No one has the range of alternative payment methods

Last week fintech media (more specifically, crypto media) was falling head over heels over a new job posting by Apple (yes, a job posting was a news headline!). Apple is looking for a business development manager for alternative payments, and I whole-heartedly sympathize with the recruiter who probably has to sift through 10 thousand applications given the publicity this role has got. Who would’ve thought an innocuous JD could blow up so much, but then this is crypto we’re talking about. Look at this CNBC article to get a sense of the level of extrapolation.

The most interesting bit though are the other protagonists which cryptocurrencies are competing with in the “Alternative Payments” saga. You’ve got digital wallets (more on this in a bit), Buy Now Pay Later (BNPL), faster payments, domestic card schemes, etc. If you think that it doesn’t make sense to put these vastly different payment methods together into one bucket, you can blame how alternative payments are defined.

Alternative Payment Methods include any form of payment which is not Cash or a card issued by a major bank-payment network combination

This definition is downright lazy and under-appreciative of some of the payment methods being labelled as “Alternative”. Reason being in many markets some of these methods have already become mainstream (e.g. WePay in China, UPI Wallets in India, BNPL for e-commerce in Australia). Additionally, the definition doesn’t give any consideration to how these methods work from a technology standpoint. If you consider the technology underlying each of these methods cryptocurrencies should be a payment method of its own, Digital wallets should be broken down into digital cards or stored value account wallet, and so on. So then why are we still we looking at all of these payment methods together? There are 3 plausible explanations:

1. They have similar market sizes / payment volumes
2. They’re all being offered by fintechs rather than traditional financial institutions (or at least they were pioneered by fintechs)
3. Payment Method is a misnomer for these, well, APMs and they’re actually other use-cases disguised as payment methods

The image below tests the 3 explanations.

Explanation #1 is not valid. As we can see market sizes vary drastically among APMs. There is an order of magnitude difference among these.

Explanation #2 is clearly valid. Banks have been laggards or at best late majority movers for these APMs, maybe with the exception of real-time payments, and that too has been driven by regulatory mandates rather than banks’ own nimbleness.

Explanation #3 is also valid to a large extent. Cryptocurrencies are more an asset class and trust-enabler rather than a payment method. Buy Now Pay Later is a lending product masquerading as a payment method — think of it as a credit card with a non-physical form factor, instant onboarding and innovative pricing and repayment terms. Faster Payments is more of an infrastructure, a new payment “rail” advocated by regulators across the globe to enable equal access to all players and real-time settlement. While the customer facing form factor for faster payments can be digital mobile wallets or internet banking, it is still a payment method in the technical sense.

However, Digital Wallet is not a payment method unless it is closed loop i.e. both the merchant and the customer need to have that wallet. Otherwise a digital wallet is just a form factor. You can have a digital wallet funded by credit card or cryptocurrencies or a credit product such as BNPL, so conflating wallets with payment methods is not correct. In India for example, you can pay via UPI using any digital wallet. The payment method here is UPI and the wallet is just the form factor.

As mentioned, in order to classify payment methods we can potentially look at:

1. Underlying technology or “payment rails”
2. Fintech-led or bank / traditional-FI led
3. Adoption (current market size / share)

A 4th factor can be the “hidden” use-case behind a payment method (e.g lending for BNPL) but that is not applicable to all methods and hence would not be a good axis for classification. The point around market size / share of payment volumes has so much variation across markets that the consistency of the classification would go for a toss if this parameter were to be included. Additionally in terms of fintech-led or bank / traditional-FI led it is safe to assume that most new forms of payment methods would be driven by fintechs, and these new payment methods are bound to have lower share of volumes. The above arguments pretty much render points #2 and #3 redundant.

With this argument as anchor we can resist the urge to fall back on a 2 by 2 to classify payment methods, and use a uni-dimensional classification mode which is the underlying technology / payment rail used. However, it must be pointed out that there is always the option to add a vertical axis as needed on a case by case basis, to facilitate strategic decisions. And hiring.

Sources:

1. https://www.businessinsider.com/buy-now-pay-later-ecommerce-financing-and-consumer-credit?IR=T
2. https://www.coindesk.com/bitcoin-usage-among-merchants-is-up-according-to-data-from-coinbase-and-bitpay)
3. https://investor.aciworldwide.com/news-releases/news-release-details/global-real-time-payments-transactions-surge-41-percent-2020#:~:text=Global%20real%2Dtime%20payments%20growth,be%2017.4%20percent%20by%202025