In 1958 BankAmeriCard was launched in Fresno, California as one of the first electronic payment capabilities. Prior to launch, Dee Hock, its founder and visionary, could not decide on the best way to get traction for the product.
BankAmericard could mail a card to every consumer and incent them to use cards at select merchants. On the other hand, they could give the card acceptance tool, known as the “knuckle-buster”, to all merchants and provide cards to select consumers with a greater likelihood of trying the new way to pay.
Instead of deciding between either / or, he had a great insight – do both, in a targeted market. They could provide knuckle-busters to every merchant in Fresno while simultaneously providing a card to every consumer household. The result, a literal ubiquity play, was a perfect network effect. Every consumer could transact with the payment capability at every merchant, and every merchant could accept payment from every consumer. Every incremental user on either side could contribute geometric value to the system.
Since 1952, network effects in consumer payments have catalyzed the rapid expansion of global GDP. The web economy super-charged GDP expansion thanks to the explosion of the consumer Internet, itself a global decentralized network of users and service providers, consumers and merchants. The largest companies in the world today are native digital firms with business models that fuel the growth of the global economy.
The consumer’s ability to purchase goods has never been easier, thanks to the creativity and competition foisted upon commerce by the Internet. But business payments, or almost any party who needs to make a monetary disbursement, remains dependent upon ossified bank infrastructure and business methods from over 40 years ago. Ironically, native digital businesses are inherently some of the most sophisticated data-driven businesses, yet their banks are dependent on manual processes, systems and business methods that generate poor, inflexible data.
This is not just a platitude. When I was a Senior Advisor at a top management consulting firm in 2014, I coined the concept of the “Service Gap”: the gap between bank and other payment service providers and the needs of the digital economy. I would regularly ask CEOs of the largest banks in the world, whether the needs of their clients, the world’s largest companies, were better served today than yesterday? Would that gap expand or contract tomorrow and into the future? Every respondent agreed that the Service Gap had crossed a critical point of no return. The root cause was clear: old systems have poor data quality (inability to interrogate or fix the data) and inflexible information management (data format inflexibility, reporting latency, poor search and tracking). There were numerous contributing factors, but the most important ones included:
- Payments getting smaller in value but larger in number: Banking infrastructure was built for predictable payments that were historically high value, low volume, regular or long-horizon payments. The web economy demands flexibility. Typical payments are low dollar value, high volume and often of irregular quantity to entities such as app developers, marketplace sellers, content publishers, and so on. With the current infrastructure, a $10 payment costs a bank $25 to send and has 23 hours of reporting latency. This is incongruous with data-driven, real-time, lightweight needs of the web economy;
- Collapse of a historical revenue stream: The Internet made Interbank FX rates easily viewable by clients, robbing banks of a high margin revenue stream that offset high internal costs of exception handling (e.g. payment errors), reporting, customer service, and other highly manual efforts;
- Inability to allocate investment dollars: CEOs of financial institutions routinely noted an inability to invest in core infrastructure like treasury. The reasons most frequently cited were (a) an inability to justify ROI due to low success when building software, and (b) that funds had to be prioritized to support the balance sheet under Basel III requirements;
- Bad data quality & user experience: The companies expressed consistent frustration with poor bank UIs, lack of transparency and latency in their reporting and tracking. The problems tie up liquidity and drive substantial infrastructure overhead to counter the issues, and contribute to poor experiences for their payees;
- Payments were biasing to fragmentation that banks could not serve: As the largest native digital companies were focused on the ‘Next 1 Billion’ initiatives, e.g. to find the next billion users / consumers of their goods and services, it was clear that the under- and un-banked would be key to these efforts. With over 2 billion people of working age still under- and un-banked, mobile-first payment types were proliferating. These payment mechanisms can operate without bank infrastructure or solely with a bank as a repository of stored value beneath the payment. For numerous infrastructure and incentive-based reasons, banks see substantial friction in paying to these ‘non-bank tenders’.
