I'm a payment junkie and not just because there is money in it. With over 10 credit cards, accounts with 5 different banks, and membership in at least 4 alternate payments programs liked Level up, I get a chance to see how many industry players are progressing. And what I'm seeing should be scary to traditional players in the payment ecosystem.
Take LevelUp, a Boston based company focused on enabling customer to merchant payments. Their 2012 year end letter to members lays out an audacious challenge to the merchant fee gospel that has persisted since plastic became money. NO MERCHANT FEES
If Level up were bigger, this would be concerning to the payment status quo. Why?
Payments companies make billions of dollars on the merchant fees they charge for every swipe. American Express, who owns the relationship with both the customer and the merchant, has the most at stake since these fees are the core of their business model and revenue stream.
But so far, only LevelUp, Dwolla, and a few even smaller players are actually disrupting the merchant fee oligopoly.
Why?
Its because all of us. You, me, your mother, all of us are addicted to points.
Those beautiful, easy to quantify bribes we get each time we use the plastic to buy something. As if the chance to pay later, buyer protection, disputes and fraud protection, travel, and other rewards arent enough. The Card companies have created an ever escalating race for attention by offering increasingly rich points rewards schemes. And we, as consumers, are eating it up.
But who pays for these rewards? The Merchants. And they are starting to figure out they have more power and more options than ever before. Witness the recent announcement of MCX, Walmart and Target's mobile wallet. Whats in it for them? 2-5 % savings in a razor thin margin business. But thats not all. The Merchants are waking up to the fact that consumers are more loyal to them than their payment providers. Since Merchants know the customer buying behavior down to the SKU level, they have a lot they can leverage to provide additional value to their loyal customers.
Consider this: once mobile wallets take on, all the breakage built in to the loyalty points will be eliminated. Instead of the consumer having to remember and act on the complex rules for each of their 5-7 loyalty programs, the mobile wallet will act like an advocate or avatar, automatically getting the best deal available.
Lets take buying gas. My wallet will know that Discover pays 5x points for gas this month, but the points max at $200 and the program only runs for a month. So as soon as my spend passes the $200 or the month, it will automatically switch to Chase's 3x points. And it will remind me when the points expire, or purchasing with points is better than using cash. If you work in the loyalty space you should be afraid. Very afraid.
If the merchants can find a program that doesn't bribe the customer by squeezing their profitability, while also providing them greater connection with their customers, the payments companies have nothing but their disputes and fraud programs left to add value to the equation.
Suddenly payments is starting to look like music, books, and videos. Ripe for disintermediation.
Take LevelUp, a Boston based company focused on enabling customer to merchant payments. Their 2012 year end letter to members lays out an audacious challenge to the merchant fee gospel that has persisted since plastic became money. NO MERCHANT FEES
Payments companies make billions of dollars on the merchant fees they charge for every swipe. American Express, who owns the relationship with both the customer and the merchant, has the most at stake since these fees are the core of their business model and revenue stream.
But so far, only LevelUp, Dwolla, and a few even smaller players are actually disrupting the merchant fee oligopoly.
Why?
Its because all of us. You, me, your mother, all of us are addicted to points.
Those beautiful, easy to quantify bribes we get each time we use the plastic to buy something. As if the chance to pay later, buyer protection, disputes and fraud protection, travel, and other rewards arent enough. The Card companies have created an ever escalating race for attention by offering increasingly rich points rewards schemes. And we, as consumers, are eating it up.
But who pays for these rewards? The Merchants. And they are starting to figure out they have more power and more options than ever before. Witness the recent announcement of MCX, Walmart and Target's mobile wallet. Whats in it for them? 2-5 % savings in a razor thin margin business. But thats not all. The Merchants are waking up to the fact that consumers are more loyal to them than their payment providers. Since Merchants know the customer buying behavior down to the SKU level, they have a lot they can leverage to provide additional value to their loyal customers.
Consider this: once mobile wallets take on, all the breakage built in to the loyalty points will be eliminated. Instead of the consumer having to remember and act on the complex rules for each of their 5-7 loyalty programs, the mobile wallet will act like an advocate or avatar, automatically getting the best deal available.
Lets take buying gas. My wallet will know that Discover pays 5x points for gas this month, but the points max at $200 and the program only runs for a month. So as soon as my spend passes the $200 or the month, it will automatically switch to Chase's 3x points. And it will remind me when the points expire, or purchasing with points is better than using cash. If you work in the loyalty space you should be afraid. Very afraid.
If the merchants can find a program that doesn't bribe the customer by squeezing their profitability, while also providing them greater connection with their customers, the payments companies have nothing but their disputes and fraud programs left to add value to the equation.
Suddenly payments is starting to look like music, books, and videos. Ripe for disintermediation.
Derek, you make the case for the value of a mobile wallet. It will create smart money and smart spend.
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