Fintech Lecture 5: Payment
Payment System
A method to amend and Record Entries on Ledgers for Money Authorizing, Clearing and Recording Final Settlement.
Visa, Mastercard and a few others are digital payment service enablers. They offer debit/credit card services, prepaid products and other payment solutions. They are leaders in their respective segments. They charge some amount of 2–10%(depending on the country) per swap which gives payment startups a chance to get inside that 2–10% and reduce it to increase the adoption.
When you are making a payment of $100, $2.2 goes to the issuing bank(your bank) which is used as a loyalty and reward program for their customers and comes back in the form of $1.06 dollars. So, the money that goes to your bank, comes back to you by 50% as a reward if you are loyal to them. That’s your loyalty fees.
Q. Challenges in the payment industry ?
- The commission while online transactions that AMEX, VISA and other companies charge on merchants for every swipe which makes them accept cash sometimes.
- Time-consuming and costly International payment because of different payment/banking systems.
Q. Lessons from big tech like Paytm, Google Pay, Apple Pay, Alipay; Startups like Plaid, Stripe, Venmo and incumbents like banks and big firms like Visa, HDFC, Paypal.
- Big tech uses a good interface and support service. Customer care is available and solves issues instantly where banks take a lot of time for the same.
- Big techs and startups are taking advantage of cellular service and wifi affordability to expand their reach.
- Bank payments are separate and individual. Big techs and startups allow users to complete a transaction over social media, where making a payment seems fun with the help of emojis and stickers.
Mckinsey Payment Report
This is McKinsey's annual report of payment. The worldwide revenues in the payment system add up to about $1.8 trillion, $1.9 trillion. Earlier World Bank statistics would say the payment system around the globe takes about 0.5%-1% of the economy.
The worldwide economy before the corona crisis was hovering just short of $100 trillion, the US economy about $22 trillion. But of that $100 trillion, we’ve probably been spending, McKinsey would say, nearly 2% on our payment system. The World Bank would say that the figure is more like a quarter to a half of that because McKinsey includes all the interest that we’re paying on our balances.
So this is the opportunity. If you’re saying, what did Stripe, TransferWise, Plaid see? This is anywhere from $0.5 trillion at the low end to $2 trillion at the high end. 0.5% to 2% of the world economy relates to just moving these digital payments back and forth plus the account-related activity liquidity, the starting, the lending balances on top of that.
Real-time gross settlement
Payment Coming from Bank of America(BOA) to other banks should be equal to Payment coming from other banks to BOA.
This is a gross settlement done for large payments. This is not a ‘net’ settlement which would be for individual bank accounts, but still effective. Very few countries have achieved instant or near-instant retail settlement including India, China and Japan in recent years.
Fintech Payments
Take is consumer to consumer or consumer to market, there are several checkpoints which has to be crossed to complete a payment. Every checkpoint is different service provider including the government backend systems and every checkpoint charge money to complete their action.
Digital payment industry is growing exponentially. Take is any part of the world, from Kenya, to USA, to India and China in Asia, everyone is moving towards digital payment. Digital wallets are dominating in payment methods.
Alipay and Wechat pay have 92% of retail payment space in China. Collaboration with the government and zero commission within the Alipay app and Wechat app allowed them a quick adoption. By using these apps, vendors, customers and merchants are saving their commission cost. This is a win-win case for merchants and consumers which leads to faster adoption.
After demonetization, India saw growth in digital payment methods. Cash payment is not declined significantly but digital payment increased, which means expenditure capability increased which is good for the economy as well. This rise in the capability of expenditure gave entrepreneurs bring more payment solutions in the market while banks and government institutions are working in the backend.
Meanwhile, infrastructure has also improved to support this. The main pain point of the current payment system is extending the settlement period, 24*7*365, lowering cost and cross-border payment which is getting solved by cryptocurrency.
Lecture 4 — Cryptocurrency — — — Lecture 6 — Credit and Lending
Lecture 1 — Introduction — — — — — — — — — Index
