| Originally published on TheBusinessofBitcoin.com on February 2, 2014 |
Payments is a big topic, with intricacies that can make it confusing. And it’s not getting any simpler, with Bitcoin coming onto the scene and many companies, like Apple and Amazon, now potentially entering mobile payments. There are even rumours that Starbucks may be planning a rollout of their mobile payment system beyond their stores. This is in addition to all the other companies that have been attempting to innovate in payments over the last few years (e.g., Square, Stripe, Dwolla, Gumroad, Paypal, etc.).
So I thought it would be useful to set up a taxonomy/framework to map things out and use as a guide for further analysis. Two things to note:
- While I’d like to keep these posts country-neutral, I will inevitably be primarily referring to the US payment system and its workings.
- This is a simplified picture and will not be 100% accurate/clean because the landscape is a bit convoluted (and I clearly do not know all the details). But I’ll do my best to present a picture that is simple yet still useful and mostly accurate.
There are four different ways to categorize and understand the payments market: network, instrument, scenario and participants.
How a payment is processed (or who controls/updates the ledger):
- Card networks – These are today’s major consumer payment systems, with the biggest being Visa, Mastercard and American Express. All three work in very similar ways (as briefly reviewed in a previous post) in the US and internationally.
- ACH – Payments between bank accounts that go through a central clearinghouse. Its main uses are B2B payments, payroll and certain B2C payments (e.g., bills). The European equivalent (usually “direct debit”) is very popular for recurring bill payment.
- Independent networks – I’m giving this name to “new” networks established by companies independent of the card networks.
- Bitcoin – See past posts.
What is used to pay (or how identity is asserted and payment initiated):
- Physical – This refers to using a physical card (credit/debit) or the number printed on a physical card. In a POS scenario (see below) you usually swipe the card and in an online scenario you type in the card number. I’d include cash and checks in this category, but will mostly ignore those instruments since they are quickly losing importance.
- Mobile – Using a mobile device (smartphone, tablet, perhaps “wearables” soon) to pay in a way that does not involve a card or a number from a card. In other words, the mobile device serves as the actual instrument and implements a new (and hopefully better) way of paying. Typing a card number into a field in a mobile app/browser does not count as a mobile payment.
Where the payment takes place:
- Bricks and mortar (B&M) / Point of Sale (POS) – In-person payments.
- Online – Not-in-person payments. You can go deeper in this scenario and split it into four sub-scenarios:
- In-app (mobile) for virtual goods
- In-app (mobile) for real goods
- Automated recurring payments
Note: you can have B&M payments that go over the Internet but they are still considered B&M in this taxonomy. For example, I may pay for a cup of coffee via a mobile app over the Internet, but the scenario was still B&M because it’s initiated in-person.
Who is paying who:
- B2C – Consumers paying businesses.
- B2B – Businesses paying businesses.
- P2P domestic – Consumers paying other consumers.
- P2P international – Consumers paying consumers across borders, usually called “remittances”.
These four categories overlap to create an array of different segments. I thought of doing a diagram that would show how the categories intersect, but it turns out it wasn’t very useful at visualizing things. The main reason is that it is not a clean matrix – many of the segments don’t really exist or aren’t worth talking about.
So instead I’m going to quickly comment on some of the more interesting segments (cutting across the framework in different ways) and this will set the stage for further posts in the coming weeks:
Mobile payments – This is a term that is usually thrown around without enough specificity, meaning everything from paying on a mobile website with a card to buying “coins” in a mobile game to paying at a coffee shop with Bitcoin. For our purposes we will be a bit more strict and only call something a mobile payment when the mobile device is integral to establishing the payer’s identity and initiating the payment (independent of network and scenario). Many companies have tried to do mobile payments in one form or another and have mostly been unsuccessful, but there is a general feeling that we are getting close to doing mobile payments at scale, especially if Apple enters the fray.
In-app purchases – This usually refers to purchases of virtual goods made inside a mobile app. This segment is interesting because Apple and Google (the largest enablers) take a whopping 30% in fees and have it in a stranglehold. Outside the iTunes and Play app stores (e.g., if you are using an Android device outside the US or western Europe), the mobile carriers take 50% or more. You can also buy real goods in-app and that usually means you are paying with a card and using much the same process as if you were buying on the web.
Remittances (P2P international) – This segment is interesting because it is large and highly inefficient, with companies like Western Union charging 10% or more, often from consumers that can’t afford expensive fees. This seems to provide ample opportunity for a brand new network (e.g., Bitcoin) to come in and reduce fees.
POS card payments – This is the largest and most established segment and there have been some recent innovations around making card payments available to smaller merchants and making the experience more pleasant. Square was probably the first but has been followed by others, including larger players like PayPal. These companies, we should note, do not change the card network fee structure in any way.
Online card payments – In terms of standard online card payments, recent innovation has primarily been around the merchant ease of use and setup. Stripe is a great example and can be thought of as the “Square of online payments”. Again, the card network fee structure remains unchanged.
Hopefully this post helps to map out what differentiates payment types and sets a framework for further analysis. My goal is to do so methodically in the next few weeks and with a bias towards covering how Bitcoin may or may not play a role in each one.