By Patti Murphy
The payments landscape is littered with failed attempts by nonbanks to establish themselves as the newest way for consumers and businesses to pay. Perhaps the most obvious of these is the Discover card, which was launched with much fanfare in the mid-1980s by Sears Roebuck and Co.
At the time, Sears was one of the largest retailers in America. The move into financial services – in addition to Discover, Sears also owned Dean Witter Reynolds Inc., a retail stock brokerage – was seen by many as the opening salvo in an assault on banks' position as gatekeepers to payment systems. Within a decade, Sears discovered that financial services generally, and payment services in particular, were a far cry from retailing, and faced with declining performance in its core business, retailing, Sears exited financial services.
While Discover has emerged as a competitive credit card brand, it lacks the kind of acceptance (and some would say panache) Mastercard and Visa enjoy. Recently, I was dining with a group of friends, and when the bill came we each threw a credit card on the table and asked our server to split the tab eight ways. I contributed the only credit card in my wallet, a Discover card. (I had two Visa-logoed debit cards with me, but prefer not to use them in these situations for fear fraudsters might be lurking around the card terminal.)
As the server picked up the cards, she spotted my Discover card and said, "I'm sorry, we don't take this card." Several heads turned in my direction, and one friend asked incredulously, "You use Discover? Don't you have a Visa or Mastercard?"
Around the same time Sears introduced Discover, Mobil Oil Corp. (now ExxonMobil) introduced a proprietary credit card with a debit feature. Cardholders authorized debits against their checking accounts, and Mobil would collect the money through the automated clearing house (ACH). I had one of those cards, too, and appreciated that it was like paying with cash even when I lacked cash on hand. Plus, clearing payments through the ACH allowed for two to three days of collection float on that cash.
More recently a consortium of large retailers (Walmart, CVS and BestBuy among them) tried to launch a mobile payment network, CurrentC, in an attempt to sidestep interchange and compete with the likes of Apple Pay. But after several years, the consortium (known as the Merchant Customer Exchange, or MCX) threw in the towel. MCX sold its technology to Chase, the commercial banking arm of JPMorgan Chase & Co., which now uses it to undergird its Chase Pay digital wallet and mobile payment app.
While banks are not technology companies, many understand the potential value of technology innovations and possess the financial resources required to pursue them. "When we think about 'fintech,' we go through a 'build/buy/partner' evaluation to decide how we can get to market most efficiently," Jennifer Roberts, head of Chase Pay and digital products at JP Morgan Chase, stated regarding the CurrentC technology purchase. "This will help us get to market faster."
Chase has been a major backer of fintech companies. For example, it invested in LevelUp, the mobile ordering, payment and loyalty app for restaurants and their customers recently acquired by Grubhub Inc. And it's been collaborating with numerous fintechs, including OnDeck, an online lender providing small-dollar loans to businesses. "The combination of Chase's relationships and lending experience and OnDeck's technology platform offers a game-changing credit product," the bank noted.
When it comes to personal and business finances, banks have several inherent advantages over fintechs striving to challenge the status quo: scale, established trust and a favorable regulatory environment. Bank charters are not easy to obtain – there are substantial regulatory hurdles, including strict capitalization requirements.
That could change now that the Office of the Comptroller of the Currency, the U.S. Treasury Department agency that regulates nationally chartered banks, is accepting applications from fintechs seeking "special purpose" charters. I suspect this will take time to catch on, as many fintechs, begun on shoestring budgets, likely lack the capital needed to secure bank charters.
Of course, there are exceptions to most every rule, and in this case it may be PayPal. But I believe PayPal is less a challenge to the banking industry's payments franchise than it is an intermediator. It uses existing rails (the card networks and the ACH) to move value exchanges, while providing a layer of protection for weary consumers. I use PayPal for online purchases, for example, in an effort to keep my credit and debit card numbers off the web.
PayPal hasn't been going it alone, either. Two years ago, the firm entered into a strategic partnership with Visa in the United States, and the partnership has since been expanded to include the Canadian market. "The partnership puts PayPal and Visa on a new path, with the companies working more collaboratively to accelerate the adoption of safe, reliable and convenient digital payments for consumers and merchants," the two said in a joint statement.
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. Follow her on Twitter at @GS_PayMaven or email her at firstname.lastname@example.org.
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