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Credit Card Usage Declines, Bitcoin Payment Systems Rise

More than half of U.S. consumers are aware of technologies that would allow them to make payments via apps. Credit Card Usage Declines As Bitcoin & Digital Payment Systems Reach Mass Adoption

An evolution is under way in the global payment system. Advances in mobile phones and internet technology are giving rise to apps and other digital platforms that allow people to pay for goods and services with their smartphones instead of with cash or traditional credit and debit cards.

Credit cards won’t be needed in five years because mobile payments are more convenient, cheaper and more secure.

Credit Card Slaves

Credit Card Usage Declines As Bitcoin & Digital Payment Systems Reach Mass Adoption

Some 44% of U.S. families carry balances month to month, and among families that do maintain this kind of debt, the average balance is roughly $5,700, according to a survey from the Fed’s Board of Governors.

New Internet technologies are giving rise to new online payment networks and lending platforms that some say will reduce transaction costs and the cost of supplying unsecured credit to borrowers.

We Don’t Need No Stinkin’ Credit Cards

Credit cards have played a vital role in our economy, but the need for them will fade away in the next five years. Electronic payments are more convenient, cheaper and more secure, and adoption of these technologies is going to accelerate as a result.

The credit cards of today perform two key functions. They facilitate commerce by allowing consumers and businesses to quickly and easily pay for goods and services. They also are the primary method for delivering unsecured credit to consumers. The economy will still need a system to perform these roles, but credit cards won’t have to be that system.

Given high barriers to entry and large economies of scale, only a few credit-card networks exist, leading to relatively high transaction fees of 1% to 4% on every purchase. Mobile phones and the internet are quickly disrupting this model as the cost of establishing a new, online payment network plummets.

Consumers can now make payments with Bitcoin, text messages and online services, bypassing the proprietary networks of the credit-card processors. Smartphone applications such as Apple Pay and Google Pay are also bringing down transaction costs by incorporating biometric security, geolocation technology and other tools that can sharply decrease fraudulent transactions relative to physical cards.

While credit cards won’t be needed in five years, some people will still want to use them, just as some people still prefer paper checks even though better alternatives exist. Still, there are signs the momentum is shifting.

Millennials are adopting services such as Venmo and PayPal at fast rates, and survey data suggest that nearly 40% of smartphone users have at least one payment app.

Meanwhile, generational attitudes toward credit cards are rapidly shifting. Younger millennials don’t have the same affinity for credit cards as their parents, partly due to a 2009 law that makes it difficult for borrowers under age 21 to get a credit card without a cosigner. Many of them will bypass cards altogether as digital-payment options expand.

Having an unsecured line of credit for emergencies and to smooth out fluctuations in income and savings is what many people value about credit cards. But this flexibility comes at a cost. Credit-card interest rates are high due to the default risk posed by borrowers.

Here again, internet technologies are giving rise to services that can fulfill this role, but at a cheaper cost. Online lending platforms such as LendingClub and Prosper connect individual borrowers with a wider range of potential lenders, reducing the interest rates some borrowers face to consolidate existing debts or finance new purchases.

The next generation of consumer lending may include more “sale-based” financing, where lenders use real-time spending and income data to price default risk on a purchase-by-purchase basis.

Consumers will still demand and need sources of unsecured credit. They just won’t need to carry around slips of plastic to get it.

 

Updated: 5-26-2019

The Swiss Surfer Behind $2 Billion Payments Startup Checkout.com

Guillaume Pousaz, chief of transaction processor with soaring valuation, says future of banking will be built on payments companies.

The newest face of the payments frenzy that has investors cheering and bank bosses scrambling is a 37-year-old Swiss surfer who dropped out of college to ride waves up and down the California coast.

Guillaume Pousaz spent roughly a decade transforming a low-tech payments firm he acquired into Checkout.com, a London-based transaction processor for fast-growing internet companies. Fresh off a nine-figure fundraising, the company is beefing up its presence in the U.S. and getting into other financial services, such as issuing cards.

With more commerce migrating to the internet and smartphones, merchants want payments providers with the technology to siphon better data from transactions and to integrate easily with popular apps. Online marketplaces that operate across multiple geographies and currencies also are looking for payments companies that can coordinate the flow of money between, say, a ride-hailing platform, a driver and a passenger.

At stake is $1.9 trillion in global payments revenue, according to consulting firm McKinsey & Co.

Banks, after a slow start, are trying to keep up with tech startups. JPMorgan Chase & Co. acquired an internet payment-processing startup in 2017 and a medical payment-technology company this month. Citigroup Inc. in March said it was starting a new unit to provide merchant-processing services for big clients. Bank of America Corp. is considering pulling out of a decade-old payments-processing venture with First Data Corp. in favor of building its own merchant payments business, The Wall Street Journal recently reported.

“Companies like Square and PayPal have done things that we could have done but did not,” JPMorgan Chief Executive James Dimon wrote in his annual letter to shareholders in April.

