Would You Like Your Photo On Your Banknote, Sir?

In this post on the consult hyperion’s blog, Dave Birch exhorts banks to be innovative or face extinction. While the blogosphere is full of such articles claiming that traditional banks will get disintermediated by Google, Facebook, mobile network operators and young startups, I decided to call this one out because its criticism of and expectations from banks are amongst the most ridiculous I’ve come across so far.

In his post, Birch describes the experience of his son – let’s call him Tom – trying to organize a party with his friends through Facebook. According to Birch, Tom “…doesn’t use PayPal, doesn’t have a cheque book, has a debit card but some of his friends don’t have bank accounts (and in any case he doesn’t know their account numbers). I told him to use PingIt, but he can’t install PingIt on his iPhone because it’s been jailbroken”. When Tom asks his father why he can’t send money to his friends via FB, the father is speechless. But, he recovers in time to confidently assert that it’s “only a matter of time” before someone comes up with a new payment product to do just that. And, when that happens, we’re to infer that banks will go the way of the dodo.

To the banks who tell him, “payments work fine, why are you bothering us (with such alternative payment methods)?” Birch draws an analogy with Square, the mobile payments startup founded by Jack Dorsey, one of the co-founders of Twitter. By enabling small businesses to accept credit card payments on a smartphone fitted with a small cardreader, Square is widely seen as disrupting the retail payments space. Square doesn’t disintermediate banks, but more on that later.

This analogy is flawed. A new payment method for Tom’s situation is unlikely to have a business model even if it finds enough takers amidst competing payment products, whereas Square solves a real problem that people are willing to pay for. Let me explain.

Banks offer accounts. Why can’t his friends have them? Bank accounts come with cheque books, what stops Tom from getting one for himself? In a market full of genuine iPhones, why should Tom buy a jailbroken one and then blame the Barclays PingIt mobile app for refusing to install on it (BTW, even Square’s payment app doesn’t install on a jailbroken iPhone).

I’ve no doubt that some bright startup will come up with a new payment product to cater to just this kind of target audience. If somebody claimed that such a product addresses a mainstream need, I might agree, at least in markets where GenY constitutes a sizable part of the local demographics. I’ll even grant that the startup might somehow find a way to fly under the radar of regulators, at least in some parts of the world.

However, with the amount of fees Tom and his friends might be willing to fork out for such a payment product, the question is how long the startup will survive before it downs its shutters or gets acquired by a traditional bank and finds itself consigned to the backburner. Even behemoths like Nokia Money have realized that, while innovation and superior consumer experience are necessary, they’re not sufficient to pay the bills. This is where the difference between such a startup and Square becomes obvious.

Without Square, individuals and small businesses who wish to accept credit card payments have a tough time getting a merchant account from their banks. I can vouch for this from my personal experience: The so-called merchant integration form issued by my bank is so complex that, even after 25 years of being in the IT industry, I’m unable to complete it. Square offers its own merchant account to these people, who no longer need to go to their banks to get one in their own name. Then, by converting smartphones into a card-swiping device with a small dongle, Square obviated the need for merchants to buy / rent costly POS equipment. It is with these alleviations to existing pain areas that Square manages to blaze the trail of retail payments. (Let me hasten to add that Square doesn’t do anything close to disintermediating banks. On the contrary, it adds transaction volumes to existing card networks and boosts the interchange revenues of banks while keeping them insulated from a new category of merchants whose higher risk profiles they’re unwilling to take on directly).

Whereas, unfortunately, I don’t see any such disruption potential of an alternative payment product that caters to Tom’s situation. People have been writing cheques for ages, people can buy genuine iPhones, so cheques and Barclays PingIt are very viable options today. Besides, there’s always cash – although I don’t know what would happen to that option if Tom and his friends suddenly decide that they’d accept banknotes only if they had their own photos on them.

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