The Payments Industry Redefined
You’ve definitely heard of Paypal and may have used it to for online purchases or donations in the past, but what you probably didn’t realize is that Paypal is part of a burgeoning payments industry, consisting of multiple companies, many of which are valued at well over a billion dollars.
Paypal was purchased by Ebay in July 2002 for $1.5 billion, and was spun-off as a separate company earlier this year, the company currently has a market capitlization of over $40 billion. Paypal processes payments for online vendors and for commercial users, but has a complicated fee structure based on a percentage of transaction, as well as flat fees that actually vary depending on the amount of the transaction. Merchants on online marketplaces like eBay and other similar sites don’t like this complicated fee structure since they want to be able to understand the fees that they’ll have to pay when they sell items, and limit the fees that they’ll have to pay.
Paypal has faced competition in recent years from promising young companies such as Square and Stripe, who offer alternatives to merchants looking to accept electronic forms of payment from their customers. While Square and Stripe provide relatively similar service offerings, and are often grouped together by paymentech analysts, the difference between the two can be summed up as follows: While Square is used for card-present transactions, meaning that customers physically pay with a credit or debit card, Stripe focuses on card-not-present transactions, online or over-the-phone transactions, where a physical card isn’t used.
Square was founded in 2009 by Jack Dorsey (also the co-founder of Twitter) and Jim McKelvey. Because the company primarily deals with in-person card payments, Square sells physical products such as credit-card readers and stands which allow merchants to turn their iPads into checkout devices that replace traditional, and relatively expensive, credit card reader machines. Aside from Square’s physical products, the company has software that can handle sales, scheduling, invoices, and inventory, among other things.
Stripe was founded by Irish brothers Patrick and John Collison in 2010, with the intended purpose of simplifying online transactions for both the customer and merchant. The company raised several rounds of funding and was most recently valued at $5 billion. A crucial component of Stripe’s products is their suite of APIs, or application program interface, that provide routines, protocols, and tools for building software applications that can help with things like scheduling, inventory, and payments. Another Stripe feature is Stripe.js, which stores credit card information on Stripe’s servers, so that smaller businesses are alleviated of the worry of sensitive customer information getting hacked.
Over the last few years, the machines that users have swiped their cards through, and the online systems that process cards, have changed dramatically. Square’s card readers have made iPads into point of sale devices (i.e. checkout registers), and Stripe has made it much easier and quicker to pay online. Yet the underpinnings of payments haven’t changed, in the sense that Square, Stripe, Paypal, and the large majority of the other new payment companies still use credit or debit cards at some level (either the physical card or the card’s information if the transaction is being performed online), and are therefore subject to the flawed and antiquated credit card network.
In this traditional credit card network, money needs to flow from the user’s bank to the merchants bank--sounds easy enough right? Unfortunately, to first receive clearance, and then successfully move the money from the user to the merchant, numerous additional steps are involved. The cardholder (user) has to submit a request from the merchant to purchase the item. Once the merchant acquiesces to this request, it has to submit a request to the acquirer. Then, the acquirer asks for permission from the issuer, which is generally either Visa or Mastercard, and so on.
Despite the fact that these steps occur extremely quickly, they are wrought with issues, primarily for merchants. As the user’s money moves from the user’s bank to the merchants bank, small percentages of money are deducted at each stop along the way, including by banks and by the card network, either Visa or Mastercard. As a result, the merchant loses part of his revenue. Additionally, various stages involved under the current payment methodology makes consumers and merchants more vulnerable to credit-card fraud.
For the user though, this isn’t a big deal. They don’t have to pay the fees that the merchant must pay, and they can take advantage of how these companies’ systems allow them to pay in more locations--both physical and online locations--and with more ease, while continuing to use the same credit card. For example, Stripe has made it much easier to purchase merchandise online, and the same goes for Square for in-store purchases.
What will take things a step further than companies like Square and Stripe, and really revolutionize the industry, is a an app or payment network that doesn’t use the traditional payments network. One such app is Kash, which is taking the speed of credit card purchases, but making it more reliable like the Automated Clearinghouse (ACH) system, which is used for clearing checks in the U.S. Companies like Kash will create a more reliable system for credit card payments, and one that, according to Kash’s website, will be 80% cheaper for merchants than credit cards. While we don’t yet know how well Kash’s system will work, the idea that card-based transactions can be performed without having to pay an abundance of fees to card companies and to either Visa or Mastercard, is very exciting for the industry.