December 28, 2020
The Dirty Secret About the Payments Industry
Alongside the fintech industry’s reputation as forward-thinking and fast-moving, lies a parallel universe of notoriously slow players and systems that are still nostalgic for an era gone by.
We should know: we spent decades working with and analyzing different payment systems benefits and detriments before launching Qolo.
Alongside so many pandemic revelations we’ve also unearthed an undeniable truth - in order for the payments industry to continue providing essential services, we must be willing to pull back the covers.
And there is one dirty secret that’s stopping us from moving forward with a more trustworthy and transparent industry.
We’ve Got a Big Risk Management Problem
So many companies say they can do everything, but if the industry takes a close look, it is apparent that they can’t. Instant payments, immediate currency settlement, cross-border transactions… the list goes on. Yet when you look under the covers you find they are sometimes multiple steps removed from the underlying infrastructure, relying heavily on others to get their business done. This adds operational and security risks, as every step removed is like a link in a chain, waiting to be broken.
So why do they do it? The closer you get to payments infrastructure, the harder it is to engage, and the more expertise you need in house. And experts in payments are neither cheap, nor easy to come by. The expedient path is to rely on someone else, yet common industry practices of using resellers to push products on customers only sows seeds of confusion and adds layers of complication, inefficiency, risk and cost.
We saw this firsthand with the Wirecard scandal earlier this summer. Amidst the unending security implications with the company’s almost $4-billion collapse, came the news that some Payoneer cardholders couldn’t access their funds. Why? Because Wirecard was the issuing entity behind the Payoneer card, and dragged Payoneer into the storm surrounding the scandal. This ultimately pushed Payoneer to obtain their own licensing and issue their own card.
But Payoneer was not alone. Most payment companies are simply putting their own shell around someone else’s infrastructure.
This is a real problem.
Peeling Back the Layers
The payments industry ecosystem includes four major components: infrastructure (like Qolo), program managers/resellers (like Payoneer), middlemen (resellers), and businesses.
Program managers sit one level above infrastructure services, but that means they are also one level removed. Middlemen like Banking-as-a-Service (BaaS) providers push their customers back one level more. And with each level is a new link that can be broken, which introduces further risk, cost, and loss of efficiency. BaaS startup Synapse is an example of this. In April, Forbes wrote a scathing article of the company, exposing questionable hiring and development practices--practices that ultimately contributed to a dwindling customer base. The company delivered on its promise of a quick-to-market solution, but some of their clients ultimately paid the price when they exited the platform to start anew with someone else.
In earlier days, the industry accepted this multilevel approach, but more recent news has revealed a flaw in that model, and some fintech companies are still reeling from it.
So, where do we go from here?
Start Investing in People as Much as Technology
The announcement of Marqeta’s upcoming IPO is merely a backdrop to what’s happening in the payments space; it underscores that there is a clear appetite for growth and new players to take the lead. Fintech companies continue to secure capital because of the promise they bring; and there is no greater promise than participating in a multi-trillion dollar industry.
Investors need to ask the question, are the companies they’re investing in removed from the underlying infrastructure, or are they part of it themselves? Do they have the expertise at all levels in their organizations to become part of the infrastructure? To truly unlock value and support tomorrow’s payments leaders, we need to invest in people as much as in technology and take the middlemen out of the equation.
In the last ten years, product disruption has ruled the payments industry, but in order to thrive, we must now be willing to disassemble our own thinking and to disrupt ourselves. Industry leaders will all share a combination of expertise, agility, advanced functionality, and being part of the payment ecosystem’s infrastructure, rather than simply sitting atop it.