With these structural challenges, I asked myself what the world would need to address the Service Gap. I did not know if we could “bring the consumer Internet to business payments”, but I was confident that if we could, we could close the Service Gap. I found myself focusing on a few ‘if’ statements, inspired by interesting cost-of-service work being conducted across the industry:
- If all data was in real-time, then reporting / payment operations can be real-time, leading to liquidity improvements for both the bank and the payor. Reconciliation will be alleviated, reducing significant payor overhead.
- If payees were empowered to own their data, errors would be reduced, and claims / treasury operations could be replaced by self-help. A real-time data dialogue between payees and the payor will allow payees to confirm or change their data before payment instructions go to a bank, minimizing issues long before payments are released.
- If all of this information management was orchestrated from the cloud, on an automated basis, and available to the right people in the organization then network management, overhead and payment operations would be materially reduced.
I took it as a given that FX costs continue to compress, and many other smart solutions could solve compliance, so I focused on the payments experience and architecture, areas where I have some facility. There was no answer in my consulting seat, but over the last 5 years, we found the insights and the answers, and now have the platform the world has needed to pay and get paid.
Following two years of development and hundreds of iterative cycles with thought leaders at corporates, banks and payment service providers, we have solved the Service Gap. Velo is a multi-cloud platform – the first enterprise, bank grade, payments infrastructure specifically designed to address the digital economy. We laddered from an alpha to a beta to our current product version, continually gaining insights and feedback from clients, prospects and the financial community. We built specific functionality to attack the problems resulting from the inherent inefficiencies within the current ecosystem.
How Velo Resolves the Service Gap:
- New infrastructure resolves cost and data frictions: A payee-directed workflow with real-time, two-way data installed in a multi-cloud environment, Velo reduces cost of service – making high volume, low value payments profitable.
- Unlocks new business models: Velo’s cost of service in steady state is fractions of a penny. The reduced cost allows the payment provider to charge differently, moving away from their dependency on FX.
- Alleviates investment risk for bank executives: With the depth and breadth of Velo’s team and proven enterprise code for regulated entities, the ROI risks of the past for bank executives have been addressed with a confidence-inspiring live solution, delivered to the bank by those with the requisite experience.
- Improves data quality: Through superior UIs and APIs, data is published real-time. Data can now be improved at their sources (payor and payee), enhancing the overall experience, reducing errors and costs with better data quality.
- Payment agnostic: Velo’s gateway approach is agnostic to bank account, e-wallet or any other form of payment type.
Delivering a network effect:
Like consumer payments, where the middlemen has an efficient, scalable cost of service and profitable ‘clicks and ticks’ business model, Velo can act as a service provider for a financial institution. FIs can then drive substantial ROI for their clients from next-generation payment services. Velo can propel the network effect that has been missing for so long in business payments in three different dimensions:
- Corporates typically use multiple commercial banks for their treasury and payment needs. When they enjoy the benefit of the Velo experience, they can encourage all their bank partners to adopt Velo.
- Payees are paid by multiple payors, so once they have enjoyed the benefit of their Velo payee-directed experience, they can encourage their other payors to adopt Velo. This in turn drives those corporates to use Velo directly, switch to a Velo-enabled bank, or request their non-Velo banks to become Velo-enabled.
- Banks and non-bank payment service providers can leverage Velo technology to reduce cost of service, and in turn acquire more business with aggressive pricing and functionality offering.
I am stanch in my belief that the Service Gap must be addressed for the global economy to thrive. Poor data quality continues to propel increasing costs and inhibit growth. By rethinking enterprise payments and creating a new paradigm, we can unlock new use cases for the digital economy. We can drive out cost by collapsing inefficient, legacy structures and eliminating manual operations; propel new revenue streams with products and services enhanced by a rich, two-way dialogue between payors and payees; extend payments to the “next 1 billion” in an accessible way – on which the global economy so desperately relies.
Velo Payments is the result of this ardent belief in the Service Gap. Come see what we have built.