I am currently in New York, and this week I had the opportunity to sit down with Ham Serunjogi, Co-founder and CEO of Chipper Cash, for an episode to be published in our upcoming season of the podcast.
Next season, we’re back to our editorial, narrative-style format – each episode explores a specific topic, and puts forth a diversity of perspectives from relevant founders and operators.
Ham and I talked, in part, about payments, which is a topic The Flip is going to explore across a few episodes next season. I’m especially interested in this topic because it’s a steep learning curve for me – I’m someone who has never really thought about what happens behind the scenes when, for example, I swipe my credit card to make a payment. And given the breadth of digital payments initiatives – credit cards, telco-led mobile money, fintech-led mobile wallets, bank-led initiatives- it’s an incredibly robust topic to explore, as well.
This week’s obsession has been Visa and merchants. Two questions I’ve been trying to learn more about:
- What lessons (if any) are relevant for African markets from Visa’s origins as a nonprofit consortium of banks, which used the Visa network to communicate with each other?
- How did card networks handle merchant acquisition? And why is merchant payments comparably difficult on the continent and in emerging markets, in particular?
On the first question, I enjoyed a recent episode of the Business Breakdowns podcast on Visa – “the original protocol business”.
Before Visa became a publicly traded company, in 2008, it was for several decades a nonprofit consortium of banks. Visa itself was (and still is) the communication protocol – or in terms we like to use today, the digital infrastructure – that enabled banks to talk to other banks. Visa sits in the middle a four-party transaction – between the customer making the purchase, the customer’s issuing bank, the merchant, and the merchant’s acquiring bank.
Much like banks couldn’t talk to each other in the earliest days of credit cards, neither could mobile money operators in the earliest days of mobile money. While public initiatives like national payments switches and private solutions like MFS Africa solve this problem from a technical perspective, interoperability requires rules or standards, which requires collaboration and partnerships, as well.
While consumers can transfer money from their banking or mobile money app to a fintech mobile wallet, it remains to be seen the extent to which fintechs will be interoperable with each other. Or, if that’s a role for Plaid-esque startups on the continent, like Mono or Okra in Nigeria, and Stitch in South Africa.
Now the thing about credit card networks, of course, is that they’re transferring value between a consumer and a merchant, whereas mobile money has primarily been a mechanism for peer-to-peer transactions. Why don’t more consumers wish to pay with mobile money, and why don’t more merchants wish to accept payments via mobile money? That’s the million (billion? trillion??) dollar question.
The most accessible answer is that consumers and merchants alike don’t want to pay fees – cash is prevalent in informal markets and no one pays any fees when paying in cash. But that’s an incomplete answer – after all, accepting credit cards comes with (every greater) fees, and millions of merchants accept cards globally.
Largely, it’s believed that for merchants to digitize, they must be provided with more benefits than just payments. As the CGAP writes,
Where cash is entrenched and largely works well, the real value proposition for digital retail payments may lie less in facilitating the transactions themselves than in building a suite of services on top of the transactions that meet the real needs of small businesses and their customers. Here, a whole universe of opportunity awaits where cash cannot compete and the digital medium adds genuine value.
Here, it’s worthwhile to revisit Visa’s origin story. While on the consumer side Visa – then known as BankAmericard – gave merchants instant consumer credit, on the merchant side it solved another problem altogether. From Joe Nocera’s A Piece of the Action (via Stratechery),
Fresno’s shop owners knew for a fact that, on the day the program began, some 60,000 people would be holding BankAmericards. That was a powerful number, and it had its intended effect. Merchants began to sign on. Not the big merchants, like Sears, which had its own proprietary credit card and saw the bank’s entry into the credit card business as a form of poaching. Rather, it was the smaller merchants who first came around. Larkin remembers visiting a drug store in Bakersfield, hoping to persuade its owner to accept BankAmericard. “When I explained the concept of our credit card,” he says, “the man almost knelt down and kissed my feet. ‘You’ll be the savior of my business,’ he said. We went into his back office,” Larkin continues. “He had three girls working on Burroughs bookkeeping machines, each handling 1,000 to 1,500 accounts. I looked at the size of the accounts: $4.58. $12.82. And he was sending out monthly bills on these accounts. Then the customers paid him maybe three or four months later. Think of what this man was spending on postage, labor, envelopes, stationery! His accounts receivables were dragging him under.”
A store owner who accepted the credit card was, in effect, handing his back office headaches over to the Bank of America. The bank would guarantee him payment — within days instead of months — and would take over the role of collecting from the customers. As for the bank, in addition to taking its 6 percent cut, the card was a way to get its hooks into businessmen who were not yet Bank of America customers.
Chris Dixon, a General Partner at a16z, coined the phrase “come for the tool, stay for the network”, an adage for building networks from scratch. Payments networks, I suspect, are no different.
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