The last time we visited this topic, I discussed new and emerging payment technologies (QR, BLE, NFC, etc.) facilitating online and mobile transactions. We also talked about the increasing use of online and mobile payment methods, especially by Gen-Y citizens and touched on payment platforms like Paypal EBAY, Apple Pay AAPL, Android Pay GOOGL, MCX, Samsung Pay, Stripe and so forth as well as offerings from traditional players like Visa and Mastercard. Here I'm talking about other developments.
The demand for suitable online payment systems stems from the need to make fast, broadly-accepted and secure payments at the lowest possible cost. So these factors determine innovation and competition in the space.
Fierce Competition in Online Payments
History has shown that setting up and operating a payments platform isn't easy. eBay nurtured PayPal, using its clout and marketplace to build PayPal's credibility and profitability until it is now ready to branch out on its own. Apple Pay, Android Pay, Samsung Pay, etc. are all being nurtured by big profitable companies. Square, on the other hand, is struggling with complementary services as the core payments business proves expensive to develop and too low-margin to be viable at low volumes.
All these systems are based on and extend the existing banking system and in fact operate on the premise that payments go through the network set up by banks. But there is also a market for more informal money transfers, commonly referred to as peer-to-peer.
Peer-To-Peer Transactions
Some of the existing systems like Google Wallet, Square, PayPal, Venmo and more recently, Facebook Messenger FB enable peer-to-peer transactions. This is categorized differently because transaction amounts are often small and usually don't involve businesses, so the cost of processing the transaction becomes all-important.
If you're crazy enough to share your bank account details, all these services will allow you to transfer funds immediately and for free. Debit card transfers are also free on Square, Venmo and Facebook Messenger, but chargeable by Google Wallet and PayPal. These two are the most developed and secure, charging 2.9% per transaction on debit and credit cards alike. Paypal also charges an extra $0.30 per transaction. So they aren't ideal for peer-to-peer.
Venmo's owner PayPal recently bought the money transfer company Xoom XOOM, which offers services in many developing countries. The company's strength is in tapping the opportunity in U.S. migrants sending money back home. Xoom's 1.3 million customers sent $7 billion home in the March quarter itself and if the expected synergies from the deal materialize, the combination could be on its way to eat Western Digital's WDC lunch. It could also build credibility for its mobile business (Venmo is notoriously unsafe and has poor customer relations support).
What About Digital Currencies?
Digital currency, or virtual currency, is a public ledger account balance maintained on behalf of the person converting cash to the currency by members of the public called miners for compensation.
So for instance, if I want to convert $100 to digital currency and choose the most developed version (bitcoin), I will get a number of bitcoins for my $100 based on the agreed value of bitcoins at the time. These bitcoins can then be used for peer-to-peer transactions or to pay businesses accepting bitcoins and can also be cashed out.
The obvious lure is that money transfers are free, immediate and anonymous. And if you link to your digital wallet, you can even reverse transactions made erroneously.
While digital currencies are being developed for some time and bitcoin in particular has loads of developers working on it, the market is still in its infancy. That's because there remain several problems in the system.
The first is related to theft or loss. While bitcoins can be bought from an exchange or from an individual, it is dangerous to leave a balance at an exchange. The exchange could have liquidity issues or bad relations with banks, delaying the process. Worse, it could get hacked (European exchange Bitstamp was hacked with $5 million worth of bitcoins lost; Japanese bitcoin company Mt Gox, which at one time handled 70% of all bitcoin transactions was compromised, with 850,000 bitcoins valued at $450 million being stolen). Storage on individual systems is also risky because they too can be hacked and the devices themselves can be lost or stolen.
Second, it is a balance held on your account with no undertaking to deliver the value, meaning that there is no one promises to return you the amount if you want to cash out. In case your money is lost or stolen, there is no one to claim indemnification from. Since no bank or other body is authenticating the system and you have no document saying what is owed to you, no one is liable for the loss. So recovery of stolen money is practically impossible. But developers are working on newer encryption technologies to protect your data, so this may be something that will be fixed.
Third, illegal transactions can be facilitated and could get linked to your account. Some countries like China and Russia aren't welcoming bitcoins. While the Chinese have specifically prohibited use of bitcoins, Russia has made the use of any currency other than ruble illegal. It is also feared that the anonymity can help drug dealers, terrorists and other underworld operators. While linking to a digital wallet can help track money transferred fraudulently from your account, we apparently can't stop fraudulent money transfers to us.
Fourth, it's not regulated, so value of bitcoins can vary widely from week to week, which makes for a very uncomfortable experience (especially if you appear to be running at a loss).
The problems notwithstanding, developers and enthusiasts remain optimistic and governments are also beginning to take notice. The implications are many, not just for users but also people otherwise linked to the financial services industry. For instance, broader adoption could eat into financial institutions' revenues and profit margins and lead to the elimination of transaction processing jobs.
Wrapping Up
Traditional payment systems are not going away any time soon, if at all. For one, despite the hot new technologies, smaller retail outlets still prefer good hard cash in many cases and are loath to try out new things, especially if it requires investment. For all the companies touting their new payments technologies, they are backing that up with a surprisingly small amount of marketing dollars.
Also, teens and twenty-somethings might like the "coolness" of new technologies, but after you've been there and done that, what you would really appreciate is a little more security.
