There I was, together with millions of people around the world, “virtually” standing in front of Jennifer Bailey as she introduced the new Apple Card. It took hours, if not minutes, for media outlets to start rolling out headlines describing this credit card as “disruptive”. But as a former General Manager at Visa and the current CEO of a leading digital payment solution, I wondered: “Is Apple Card really a disrupter of the payments industry?”
To answer this question, we must first be on the same page, at least, linguistically. Journalists and bloggers are now using the word “disruptive” to describe any situation in which an industry is shaken up by new or existing players. But “shaken up” does not imply change. Interestingly, days earlier I had come across an article from Harvard Business Review entitled “What Is Disruptive Innovation?”. By definition, disruption originates from one of two possible “footholds”:
- Low-end “footholds”: as market players focus on providing better services to the most profitable and demanding customers, low-end clients are often left behind, trapped in mediocre services. In this scenario, disrupters try to capture low-end clients by offering a “good enough” alternative.
- New-market “footholds”: this is all about creating a new market. Taking Crypterium as an example, we allow holders of digital assets to use them offline and online in an easy, fast and low-cost way. Something that, to date, was almost impossible. In our case, disruption turns non-customers (crypto holders) into customers (Crypterium users).
Looking again at the Apple Card, it doesn’t seem to fit into either of these scenarios. It is neither targeting low-end consumers nor creating a new market. After all, credit cards have been around since Frank McNamara forgot his wallet while dining out in New York back in 1949. Hello Diner’s Club!
“My reaction when I saw the announcement was, first competitively, all of the features that are in that card are offerings we have today, […] The card plastic for swiping itself, all the way through to the mobile and electronic wallet,” said Cathy Bessant, Bank of America’s technology and operations chief in an interview with CNBC.
My reaction was no different. “Simple, transparent and secure” is not something particularly original as a value proposition. Looking at my phone, I have a dozen banking and payment apps, all offering me exactly that proposition. This led me to a second question: if the Apple Card is not delivering a truly revolutionary product, why enter the payments market at all?
All About The “Base”
Apple is trying to diversify its revenue streams. They are not alone. Other giants in the tech industry, such as Google, Amazon and Facebook are also in a race to monetize their existing, huge customer bases by bringing payments into the flow.
Last week, I informally met with someone from Facebook’s Payments team in London. The brief meeting confirmed the social platform’s public interest in the payments space. Zuckerberg’s stated intention behind any Facebook’s peer-to-peer payment solution would be to eventually launch social payments globally, opening the doors to the creation of social marketplaces — taking advantage of all of Facebook’s company assets.
Facebook-owned Whatsapp is already beta-testing its e-payment service, known as Whatsapp Pay, in India, one of the app’s largest markets (over 200 million users). Another reason to pick India as a test-market is that local banks underserve customers digitally, something that researchers from Bain & Company directly correlate with citizens’ willingness to use financial services directly from technology companies.
Back in February 2018, Whatsapp Pay was made available for a limited number of users. Since then, the company has struggled to get a green light from Indian regulators for full deployment.
The “lucky ones” that take part in the test should have a bank account with a bank that supports the Unified Payments Interface (UPI) — which enables real-time transfer of money between bank accounts, using smartphones. Just like Apple with Goldman Sachs, Facebook is also tied to using banking partnerships that enable the eco-system, but might reduce their potential profits.
This might well explain the strong market rumors surrounding the development of Facebook’s own digital currency. I am talking about the Facebook Coin — supposedly a stablecoin pegged to the U.S. dollar, that would allow users to send and receive money instantly through Whatsapp, and later on, potentially, Facebook Messenger.
This is a smart way to go. Running transactions in their own cryptocurrency will ensure all profits from this new revenue stream stay within Facebook’s system, not go to partners. Barclays internet analyst Ross Sandler has estimated that the Facebook Coin could generate an additional revenue of $19 billion by 2021.
As previously said, all tech companies want a piece of the crowded e-payment market. Google partnered with four large banks in 2017 to launch Tez — its own mobile payment system running on UPI. Disruptive? No. Innovative? Maybe. For large tech players, their network-effect power relies on extensive user bases that, by introducing P2P payment solutions, could also bring all (or most of us) into a single, highly revenue generative ecosystem.
And Then There Were None
Many people used to think of banks as a little like medieval doctors. Most of them were horrible and there was a high chance you would “die” at their hands, but what else was there…? Today, that’s not the case anymore. Not only do we have more banking options, but also new alternative solutions, such as PayPal, the Apple Card or real disruptors such as Crypterium.
A survey by Deloitte “Millennials and Wealth Management” shows that nearly 57% of U.S. millennial responders are willing to change their bank for a tech platform. However, banks remain in high-regard when the “trust” word comes into play.
