How Transactions Will Eventually Become Free
In the 1970s, email was compartmentalized. It had its own ecosystem within which messages would traverse back and forth. You could not send email from one network to another. In most cases, the networks were disjointed as far as email was concerned and other times, an intermediary had to be involved. Messages had to be juxtaposed from a given format/protocol to another.
All that changed with the advent of the @ symbol. The SMTP was born – Simple Mail Transport Protocol. Emphasis is on the word Simple. Email had been liberated. Today, we can send email to literally anyone without so much as thinking of the underlying layers that make it possible. We just do it.
Email killed a lot of verticals. It literally obliterated letter writing, especially business communication in the form of physical letters. It killed the fax machine with the option of having attachments.
Along came the mobile phone which wrecked havoc on the landline telephone. When the camera was added, digital camera sales plummeted, even more so with better optics, resolution and post processing features.
There are 100s of examples of how Obsolescence has been at play throughout history. The Buggy-whip, Sextant, Blockbuster, Foldable Maps, CD players, Typewriter, etc. We invent things or processes but then scientific innovation along with user behavior disrupts the status quo.
Look at the example of the famous London Black Cab. In order to become a cabbie, one has to learn and memorize 25,000 streets and the average time to pass the course is about 34 months. In today’s day and age, this is a futile effort. Why? Because GPS! Why would anyone want to learn 25,000+ streets and spend nearly 3 years in passing out, when a device for less than US$ 200 can do the same? With much more accuracy and real-time, without making mistakes. It is a classic example of a dying industry that refuses to accept that its time is up.
Today, almost every new car comes with a GPS unit, and if it does not, not to worry, Google maps does an excellent job of aiding you, right from your phone.
Now, the modern banking industry is – for the very first time – facing Obsolescence. The birth of Bitcoin is not so much about the currency itself, as it is about the value-transfer system on the Internet without the possibility of double spend and a consensus based agreement on the ledger. This fact just cannot be ignored. If you don’t fully comprehend the gravity of this invention, you just might be on the side of Obsolescence.
There is a very famous quote from the movie LadyHawke in which one of the characters, a Bishop says the following:
Great storms announce themselves with a single breeze, and a single random spark can ignite the fires of rebellion
It is this very breeze that came in in the past few days, disguised as an announcement (No More Bank Transfer Fees) by Ben Milne (Founder of Dwolla). For the first time a payments company has completely removed any fees associated with the transfer of money.
In his blog, Ben has a great post aptly titled: Generally Obvious Things About Real-Time And $0 Transactions says:
“The number of times a payment can be exchanged before it’s worth $0 assuming the service exchanging the money carries a 3% + 30 cent fee is pretty predictable.
If you start with $100 Dollars in such a system you can exchange it 79 times before it’s worth $0″
Think about that for a second. In real-life if you give each other physical money, the value does not decrease, yet, when we do it online, the value decreases. Would you accept the same if this were email? What if email systems started shaving off lines from your messages and attachments when it is sent online, how would you feel? Feels illogical right? That same analogy is now slowly being applied to money. Our money!
With the inter-connected world we live in, the 600 year old depository banking industry is for the first time being challenged. The Knights of Obsolescence have started marching towards the banking sector. The de-bundling of the banks has begun and small business segments and functions are slowly being chipped away. Startups are offering these services individually, thus focusing more on innovative customer acquisition, stellar customer support & engagement, retention and more bang for the buck.
If the above doesn’t convince you, then start taking a look at the funding activity within the Fintech sector:
The Days of Metadata Cometh
Now, all of this doesn’t point towards zero-fees system, that will take a few years maybe even a decade or so, before it becomes really noticeable and mainstream. Today more companies are relying more on the Metadata that is generated by the transactions they process. Many startups will not be making money in the first few years. They are banking on the user generated data, which to them is worth its value in gold.
Metadata, be it from transactions or user generated data from interactive behavior, is what companies are now analyzing. It is like the DNA sequence that holds the power of unlocking how commerce and money would work in the future. How this data will be leveraged remains to be seen, in some cases it is already being monetized.
Web, Mobile and Millennial savvy companies have already seen the writing on the wall, that nothing lasts forever. The new age companies are disrupting by visiting old-age problems and solving behavior issues. Pundits will tell you, the problem is not about technology, it is about behavior. Understand behavior, study the metadata, solve the problem and you quite possibly have a winning hand.
Internet based value transfer, along with decentralization is what would be the key here. As more and more people participate in becoming a node on the new financial networks, the needs to pay money to transfer money would be a thing of the past. As the transfer cost is reduced and eventually removed from the network, the only other way to make money is to use the metadata and commercialize it.
Such commercializing can be done through subscriptions, priority queuing, slab rate memberships, marketplace exchanges, etc.
It would be interesting to see how this space pans out. Your views in the comments would be highly appreciated. Do you think we will eventually go towards a $0 cost of transaction model in the near future?
I’m not sure we’ll reach a point of Zero transaction costs but will probably see pure transaction services bundled with other services that add value, which in turn could justify higher platform fees. The value of metadata, once unlocked, may help subsidise these fees. With thousands of payment services competing for retailer share, PSP’s and merchant banks, being one category of processing, will need to build more value into their offerings to stay competitive and differential in an ever crowded landscape. This can only be good for retailers and consumers – great article Faisal!
Thank you for reading. It is an evolving model. Lets see how things turn out to be.