How software disrupts payments
Mobile technology and app-stores transform distribution for payments companies
Today we have an on-demand economy and can do almost everything we need from a mobile phone. We use phones to book a taxi or hotel. We can check up-to-the-minute sports scores. And many of us do our day-to-day banking on our mobile phones as standard.
This trend for apps, for a software-first world, has grown massively since Marc Andreessen declared, over ten years ago, that “software is eating the world”.
Now software is seeping into every aspect of our lives, especially with the growing interest in Artificial Intelligence (AI) and big data, we will become more and more aware of how software impacts us. Everything is becoming software.
Especially in the era of app stores, the software has zero marginal cost. In other words, once an app is developed and launched, the distribution cost for each new user is close to zero. With app-based businesses there is no physical store and no physical product; this means software-based businesses have some unique characteristics.
Companies traditionally have had to incur (up to) three types of marginal costs when it comes to serving users/customers directly.
The cost of goods sold (COGS), that is, the cost of producing an item or providing a service
Distribution costs, that is the cost of getting an item to the customer (usually via retail) or facilitating the provision of a service (usually via real estate)
Transaction costs, that is the cost of executing a transaction for a good or service, providing customer service, etc.
The world of payments traditionally did operate in this way, with the marginal costs noted above, when most payments required Point of Sales (POS) hardware. This was the nature of payments in earlier times.
In contrast, a new model is changing things, especially due to software-based payment solutions. Let’s look at how we got here.
Card acquiring in brief
For many decades, card acquirers were part of a bank. They provided businesses with the ability to accept credit and debit transactions at the point of sale. This card-acquiring capability formed part of a business banking relationship. As well as card acquiring a bank provided a current (checking) account, credit cards, loans and other products and services such as insurance.
These original card acquirers were typically concerned with Card Present payments (payments taking place in an in-store retail environment). Facilitating in-store payments required the provision of Point of Sale (POS) hardware.
Card acquirers needed a wide range of resources to support POS payments. For instance, a sales team to go out and meet large clients, sign contracts and show the hardware in action; specialised staff to integrate and provide project management expertise; a call centre to handle technical issues, and make outbound sales to smaller less complex clients.
In short, for a long time, being a card acquirer required a wide range of infrastructure and personnel. These companies eventually got around to providing online payment solutions, besides in-store payment solutions. However, their focus remained on card present payments.