Can we cut out the middle man in payments?

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KC Seow

MD, Awepay Limited

“Disintermediation is the removal of intermediaries in economics from a supply chain, or cutting out the middlemen in connection with a transaction or a series of transactions.”

In many industries today, we see more businesses, manufacturers, developers, etc. cutting out the middle man in the goal of acquiring customers directly and increasing profit margins. In some case it has worked remarkably well (case in point: Alibaba) and in others not so much. Within the banking and payments space there exist many middlemen, who acquire merchants on behalf of banks and manage as well as take on the liability of said merchants’ risk portfolio. Otherwise known as payment service providers (PSP).

With new remarkable technologies coming up in the fintech space, there is an ever-growing desire by both old and new players trying to disrupt traditional payments industry especially with the latest buzz in applying blockchain to create “trust-less” decentralized solution and/or ecosystems to reduce transaction costs and essentially removing middlemen. In the Austrian economics perspective this is the ideal situation we can create through the means of new technology but is it just a pipe dream? Are we able to have 100% certainty that a shared ledger between multiple parties cannot be compromised at all? In my experience and perspective, fraudsters and scammers will always find a way, whether through malware, spyware, and a multitude of malicious tools to find a loophole or vulnerability in the system. If or when that happens, how is fraud handled? The point I am trying to make is that card payments have evolved a long way to implement policies, dispute resolution standards, etc. and is still very much an imperfect system that is still maturing and growing. Blockchain technology while holding much promise in the future, is very much still in an infancy stage and there is not enough real-world use case data to know if there are any potential pitfalls yet.

Allow me to digress back to the middleman. To give you some perspective, allow me to explain currently the most known payment medium; card payments. In a very atypical Visa/MasterCard transaction whether on a POS terminal or through an online payment gateway, a bulk of the Merchant Discount Rate (MDR) percentage goes to the bank that issued the card to the bank, this is called the interchange; typically at somewhere between 0.8-1.2% (side note: in Europe it has been reduced to 0.2% but many card issuers offset the loss in interchange by implementing additional card fees) in Asia, in Malaysia for example, the market rate to a regular SME or retail F&B outlet is at or around 1.5%, typically acquiring banks will appoint a PSP to acquire these merchants, essentially giving the PSP a buy rate somewhere between 0.9% to 1.3%, in a nutshell, the PSP/middleman in most cases only has a profit margin of 0.2%-0.6% whilst being liable for any merchant fraud/chargebacks, violation fines by the card associations, not to mention costs of operations, payment gateway and even buying the POS terminals now. Based on this information and my opinion might be biased, but the middleman in payments is not causing transaction costs to increase drastically, a bulk of the MDR is taken from merchant’s profit margins by the card issuing bank. That is why you will always see banks aggressively trying to acquire new cardholders. The banks are not to blame for this, it is a for profit institution and naturally any business will strive to increase revenues. So, cutting out the middleman in card payments doesn’t make transactions cheaper by much, margins of 0.2%-0.6% really only affect large MNCs with thousands of transactions every day.

But, to ignore what the market wants is both foolish and short sighted. As such, AWEpay has been working on a new payment solution that cuts out all middlemen in the equation, providing a payment gateway that any merchant with a bank account can use almost immediately, implementing a payment software as a service (SaaS) model. We hope to be able to bring to the market a new solution aptly named AWEbanking, which we target all the merchants that only accept cash because their profit margin is too thin to take on card payments. Please add Awepay on your social media (Facebook and LinkedIn) to stay tune for a truly disruptive fintech that benefits all in the ecosystem.

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