Payment series 2 — why is payment important

Why is payment important? If you look into financial application / function, payment is one of the most frequently used function. In our interaction with finance, 80% is payment. This means a couple of things:

1. get more data
2. it’s a hook to drive traffic and increase usage — important for platform
3. usage creates more use case scenarios

More data

In today’s world, and for the foreseeable future, data has become the key ingredient to innovation. It’s the foundation for AI and data analysis which has a number of practical usage from personalized marketing, operational efficiency, risk calculation, and to product direction. One of the biggest problem in data modeling is the quality of the data. Payment data happens to be of the highest quality because it’s based on user’s transaction.

Drive traffic

In today’s fintech or even tech world, I generally see 4 types of models:

1. use technology and first principle of design to improve and innovate, such as digital banking, e-wallet, robo-advisor in fintech
2. platform
3. target and specialize for specific group
4. the API / infrastructure approach.

Each model is suited for different phases of the the innovation. In the beginning, you will most likely see model 1 focusing on a specific component / service. Then, some of the 1 will add more services and becomes more like 2 (like Revolut in UK or Robinhood in US). Others will grow by forming partnership with incumbents (like Transferwise partnering with banks). I will not go into each of the models here as it’s in my other article on bank digital transformation. But I think the future significant fintech firm will be platform and based on payment. Let’s explore this idea further, there are 2 rules:

1. high frequency apps distinctly advantage over low frequency ones
2. digital Matthew’s effect / network effect

I am not sure how many apps you have on your phone, but you mostly just use a fraction of them (5–10). Apps are vying for our attention. The survivors are the apps that we find ourselves use more often than others.

Matthew’s effect states that the stronger will keep on getting stronger. The rule generally applies to any commoditized digital services that usually ends up with 3 players, the leading firm having 70% of the market, followed by 2nd firm with 20% of the market, and the 3rd firm with just 10% of the market.

Combining these 2 rules, imagine a financial platform based on high frequency usage of payments as a way to lure you into its financial eco-system. Once users get used to use the app for payments, then start to offer saving accounts, loans, wealth management products to insurance. You end up with a start-up valued over $150 billion. It’s called Alipay from China. And it’s not just China, you have Paytm in India and Grab pay in South East Asia just to name a few. What can be seen is the future Amazon of finance is shaping here. For example, using the high frequency of payments as hook to get user to use the App, Alipay created the largest saving account in the world, yue-er-bao (excess cash), with over $300 billion in asset. With one-click of a button, you can put the money in your e-wallet into a saving account earning ~3% interest. I think if you ask user what’s more convenient:

1. an app for payment, an app for saving account, an app for investing, an app for spending usage…
2. or one app that does it all, financial related.

The answer is clear. The exciting part is that this is just the start. As B2C payment getting more friction-less and applying to different use cases, I am also seeing disruption to B2B payments and other finanical products. There is a lot of opportunities here, but the basic ingredient is payment.

Use cases

As I alluded to above, payment not only can be used as a gateway to get people into your app for all things financial, but also can be used in a number of use cases. I will present 2 examples here. It’s certainly not exhaustive.

In the near future, we will have embedded banking. Basically, any banking needs should have been automatically presented or even processed. For example, imagine you are in the supermarket buying grocery, and your bill is more than your current account balance. At the checkout, your “payment app” should have triggered request for a loan, based on your payment history, previous account balances…, etc. So instead of getting rejected at the register, you would be able to make the purchase without any issue. Now there are two places payments are important in this scenario: payment history data and the checkout.

In the second example, I want to use Tmall’s new retail strategy. Tmall is Alibaba’s onlinestore plafform for b2c markets. Tmall created a new retail strategy for merchants, which is a suite of software and marketing solutions that brings omni-channel experience for merchants with different channels. It offers functions from interactive marketing, inventory management, smart shopping area (help business choose what product to sell), customer segmentation, and to loyalty management. I will not go into the details here. But what’s important is that the basis of the strategy is enabled by Alipay, the payment app. All these analysis are based on payment data.

Conclusion

The future of fintech is whoever has the data and user traffic. I believe payment is key unless some other financial function would trigger more usage.