Malcolm Gladwell turned the biblical story of David and Goliath on its head by noting that the giant was actually much weaker than his opponent. So why, as Gladwell asks, do we continue to tell the story the way we do? Maybe it’s because we’re built to root for the underdog while fearing the giant. I think the same dynamic is at work in the payments field, with tech start-ups the traditional Davids and payments processors the Goliaths.
Frequent acquisitions in the payments industry are creating giants. The first notable acquisition — of Litle & Co. by Vantiv in 2012 — kicked off Vantiv’s steady march to huge scale. The recent $12-billion Vantiv-WorldPay merger seems to have created a feeding frenzy among payments companies of all sizes and abilities. To what end?
Unfortunately, payments processing has been an industry devoid of innovation for some time. The only differentiator among providers was price, until companies started adding third-party solutions to their suites of services either through acquisition or partnership. Becoming an ‘end-to-end’ solution evidently has become the goal of major payments companies, which will most likely lead to the industry cannibalizing itself until only a few end-to-end companies are left. Missing from this scenario is innovation.
Nothing too groundbreaking has happened in payments processing since procedures for an open-ended subscription billed to a credit card were patented 17 years ago. Created for magazine publishers to handle subscriptions, the innovation gave birth to everything from monthly box delivery to streaming video. Now, the stored credit card is expanding into many forms of recurring payments as the Internet of Things and on-demand services increase. Like subscriptions, these new ‘frictionless payments’ rely on stored credit card data and are permeating every segment of global commerce as consumers clamor for convenient access to goods and services. Whether they take the form of mobile payments, tap-to-pay, voice payments, hands-free payments, in-app purchases or connected cars and homes, these advances allow customers to do everything from placing an order at Dunkin’ Donuts before arriving at the store, to leveling up within a video game without ever having to reach for a credit or debit card. The essential element to these frictionless payments is that the underlying credit card must approve the purchase in order for the transaction to complete. If not, Uber isn’t showing up, and Alexa isn’t ordering your Domino’s pizza.
Payments processors and acquirers are feverishly buying other payments companies rather than addressing the core issue: frictionless payments put the payments processing industry in a precarious position. Unless it figures out a way to offer reliable card approval so that frictionless commerce can flow continuously, merchants will abandon today’s processors for newer, more technologically advanced payments methods that rely on peer-to-peer systems and cryptocurrencies.
The good news is that innovation in payments processing does exist. Our product, Payometry, for example, uses nontraditional merchant data points to upgrade legacy processing systems. By using data science and machine learning, Payometry customizes processing logic for every merchant according to their individual business needs. As a result, a subscription box, online dating site, and an on-demand app would have their payments processed very differently from each other, instead of receiving today’s cookie-cutter approach. Why does that matter? Because customization means more frequently reliable approvals for those stored cards, and approvals are necessary for the continuous flow of frictionless commerce.
Upgrading legacy systems is happening all around the payments space, with fintech companies working alongside incumbents to promote real change. Looking beyond our company’s activities, we’d also point to Zelle, which signifies true vision on the part of Early Warning and its partner banks. What Early Warning has achieved with its efforts is remarkable, not only because their product will bring peer-to-peer payments to multiple financial institutions at once, but also because it has proven that innovation and a technology upgrade of legacy systems can be a collaborative model instead of a competitive one.
New payments technologies that can offer more frictionless commerce seem poised for quicker and more agile routes of adoption than ever before. We hope other companies will join us, because the market opportunity is huge, and the slow-moving Goliaths have never been more vulnerable to innovation slingshots than they are today.
Michele Tivey is the co-founder and CEO of Fintech Payments Corp., whose signature product, Payometry, uses data science and machine learning to upgrade payments processing with customization. Michele is a former NYC prosecutor and payments consultant.