Sunday , November 24, 2024

A Banker’s Nightmare: Social Networks Beget a Slew of PayPals

Non-bank threats to banking franchises like electronic payments are nothing new, but if a researcher is correct, banks and the card networks they built could soon find themselves under assault from a whole new batch of players that have found a niche in social networks and online gaming. “I don’t want to sound alarmist, but they will make inroads in transaction volume and revenue that accrue to banks and card networks,” Patricia McGinnis, principal analyst at Mercator Advisory Group Inc., tells Digital Transactions News.

These upstart processors, most of which have emerged only in the past couple of years, are fulfilling a need for micropayments for digital content for now, and so might seem to pose little threat to titans like Visa Inc. and MasterCard Inc. But the massive scope of social networks like Facebook, which boasts more than 400 million users, coupled with the rapid rise of social gaming, is propelling these companies toward increasing economies of scale, McGinnis argues. That will soon allow them to seek new markets in higher-ticket online goods, including physical goods, and at the physical point of sale.

McGinnis says the current pattern has already played out in the recent past, accounting for the rise of bank nemesis PayPal Inc. “PayPal got established in eBay and used that as a foundation from which it could expand in all sorts of directions,” she says.

Maynard, Mass.-based Mercator released a report this week by McGinnis that she intends as a warning to banks about the risk to traditional card payments. “It’s a heads up,” she notes. “There is a significant risk some of these new players could move into segments of business that traditional players think belong to them. They should be paying attention.” The new players have benefited from access to low-cost transaction networks like the automated clearing house or have leveraged systems that let users charge purchases to their mobile bills.

Another factor working in the newcomers’ favor is the emergence of smart phones, which have the built-in intelligence to enable mobile wallets as well as interactivity with both marketing data bases and payment-settlement networks. These devices can provide a bridge for what are currently e-commerce processors to reach the physical point of sale, McGinnis points out. Evidence of this trend emerged earlier this week with news that PayPal and Google Inc. have found ways to let accountholders with their payment systems use their handsets to tap those accounts with physical merchants (Digital Transactions News, July 6).

Indeed, McGinnis argues that banks that aggressively pursue mobile strategies stand the best chance of offsetting potential card-volume losses. Many banks have adopted mobile-banking programs, and some have started to test person-to-person products based on handsets. “Because you’re in mobile you have the opportunity to build another revenue stream that will allow you to net come out even,” she says.

Not all of the newcomers have found success with their initial business models, however. Atlanta-based Twitpay, for example, recently changed its emphasis from person-to-person payments to donations to nonprofits and political campaigns (Digital Transactions News, June 15). It relies on the communication network set up by the hugely popular Twitter microblogging site to move funds.

McGinnis says success for any of the new players will depend on finding the right combination of variables that fall into five categories: user demographics, type of payment activity, device interface, settlement system, and local-market factors like language and currency. “Some will come up with a combination that works,” she says.

McGinnis’s report is entitled “Social Networks And Consumer Payments: Disruptions Ahead! Or…the Games People Play.”

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