August 19, 2020

The War to Win Cash Replacement

Article

Battles are being waged amongst popular fintech companies to own cash and cash deposits. Silently fought, competitors know that a battle over supplying the increased demand for innovative cashless solutions will leave few victors. Who will take the lead, and who will be left behind?

The Battleground

Traditionally, many fintech companies have worked to own both the credit card processing for merchants (online and offline) and credit card revenue for consumers. They do this by partnering with a bank or partnering with a card brand (Visa, Mastercard, Discover, AMEX). 

For the uninitiated, the typical credit card payment journey is as follows:


There are three components (or fees) for each transaction: the card brand, acquirer, and issuing bank. Each party receives a share of revenue generated from the credit card transaction. This process occurs within seconds of a card being swiped, inserted, or tapped. The more one party can consolidate these processes, the greater their share of the transaction.

It's important to understand the concept of "interchange." An "interchange fee" is a fee that a merchant is required to pay for each debit or credit transaction. Also known as "swipe fees," issuing institutions charge this fee in return for accepting the credit risk and handling charges inherent in credit card transactions.

Why has a war broken out over owning consumers' cash deposits? Interchange ownership. Interchange ownership empowers an institution to drive more revenue across the products and services it owns through providing incentives like a discounted rate of interchange.

What’s Needed to Win The War?

To win the War to Win Cash Replacement, you must dominate in the following categories:

  • Merchants’ trust
  • Consumer-to-consumer payments
  • Consumer-to-merchant payments
  • Consumer checking accounts/cash accounts

The Four Armies

Apple - Most popular for their consumer products. Does not do well selling to brick mortar businesses directly. Typically their products are sold (e.g. iPads) to small businesses by a third party / carrying a third party software. Had a slow start with Apple Pay (mobile wallet), but starting to see an uptick in use amidst the pandemic. Recently bought Mobeewave, allowing them to own a piece of the interchange. 

Square - Has hundreds of thousands of brick and mortar merchants using their payment terminals, suite of financial tools like Square Capital, and a popular consumer cash app for consumers to pay each other. Recently built their own sponsoring Bank to own more sides of the revenue for merchant processing, merchant capital, and cash app.

Paypal - Has done exceptionally well with ecommerce (online payments for merchants) and bought Venmo to help consumers pay each other. Paypal hasn’t done well with brick n mortar businesses (in-person payments), so they're strategizing around Venmo to compete with other fintech payment companies and banks to ultimately own cash and deposits. Recently approved in 2020 to provide small loans to businesses

Google - Built Google Wallet and GPay for consumers to check out faster. Hasn’t put a ton of effort into selling payment products to merchants besides the use of GPay. In 2020 Google partnered with Banks to provide consumers with checking accounts driven by a great tech focused experience. If they own the cash there is more incentive for the consumer to use Google Wallet and Gpay. 

The Silent Killers 

Shopify -  Similar to Paypal, Shopify has done incredibly well with online payments for local merchants and enterprise businesses. Recently, they focused on SHOP which is an easier way for the consumer to check out when online shopping and/or on mobile sites. No public record of a digital wallet or cash app in the works, but easily a big winner in the online shopping space trying to compete directly with Amazon.

Amazon - Of course we know Amazon as the largest online marketplace, but behind the scenes they’re silently building Amazon Payments into an empire. With the amount of transactions they account for every day, it won’t be hard to incentivize consumers to use Amazon Payments when checking out online or in-person (e.g. Whole Foods). No public signs that indicate the development of a cash-app or interest in holding consumer cash. 

Samsung - Well known for their consumer products and mobile devices, they’ve done fairly well with Samsung Pay for consumers. Although late to the cash war, they just signed a deal with SoFi to launch a money management program for consumers. Curious to see what traction in the cash war this partnership brings for Samsung. 

WeChat - It’s possible most Americans hadn’t heard of WeChat until it recently entered the political spotlight, but any observer of China’s meteoric economic and technological growth is certainly aware of this Tencent subsidiary. WeChat is a multi-purpose application that has come to dominate many aspects of daily life. Within the payments landscape, WeChat Pay has over 800 million users, along with 50 million merchants, and averages 1 billion transactions per day. WeChat Pay combines many of the principles we’ve discussed here and allows customers to connect bank accounts, use credit and debit cards, set up an in-app wallet for cash balances, and complete peer-to-peer transfers, as well as merchant acceptance at over 300,000 offline stores and 50 million digital merchants. While QR codes haven’t caught on in the US, they have dramatically accelerated the adoption of digital payments in China. When we think about the war to win American wallets, WeChat is an example of what success may look like.

Potential Victors

Paypal and Square have won the consumer-to-consumer payment contest with Venmo and Cash App (which purposely builds cash accounts for consumers), respectively. They have also won the merchants’ trust contest with their ecommerce and payment terminals.

Google and Apple have won the consumer to merchant payments contest. They’re also making it easy to provide consumers with a checking account and cash account. They haven’t entirely won the merchants trust contest - besides allowing a form of payment on merchant terminals. They have not won consumer to consumer payment.

Good Timing For Battle

There has been a massive increase in demand for contactless payments. Fintech companies are taking advantage of that. People are afraid of handling cash so they’re using their Mobile Wallets through Apple, Google, and Samsung to avoid contracting a pathogen. Square and PayPal are quickly testing ways for a consumer to pay merchants with Cash App and Venmo on their mobile phones. 

There's plenty of attention on mobile wallets, and for good reason - if these become a popular mobile checkout option, they’ve won the consumer. Then it will be easier to drive them into opening an account where they can store cash and further pay merchants and other consumers easily. Apple's credit card incentivises consumers with cash back and strategically builds an Apple Cash account for their clients, which ultimately is a checking account similar to Venmo and Square Cash. 

Will Square allow consumers to use Cash App on merchants that do not have Square Payment Terminals? There is a possibility that Square discounts Cash App consumers buying products from Square merchants, but we have not seen closed off payment apps/techniques work in the past (hint why Visa once dominated Diners Clubs). There is still no dominant sign of online payments with Square which puts them behind Paypal in that category. 

Paypal can also allow a faster check out online with Venmo if they use similar software to SHOP by Shopify. But that doesn’t gain them enough traction for Consumer to Merchant (in-person) transactions. This is why Paypal is putting a Venmo Check out into 8,200 CVS Store to try and beat Square where they’re most dominant. 

Who Will Win?

This might sound opinionated, but I truly think Square and PayPal have the best chance of winning the War for Cash Replacement. They both have the merchants' trust, consumer to consumer payment, checking accounts and cash accounts for consumers. They also have big enough brand names to motivate enterprise businesses to accept their payments. I think many large tech companies overlook how hard it is to gain merchants’ trust. Just because you’re big, powerful, and have a ton of money, it doesn’t mean local businesses are going to hand over their payments and technology to you. 

The only thing Square and PayPal don’t have is consumer-to-merchant payment, which can ultimately beat out Apple and Google with the cash apps (Square Cash and Venmo) if presented clearly at check out for consumers. Square and Paypal run much of their software in stadiums and at music festivals. If they keep pushing the seamless check out option with their cash apps, they might actually pull this off.