Bill Gates said it in 1994: “while banking is necessary, banks are not.” The survival of banks largely depends on their ability to adapt. And with big tech players rapidly eroding the boundaries between industries, offering cheaper, faster and more convenient services, timing is everything. Are banks changing as fast as they should?
Not sure about “fast”, but banks are certainly trying to change. They’re trying hard. A recent study conducted by Ernst & Young reveals that 85% of the world’s top 200 banks perceive the implementation of a digital transformation program as a major business priority.
Barclays is a good example of how banks are experimenting with new technologies. In 2016, the financial institution carried out the first trade transaction on blockchain. Normally, a trade deal involves at least 20 parties and takes over 10 days to be fully executed. Using blockchain technology, everything happened in the blink of an eye.
As a former banker, I know that traditional banks’ legacy systems are making the introduction of new technologies extremely difficult. Even today, most core banking systems, used by banks in developed nations, are decades old. These systems cannot easily cope with instant account opening, speedy transaction processing, transparent and immediate customer information updates, etc.
Another thing holding banks back is regulation. While the world has shifted to a post-crisis stage, policymakers remain cautious on banking regulatory frameworks. The same report by E&Y suggests that “banks should not expect compliance requirements to loosen. In fact, pressure on banks is likely to increase, as regulators around the world each implement their own particular version of the Basel reforms, and as regulators set the rules under which banks must deal with the challenges posed by new technologies.”
Let’s take Hong Kong as an example. The city has recently opened up e-money licenses so that tech companies and banks can operate within a regulated framework. But these licenses do not come cheap. You need to have over 300 million Hong Kong dollars (almost $40 million) in capital to get one. Most start-ups don’t have such money. But tech giants and banks do. Standard Chartered — where I previously worked as Head of Customer Experience — is one of the major parties, together with players such as Tencent and Ant Financial, applying for a license.
Once the Hong Kong Monetary Authority issues the license, Standard Chartered and its partners will launch mobile banking services to reach, guess who, the tech-savvy millennial generation.
“We’ve learned a lot through that process […] We’ve learned a lot about setting up partnerships, trying to create a user experience that goes beyond traditional banking products,” said Bill Winters, chief executive at Standard Chartered Bank.
No Base, No Money, Unique Proposition
New entrants do not have the big user bases, nor the cash. But they have something that no other tech giant or bank is putting into the equation: flexibility to deliver unique, customer-oriented value propositions. These are the real disruptors.
The latest records from Kenya’s Central Bank show that there are 2,852 ATMs in the country (April 2018). M-Pesa, a mobile-based money transfer, credit and microfinancing service, has over 120,000 agents distributed all around the African nation. For a small fee, Kenyans can pay for basic services, transfer money to one another and even get salaries. It’s all virtual. And if they ever need cash or load their accounts, there are plenty of corner shops and kiosks to do so. The service is now used by 96% of Kenya’s households and nearly 25% of the country’s GDP is processed through M-Pesa. That’s disruption.
So… What’s behind M-Pesa’s success? While working for Visa, we did a lot of research on the M-Pesa model. I would say M-Pesa got its disruptor “medal” by offering the right services to the right people, at the right place and time, in the right way.
It offered a digital way to exchange money using mobile phones to a largely unbanked population where remittances played a critical role. Safaricom — the telecom operator behind M-Pesa — had an extensive base of clients to leverage. That, naturally, also contributed to its success. Additionally, with the local regulator being very supportive, it made it faster and smoother for them to launch. While the M-Pesa model is not one that could be replicated in many other places, one thing we can learn from them: it is mandatory for start-ups to approach the market with client-centric value propositions. We now also see new blockchain start-ups in Africa, such as Wala, taking open financial services to a next level.
Benchmarking innovative technologies, such as blockchain, can also be an essential way to build solid competitive advantages, in order to attract customers or, in some cases, create them. This is precisely what our entire team in Crypterium is doing: delivering a unique customer-driven proposition. For us, this is enabling cryptocurrency holders to keep all their digital assets in a single wallet, use them offline and online, or transfer them freely and at minimum cost to bank accounts or MasterCard accounts. We are testing and introducing new services such as loans and deposits to enable customers to use us as a sort of “crypto-bank”.
In summary, despite not being truly disruptive, tech giants have all the chances to establish themselves as solid players in the financial services industry. Deep pockets, massive user bases and the network effect are their advantage and they have the ability to build out payments ecosystems from these assets. For banks, they need to work out how they “play” in this new world and can take advantage of the opportunities provided by technology. They have the assets of trust and loyal customers, but need to be more flexible and less risk averse if they are not simply to become utilities. One way is to build partnerships with those that understand customers like no other, small start-ups — disruptors that rely on agility and customer-centric value propositions as their primary weapon. In the new world, maybe all will disrupt and win in different ways.