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Market News and Data brought to you by Benzinga APIsThe demand for suitable online payment systems stems from the need to make fast, broadly-accepted and secure payments at the lowest possible cost. So these factors determine innovation and competition in the space.
Fierce Competition in Online Payments
History has shown that setting up and operating a payments platform isn't easy. eBay nurtured PayPal, using its clout and marketplace to build PayPal's credibility and profitability until it is now ready to branch out on its own. Apple Pay, Android Pay, Samsung Pay, etc. are all being nurtured by big profitable companies. Square, on the other hand, is struggling with complementary services as the core payments business proves expensive to develop and too low-margin to be viable at low volumes.
All these systems are based on and extend the existing banking system and in fact operate on the premise that payments go through the network set up by banks. But there is also a market for more informal money transfers, commonly referred to as peer-to-peer.
Peer-To-Peer Transactions
Some of the existing systems like Google Wallet, Square, PayPal, Venmo and more recently, Facebook Messenger FB enable peer-to-peer transactions. This is categorized differently because transaction amounts are often small and usually don't involve businesses, so the cost of processing the transaction becomes all-important.
If you're crazy enough to share your bank account details, all these services will allow you to transfer funds immediately and for free. Debit card transfers are also free on Square, Venmo and Facebook Messenger, but chargeable by Google Wallet and PayPal. These two are the most developed and secure, charging 2.9% per transaction on debit and credit cards alike. Paypal also charges an extra $0.30 per transaction. So they aren't ideal for peer-to-peer.
Venmo's owner PayPal recently bought the money transfer company Xoom XOOM, which offers services in many developing countries. The company's strength is in tapping the opportunity in U.S. migrants sending money back home. Xoom's 1.3 million customers sent $7 billion home in the March quarter itself and if the expected synergies from the deal materialize, the combination could be on its way to eat Western Digital's WDC lunch. It could also build credibility for its mobile business (Venmo is notoriously unsafe and has poor customer relations support).
What About Digital Currencies?
Digital currency, or virtual currency, is a public ledger account balance maintained on behalf of the person converting cash to the currency by members of the public called miners for compensation.
So for instance, if I want to convert $100 to digital currency and choose the most developed version (bitcoin), I will get a number of bitcoins for my $100 based on the agreed value of bitcoins at the time. These bitcoins can then be used for peer-to-peer transactions or to pay businesses accepting bitcoins and can also be cashed out.
The obvious lure is that money transfers are free, immediate and anonymous. And if you link to your digital wallet, you can even reverse transactions made erroneously.
While digital currencies are being developed for some time and bitcoin in particular has loads of developers working on it, the market is still in its infancy. That's because there remain several problems in the system.
The first is related to theft or loss. While bitcoins can be bought from an exchange or from an individual, it is dangerous to leave a balance at an exchange. The exchange could have liquidity issues or bad relations with banks, delaying the process. Worse, it could get hacked (European exchange Bitstamp was hacked with $5 million worth of bitcoins lost; Japanese bitcoin company Mt Gox, which at one time handled 70% of all bitcoin transactions was compromised, with 850,000 bitcoins valued at $450 million being stolen). Storage on individual systems is also risky because they too can be hacked and the devices themselves can be lost or stolen.
Second, it is a balance held on your account with no undertaking to deliver the value, meaning that there is no one promises to return you the amount if you want to cash out. In case your money is lost or stolen, there is no one to claim indemnification from. Since no bank or other body is authenticating the system and you have no document saying what is owed to you, no one is liable for the loss. So recovery of stolen money is practically impossible. But developers are working on newer encryption technologies to protect your data, so this may be something that will be fixed.
Third, illegal transactions can be facilitated and could get linked to your account. Some countries like China and Russia aren't welcoming bitcoins. While the Chinese have specifically prohibited use of bitcoins, Russia has made the use of any currency other than ruble illegal. It is also feared that the anonymity can help drug dealers, terrorists and other underworld operators. While linking to a digital wallet can help track money transferred fraudulently from your account, we apparently can't stop fraudulent money transfers to us.
Fourth, it's not regulated, so value of bitcoins can vary widely from week to week, which makes for a very uncomfortable experience (especially if you appear to be running at a loss).
The problems notwithstanding, developers and enthusiasts remain optimistic and governments are also beginning to take notice. The implications are many, not just for users but also people otherwise linked to the financial services industry. For instance, broader adoption could eat into financial institutions' revenues and profit margins and lead to the elimination of transaction processing jobs.
Wrapping Up
Traditional payment systems are not going away any time soon, if at all. For one, despite the hot new technologies, smaller retail outlets still prefer good hard cash in many cases and are loath to try out new things, especially if it requires investment. For all the companies touting their new payments technologies, they are backing that up with a surprisingly small amount of marketing dollars.
Also, teens and twenty-somethings might like the "coolness" of new technologies, but after you've been there and done that, what you would really appreciate is a little more security.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
XOOM CORP XOOM: Free Stock Analysis Report
WESTERN DIGITAL WDC: Free Stock Analysis Report
GOOGLE INC-CL A GOOGL: Free Stock Analysis Report
FACEBOOK INC-A FB: Free Stock Analysis Report
EBAY INC EBAY: Free Stock Analysis Report
APPLE INC AAPL: Free Stock Analysis Report
To read this article on Zacks.com click here.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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