The Business of Payment Gateways

In my previous post (Collaboration and not disruption, may just be the key! Stitching together the world of disparate payments) I discussed on how fragmented the payment system is world over.

I want to highlight a problem area that is abundantly documented in the form of posts on forums all over the internet – the ability to take one payment and juxtapose it to another payment platform.

In my previous post, I highlighted three examples:

  1. There is no way a PayPal payment can land on a bKash wallet in Bangladesh.
  2. There is no way Boleto payments can be loaded on to a debit card in Philippines.
  3. There is no way for a Dwolla payment to go to Venmo – seamlessly.

Companies are reluctant to expand into territories or connect to other payments system, if there isn’t a business case for them. This is precisely where a payment gateway operator’s business model makes sense.

Think of a payment gateway as a financial router (I have to credit my good friend Yusuf Jan for this term, for he coined it about 10+ years back).

The financial router or gateway will enable two or more disparate payment system that have no commercial intention of integrating, connect together. The business model for such a gateway stems from the power of aggregation. Take the example of freelancers in Pakistan or Bangladesh, there are 100,000s of them. Because PayPal is not available in either of the countries, most of them have made PayPal accounts from outside these countries, the problem? They cannot cash out. There used to be a way for a Payoneer card to be associated with PayPal, but that is no more the case.

Classical example where a commercial payment gateway can make money. Take both PayPal and Payoneer onboard, share the AML/KYC risk and then interconnect both system. Both are licensed entities, yet now they don’t talk to each other.

Taking cue from example # 1 above, if an intermediary entity were to enable PayPal to send payments to bKash wallets, that essentially opens up a whole new world of payments, without even formally entering the country. I might digress and say that Xoom, which is now acquired by PayPal may already offer this service, but how cool would it be if someone said, give me your PayPal ID and you gave them your bKash telephone number and they would be able to pay on it? It is not a far fetched thought.

I personally know 100s of marketing companies that operate out of Philippines. They do business all over the world. Selling items like eBooks, Virtual Assist services, health care products, arts & crafts, t-shirts, etc. The one country they find it difficult to do business in is Brazil, because most people prefer to pay via Boletos. The few companies that do provide Boletos to payments abroad, use a very broken process. Seamless integrators are very few and the ones who are operational, charge in excess of 8%-10% for transactions to be completed.

You don’t have to venture outside the US to see a broken system. Look at a simple example of exchanging money between a Venmo and Dwolla user. Not possible. The Mecca of payments has interoperability issues.

Most payment companies are cognizant of these issues, however, they would prefer to work with very large financial institutions or eventually enter the space themselves. There is a walled garden that exists in almost every payment company and yet, they complain of interoperability.

Aggregators, in my opinion is where the next wave is, and many are tackling this problem already in their own rights. A major problem are US banking and payment institutions who at times are so oblivious (sometimes even biased) towards the outside world, that for them, doing business outside the US, is a low priority.

A particular example I want to highlight is MFS Africa, here is an example of a company that sees Africa as a continent filled with opportunity and are working diligently to connect to all the mobile wallets in Africa. One interface and boom! You’re connected.

Another example is PayKii, where they are on a mission to connect all the countries in the world, for purposes of bill payments. Just fathom for a moment what that entails, connecting to 100s of countries, 1,000 of billers and being able to streamline it under one interface.

Aggregators look at opportunities. If there is a decent enough market for two payment systems to connect together and do transactions, they go for it. Most opt for the low hanging fruit. The orchid is blooming and those with a ladder, will find plenty of opportunity waiting to be plucked.


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