When it comes to moving money, embedded solutions are no longer considered cool features, but have become expected low friction experiences. People want to consume and pay for things on their terms. Banks once served to protect people’s money, provide loans and enable solutions for people to pay one another. Technology and the digitization of money have left bank’s struggling to provide low friction consumer value. Legacy behavior, systems, rules and their reluctance to change have left banks unable to respond to a changing landscape.
Technology companies are slowly picking up the slack. The numbers are staggering. It took JP Morgan Chase “Chase” nearly 150 years and several large acquisitions and mergers to amass 80 million customers; while it took Alipay just 9 year to acquire 650m users and 3 years to become the world’s largest money market fund. If you think that kind of growth is unique to China, let us remember that it only took Facebook 14 years to acquire 2.32billion users. To put that in perspective 31% of the world has a Facebook account (and Facebook is prohibited in China).
Chase already has 24% of the total U.S. population as customers; remove the unbanked and those too young to bank and you will see that Chase is closer to owning 40% of the banked population. Given those stats, it’s easy to see why legacy behavior and thinking rule the roost. This arrogant and oligarchical approach will relegate banks to the same road that the likes of Kodak, Xerox, Blockbuster and others have traveled. We are not saying banks will go to the wayside, we are however saying they will be forced to innovate - when it’s too late.
Financial institutions are at their pinnacle, but they are not choosing to embrace societal demands when it comes to financial innovation. Instead they are still stuck in the age of classifying account products. Younger customers don’t care about the difference between types of bank accounts, they want instant access to their money and more control over where and how their money is invested. U.S. banks are not providing this flexibility.
Millennials dig into their pockets on average 5x a day to pay for a good or a service. More and more, they are looking to technology for a frictionless experience. We believe embedded solutions will take over payments. Successful embedded solutions that provide low friction and multiple values will win this battle. WeChat pay is a good example of a successful embedded solution. WeChat started in 2011 as a chat app that kept adding features. In 2014 it added a payment function that within 4 years grew to process over $6.5 Trillion in a single year. At more than 1 billion users, even Charlie Munger has agreed that they are a major threat to Visa, Mastercard and American Express.
Our thinking is not entirely different than that of WeChat‘s, but the U.S. has a very different set of challenges. The imbedded practice of a Physical Card and Terminals (PCT) has created tremendous friction points, lots of players and too much legacy infrastructure. View our Payments 101 section for more. The PCT system is fragile and expensive to operate, it’s also widely disliked by nearly all merchants. The good news is that it’s no longer needed, the bad news is that it’s the only system outside of checks or cash that is used in the U.S. This is why countries in Asia, Africa and Europe have been able to outflank Visa and Mastercard.
There are several components that make up a Visa/MC network, but we will paraphrase:
Customer / Merchant
Account number (usually held on a physical card)
Association Member (Visa, MC etc.)
Issuing bank (consumer credit card issuer)
Merchant bank (merchant’s bank)
Processor (provides the terminal service and physical device)
All of the aforementioned is being challenged and is ripe for disruption. The first step has been to replace the physical card with an electronic account number holder. Wallets like ApplePay, SamsungPay, GooglePay etc. have done this using the mobile phone, but these mobile wallets still need a terminal to communicate, so the industry did an upgrade. The terminal is a legacy holdover that essentially sits as a communication device. We have seen some progression on the terminal side with the dongle, which has enabled terminal mobility and lessened device cost. Square has led the way. Think about how legacy it is to have a communication device sit between two devices that can communicate without an add-on device.
Next we have the Association Members. Banks created the credit card but now struggle to keep up with their creation. If your money is kept in a bank, why should you have to use a credit card to spend it with a merchant? Then came the debit card, but guess what, the banks again turned to the credit card companies to process the transactions. While debit card transactions cost as little as $0.25 to process, it’s still quite pricey.
Concentrating on the customer, the merchant and the network is where everything gets resolved. Doing so enables payment companies the flexibility to change how people transact with each. For example, Honey can remove the physical card and the terminal by replacing both with a mobile transaction methodology. Most overseas players did this using a QR code and Honey has done the same. It’s efficient, fast and easy to use. Next it’s about finding a suitable network. We agree with most merchants, the association networks are far too expensive, cumbersome, wrought with fraud and take too long to settle. It’s wholly desirable to use the banking system to move money - only it needs to be done much faster than it is today to accommodate a merchant transaction. That’s why we architected an intra-bank transaction network.
Deploying an intra-bank transaction network gives us the flexibility to do a fast banking transaction using an instant settlement mechanism, it also enables us to settle faster and avoid the association member tax.
Before one starts bringing up credit card balances, loans etc., keep in mind that only 1/3 of millennial’s have credit and the majority of them don’t use them to transact daily, they use their debit cards. In 2009, debit card transactions overtook credit card transactions and in 2019 they are set to take over cash transactions in the U.S.. The data overwhelmingly shows that solving for a fast bank-to-bank transaction is a priority for consumers and merchants alike. So let’s give people what they want.
Honey combines the customer and merchant with a network, but now the challenge moves to getting people on the network, so how do we do that? Give it away! Don’t charge merchants to process a payment. Free payments eliminates merchant obstacles and encourages fast adoption. How do you get consumers to adopt Honey? Give them something of value. How do you make money giving away free? Give merchants something of value. This is Honey’s bailiwick.
Let start with the merchant, every time a customer uses Honey to pay for a transaction, the merchant acquire the right to market to that consumer
We will let your mind run on what that can do for banking in general, meanwhile, we will take you back to the customer and the merchant.
Once you have a network - even one that is based on the ACH network, you can eliminate all of the user and merchant friction.
in a only a few years have out We believe creating a network that allows people to move money from bank-to-bank with very little friction, to lesson the friction, If you can mimic a user’s account
WeChat Pay and Alipay (among others) simply created a network that allows people and merchants to approve a transaction by using QR codes and the cloud to process transactions.
e see the world differently Honey is choosing a different path to that of WeChat as the U.S. has different challenges, but we are not unlike in our thinking. Honey agrees with that terminals and plastic are all but dead.
Payments are cumbersome in their current form. If it’s cash, we must go to an ATM, make sure we have enough and carry around change. If it’s a credit card, we have to remove
and choose not to think but it’s not for technology companies that create embedded solutions. WeChat is a chat app that has 1 billion users and they launched a payment feature There is a tremendous amount of friction in the U.S. payments and banking industry and it’s ripe for change.