There is no guarantee that the payments business will live up to the hype. Online lending startups, once hailed as the future of finance, have struggled with rising defaults and governance scandals. Cryptocurrency startups attracted billions of dollars from Wall Street and Silicon Valley investors, with little to show for it.

Still, investors are enamored with payments. More than $22 billion in venture capital went into payments startups globally in 2018, over four times the total for 2017, according to Dow Jones VentureSource.

Earlier this month Checkout.com said it sold a $230 million stake to investors including Insight Partners and Yuri Milner’s DST Global. That deal—Checkout.com’s first—valued the company at nearly $2 billion, a higher mark than all but three other companies achieved on their first-ever venture rounds going back to 2002, according to research firm PitchBook.

“The future of banking is going to come out of payment companies,” Mr. Pousaz said. “I believe that 50% of financial-services brands that we know today will not be here in 20 years, and maybe 10 years.”

Mr. Pousaz, a Swiss national, got his first job in the payments business in 2006. He left an economics program at the University of Lausanne in Switzerland at the end of the previous year following a family member’s cancer diagnosis, and moved to the U.S. to live the life of a surf bum on beaches from San Francisco to San Diego. When he ran out of money, he took a job as an analyst at a payments firm that allowed him to catch waves around Malibu each day after work.

His employer was a firm that set up fledgling American e-commerce businesses with accounts at big banks that let them accept credit cards. Mr. Pousaz envisioned that, over time, such companies would use the internet to bulk up and go global.

“They were not thinking big enough,” Mr. Pousaz said of his former employer. “They weren’t thinking technology. They were not thinking other countries.”

Mr. Pousaz’s path to building an international payments player was an offbeat one. After briefly running a foreign-exchange business, he spent around $350,000 in 2009 to buy a payments company based in the island nation of Mauritius that was already authorized to work with the major credit-card networks. He hired engineers to upgrade the company’s “very bad” technology and started poaching Asian clients of bigger companies such as PayPal Holdings Inc. with offers of lower prices on foreign-currency transactions.

A few oceans away, Silicon Valley was starting to pay attention to payments. Jack Dorsey co-founded Square Inc. in 2009 to help small bricks-and-mortar businesses accept credit cards. Patrick and John Collison founded Stripe Inc. a year later to do the same for tech startups.

After setting up Checkout.com’s London headquarters in 2012, Mr. Pousaz sensed opportunity in the Middle East and moved his family to Dubai in 2014. He zeroed in on multinational merchants like food-delivery startup Deliveroo that were looking to expand in the area but needed to find a local payments provider, wagering that solving their payments problems in hard-to-crack markets could help Checkout.com win business in bigger ones, such as Europe and the U.S.

“You focus on the geographies where there is less competition,” said Deven Parekh, a managing director at Insight Partners, which led Checkout.com’s recent fundraising. “You prove your scalability that way.”

Checkout.com, now with roughly 375 employees, processes payments for a range of companies, from Getty Images Inc. and Samsung Electronic Co. to financial-tech startups such as TransferWise Ltd. It wants to be the financial-services provider of first resort for its customers, starting with giving them the ability to issue debit and prepaid cards to their own customers through Checkout.com.

“You build all these transactions on payment processing and control the revenue, and then you build incremental products on top of it,” Mr. Pousaz said. “There’s an emergence of new brands that are going to be actually distributing financial services, and a lot more than just payments.” Credit Card Usage Declines, Credit Card Usage Declines, Credit Card Usage Declines,Credit Card Usage Declines

Updated: 5-29-2019

2 Payment Company Stocks Are Rising On A Possible Merger, But Beware What Happens Next 

Payments companies Global Payments (ticker: GPN) and Total System Services (TSS) have talked about a potential deal, Bloomberg News reported Friday morning.

The news of another possible merger in the payments industry sent shares of Total System Services, known as TSYS, up more than 10% and Global Payments stock up more than 3%. Representatives for both companies did not immediately respond to requests for comment from Barron’s.

The back story. There have been two big payments deals already in 2019. In March, Fidelity National Information Services (FIS) agreed to a $34 billion deal for Worldpay (WP), and in January, Fiserv (FISV) bought First Data (FDC) for $22 billion.

Investors hunting for the next deal have helped push Global Payments stock up more than 49% and TSYS stock up 34% so far this year.

What’s new. Global Payments might find this deal attractive because its North American payments business growth has been lower than Visa’s, Nomura’s Dan Dolev said in a note to clients Friday morning.

For TSYS, on the other hand, Dolev points out that a tie-up “could be an elegant retirement strategy” for its CEO Troy Woods, who is 67 years old.

Looking ahead. If a deal is made, Dolev thinks that there are synergies to be had, but “the likely culture clash between a promotional and conservative management team could result in potential long-term friction.”

Share Your Thoughts:
Who do you think will win the payments race: big banks or financial-technology startups? Join the conversation below.

 

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