Is Fin-tech the New Tap and Go?

Has it happened to you? It sure has happened to me.

You are walking around the city, when you hear a great busker.

You stop and enjoy the music.

You then rummage through your wallet and pockets, but you aren’t carrying any cash.

All you have in your wallet is plastic, and, as everyone knows, buskers don’t take cards.

So, you walk away, feeling a pinch of guilt for not being able to give the busker anything in return for entertaining you.

Cash is an Endangered Species

Cash is an endangered species here in Australia. The truth is that not many people carry cash with them these days.

And, why would you, right?

It is inconvenient.

You need to go to the ATM to get it, and there is always the risk of losing it.

Tap and go is far easier. All you need is your card.

That’s why our preference to use cards over cash has been growing in recent years.

Cards are easy to use and they’re pretty much accepted everywhere. Plus, they are backed by guarantees and rewards. Cards have become convenient even for merchants. In fact, some of them have even stopped taking cash.

The problem is that cards can be expensive.

You see, there are a lot of intermediaries and fees along the way.

As CBI Insights recently explained:

Banks are happy to offer credit cards to their customers — they’re highly profitable, and consumers like their convenience, among other benefits.

The credit card system involves a number of different parties that allow consumers to pay using a line of credit. Banks, payment gateways, payment processors, and card networks (among others) establish a web of trust between customers and merchants. For their services, these middlemen charge fees.

In the scenario below, five middlemen — the issuing bank, payment gateway (or point-of-sale terminal provider), payment processor, card network, and acquiring bank — establish trust and take a cut.

The credit card value chain 02-08-18

Source: CBI Insights

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Tap and go, here in Australia, is also costly, even if you are using a debit card. As recently reported:

We all know that paying by credit card can attract a surcharge of anywhere between one and two per cent — cashiers at shops will tell you as much. But using a debit card has always been free. In fact, the Reserve Bank’s 2016 Consumer Payments Survey found that more Australians use debit cards than credit cards to avoid surcharges.

But in this era of tap-and-go payments, even debit cards aren’t free anymore. It turns out tap-and-go attracts hidden charges that many consumers aren’t aware of.

Contactless card payments (like payWave or payPass) cost businesses a lot of money. The Australian Retailers Association estimates banks charge businesses around $500 million every year to process card transactions.

Merchants usually add on those costs to the goods they sell. And, we are even seeing some of those merchants charge a small fee for using cards at the register.

Banks and credit cards have been tapping on our search for convenience to grow. Now, fin-tech companies are doing the same.

Because, if you think about it, there is an even easier way of paying.

I’m talking about your mobile phone.

Fin-tech is Simpler

After all, you already carry it everywhere you go. It is more convenient. And, with our current payment system having so many intermediaries taking a fee, card payments are a prime candidate for disruption.

Fin-tech companies usually have a much simpler model.

Alipay and WeChat, for example, provide an escrow payment service. That is, they take payment from the customer from their bank account and hold it for the merchant. Once the customer confirms they are happy with the service, they release the money.

They don’t need middle men.

The Alipay/ WeChat value chain 02-08-18

Source: CBI Insights

[Click to open in a new window]

Alipay is one of the many fin-techs changing the world of payments. Alipay is part of Ant Financial, the top fin-tech company.

In Australia, they have been working with the Post Office and they can even use their e-wallet to pay for Australian BPAY bills. They have over 600 million users and have been disrupting Chinese banks for years.

As Bloomberg recently reported:

The company’s extraordinary rise over the past 15 years has come largely at the expense of traditional financial companies in China and, to a lesser extent, overseas. Ant’s wildly popular money-market funds have siphoned deposits from banks. Its online payment systems have disrupted card issuers. And its credit units have challenged lenders of all stripes.

They are now facing more regulatory challenges in China, so they may be looking at expanding abroad.

Yet it is not just Ant Financial. There are plenty of fin-techs tapping into our need for convenience and our mobile phones.

According to a recent report by the United Nations, the credit card share of e-commerce payments is expected to fall to 46% by 2019 from 51% in 2014 as e-wallets and other alternative methods like mobile payments take on.

Fin-techs could give traditional payment systems a run for their money as consumers start tapping onto alternative payments.

And by the way, if you are still feeling guilty for not tipping buskers, I have good news for you.

For the next month, Alipay is piloting a program with 15–20 buskers in Australia. It will allow anyone with a smartphone to tip them.


Selva Freigedo,
Editor, Markets & Money

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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