and credit card payments per annum, significantly more than PayPal’s $72 billion for the year.
Core payments represents the almost $4 trillion in foreign exchange transactions performed every day.
That's over a quadrillion dollars worth of transactions per year.
A quadrillion dollars per annum makes PayPal look like a bit of detritus on the landscape of global payments volumes.
This is not to say that PayPal are detritus. They are important, but they are not all consumingly the be-all and end-all of innovation or even change because, when it comes to payments, nothing much has changed. In fact, banks are starting to eat back into their business by launching secure online payments systems like iDeal and Rightcliq by Visa.
And this is easy, when you have an industry that processes gazillions of dollars per year using standards, structures and systems which have globally stood the test of time.
These standards, structures and systems allow the billions of transactions in global capital markets and corporate supply chain and person-to-person payments to operate.
These are the core ingredients of the cake.
So yes, add to this a little bit of cream on the cake, PayPal; or add to this a little froth on the cream, Facebook and Twitpay.
But don’t mistake the froth and cream as core.