The Race for New Payment Rails

Hey y’all! I have a special guest writer publishing to the list today—Reggie Young. He is writing about how new payment rails might be built and which companies have the best chance of succeeding. Reggie normally writes at FinTech Law TL;DR, which explains top legal/regulatory news in fintech, written for non-lawyers. He also works as product counsel at Lithic, where they’re building an API for businesses that want to use cards to send $$, spend $$, or sponsor their own card program. You can connect with him on Twitter @ReggieCYoung or subscribe to his newsletter. 

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In the pursuit of yachts, CEOs tend to go after markets where they can make lots of money. An obvious target is, well, markets with lots of money in them. In the current tech landscape, the yacht/market of the moment is payments. 

The payments industry is pretty massive. Within it, there are five modalities that currently matter for moving money in the US: cash, check, ACH, wires, and cards.

Just one of those methods handles a gobsmacking amount of money. The two main card networks, Visa and Mastercard, handled $10.4 and $7.7 trillion in global payments volume during their 2021 fiscal years, respectively, and earned $24 and $19 billion in fees. 

Fewer transactions are sent via wire, but wire has the biggest average transaction size.

If a tech company can build another payment method (or “rail,” as we call it), it can take market share from the card networks and other existing payment methods, and potentially even enable and capture new payments that aren’t currently happening. And that’s why folks in fintech see becoming the next payment rail as the holy grail.

To give you an idea of scale, Visa’s market cap ranges $400-500B right now. And cards only process a fraction of payments; Glenbrook estimates that cards only processed around 7.4% of all 2015 US payment volume. The potential is staggering.

This piece is about how to pick apart what’s needed to become a payment rail. But the questions and process apply beyond fintech to any network. We’ll start by walking through the capabilities you need and then apply them to a few case studies of bigger players (Square, Stripe, PayPal, and Walmart).  And as you’ll see, there’s at least one big fintech, Stripe, that’s not as well-positioned as most folks think. Given how lucrative being a payment rail—or any network—can be, you’ll walk away with a better sense of what to look for when building your own network, sizing up investment opportunities, or wherever else networks may come up.

Tactics & Capabilities

There are tactics, which focus on solving the chicken-or-egg problem inherent in creating a network. Like how Visa (originally BankAmericard) kickstarted its network by mailing 60,000 ready-to-use cards to Fresno residents. That made it easier for Visa to get businesses on board because, well, there were already tens of thousands of cardholders. 

Most conversations about networks focus on those tactics (see, e.g., Andrew Chen’s book The Cold Start Problem). 

But tactics aren’t worth much if you don’t have the necessary capabilities. What I mean here is the functional capacity to meet the bare minimum market needs. For example, you can’t start a rental car company without cars. If you’re a startup with all tactics and no capabilities, your “tactics” are actually just donating venture capital money to AWS and Google Ads. So let’s run through some case studies on who has the capabilities to build the next payment rail. 

MVCs

When trying to determine a network’s needed capabilities, the easiest way is to ask: who needs what, when, where, and how?