Oct 29, 2012

Value of payment data and payment transactions

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The payment transaction information  is going to become of high value to those companies who can convert that data into insight that can be monetized, while the cost per transaction that can be charged is under severe pressure.  Here is the link to the full article which I can highly recommend and I fully agree with the key message in this article.
The only part I wanted to comment on is related to this quote related to the charges these companies charge today:

"None of this is to say that the fees charged today are wholly unreasonable and unconscionable; ..."
My position is that a charge of around 2.5% is totally unreasonable and that lowering that could be a real saving to consumers and even to the public services like the healthcare system.  Let me explain by looking at some numbers and comparisons:

For a single payment transaction of $ 100, this means $2.5 commission.  
Now what does that mean to a seller and their profit margin?
"Specialty retailers and general merchandisers -- department stores -- were the most profitable sector of the retail economy in 2009, according to "Fortune"magazine, with a 3.2 percent average profit margin. Food and drug stores operated on a 1.5 percent margin. "  Source: here
Clearly, they can't afford to give up 2.5% of their margin...they first had to add the 2.5% to the cost to the consumer. For the seller, this has become a cost of doing business (as also stated in the article), similar to having to pay the rent.  In fact, it is the consumer who is paying the bill.

And how much would it really cost to execute such a transaction in modern systems?  Let's compare with another platform:

Facebook reported cost of revenue in 2011 as $ 860 M, or roughly speaking $ 1 per user per year.... 
It was reported that Facebook users spent an average of 405 minutes on the Facebook site in January only...our about 5000 minutes per year, or 83 hours.
In comparison that millisecond transaction costs 2.5 times more than spending 83 hours on line on Facebook.  And Facebook is adding 500 TB of data every day....Source: here
Oh, one more thing...whether you transfer $10 or $ 10.000, the actual transaction cost to execute the transaction in their systems should be the same!
Another comparison: The Bancontact/Mister Cash system in Belgium handling debit cards charges € 0,0637 per transaction (in addition to a monthly fixed fee of € 19,61 for the subscription + phone costs).

In other words, many financial institutions make us pay far too much and they are playing a dominant role (as opposed to a keystone role) in the ecosystem in which they take a far too big pie of the value chain in the ecosystem.  That is the main reason why they will be challenged by newcomers which can undercut their rates by a significant margin.  
If these costs would go down from 2.5% to 0.5% (which I still find too much),  that would increase the buying power of consumers with 2% (if they were using credit card payments for all their payments).
In the same assumption,  it could reduce the cost of public services with 2% (e.g. healthcare).

Don't forget, the only value these companies deliver is that virtual money moves from one bank account to another.