Payment Perspective – UK Banks Money Grab

We get it: Trump is entirely unpredictable.

Banks like stability.

They like doing nothing.

And they especially like laws that prevent competitors from doing anything that upsets the banks doing nothing.

Things like giving customers programmatic access to their data?

Don’t like that.

That would modernize society.

Make finance move faster.

Evolve, even.

Can’t have that.

So in 2015 the EU regulated banks to do it anyway.

From Wikipedia:

In October 2015, the European Parliament adopted a revised Payment Services Directive known as PSD2. The new rules were aimed at promoting the development and use of innovative online and mobile payments through open banking. It introduced a number of new services, definitions, and obligations for market participants.

We’re not fans of regulation; we believe free markets tend to solve problems pretty f*cking well.

The problem, however, is that incumbents lobby and then pass regulations that protect their positions.

Incumbents do this to the point where they have no competition and they become effective utilities.

Well, that’s NOT a free market.

Like, why did it take Square years to get a banking license?

Look at the bullshit Square suffered through (from AI, but tracks with our understanding so we’re good with it):

• Initial Regulatory Rejection/Withdrawal (2017-2018): Square first applied in September 2017 but withdrew its application in July 2018 due to pressure from regulators regarding concerns over its infrastructure, governance, and the suitability of the ILC charter for a fintech firm.
• Intense Lobbying and Opposition: Traditional banking groups, such as the Independent Community Bankers of America (ICBA), strongly opposed the application. They argued that allowing a tech company to own an ILC bank created a “loophole” that bypassed the Bank Holding Company Act, allowing a commercial firm to mix banking and commerce.
• Refiling and Structural Changes: Following the withdrawal, Square had to refine its application, which included setting up a physical presence in Utah, naming a new CFO for the banking division (Brandon Soto), and addressing specific, detailed questions from the FDIC.
• Regulatory “Not Active” Status: Even after receiving conditional approval from the Utah Department of Financial Institutions and the FDIC in March 2020, Square still had to wait nearly another year to satisfy all conditions to become “active” and begin operating, which finally happened in March 2021.

BTW, Stripe, Square, Plaid: all these fintechs broke the hell out of “rules” to deliver modernization and fight an antiquated system trying to keep people in the stone age.

Just stupid.

Well, UK banks looked at Trump, looked at the card duopolies, then realized that the banks are the ones who control both sides of the financial market (merchant + consumer) and thought, you know, I can make some more money here.

How much money?

Not as much as in the US.

Visa and Mastercard rip about 20 bps to move money.

PIX was built in Brazil for $4M with $8M in annual operating costs.

Well, there’s about $1.2T of card volume in the UK annually.

20 bps would yield $2.4B revenue, which really means about $2.392B of EBITDA.

Sure, there are some costs to run a network, but the banks effectively already run the only real cost of the card networks (final dispute resolution).

The UK is a bit different though thanks to legislation.

Interchange costs are capped at 20 and 30 bps for debit and credit respectfully, but the card duopolies see none of that, as it all goes to the issuing banks (note that Brexit opened an opportunity for the schemes to raise fees again, but earlier this year the schemes were put back in their boxes).

Instead, the duopolies charge assessments and other fees, which according to the PSR (the UK body that regulates payments) end up between 5 and 15 bps.

Call it 10, meaning UK banks stand to earn $1.192B of EBITDA by replacing the duopolies.

Not bad for a few days of work.

But here’s what this entire exercise should show you.

Banks are large enough and concentrated enough to build their own A2A (account to account) payment network.

It can be real-time.

It can be free.

But banks will never do this because.

Why?

It’s not in their best interest.

Domestically, banks they rip $187B (and likely more) in free interchange revenue for “rewards”.

Which don’t reward d*ck because any merchant with a brain marks up these card acceptance costs to the end consumer.

Consumer points, which end up being a windfall profit for banks and the card schemes, are just a massive societal tax.

In total irony card rewards actually punish consumers.

What society needs are neo banks, who are looser with rules and open to changing banking for the better, to partner with those that have merchant distribution to build a rail.

The costs to build and maintain said rail are cheap.

And look, it’s not like plastic isn’t valuable: consumers no longer have to carry around inconvenient stacks of paper and metal, and merchants worry less about friendly fraud and don’t have to make trips to the bank.

We’re not saying digital payments have no value.

Quite the opposite.

What we ARE saying is that you CAN have digital payments AND they can be asymptotically close to FREE.

Charge a little bit – like 5 bps – to underwrite the rail and dispute adjudication, and make the bulk of the money on credit underwriting.

That would be good for the neo banks, who can make good money on credit extension.

As a condition of having a truly low cost form of digital payments acceptance, participating merchants must agree to dual pricing other forms of card acceptance (since surcharging has been completely and capriciously bastardized by the duopolies).

We just don’t see RTP (who can’t even reply to emails and phone calls) moving their rail to a pull mechanism since it would upset their bank partners.

Same with FedNow.

Would love to be wrong, but private industry is the only way we’re going to solve our domestic state of perpetual payments servitude.

The yoke has grown heavy, massa.

BTW, loving AI image generation. Nano Banana below. So accurate it’s like AI knows the plight of citizens.