Sara Toth Stub joins editor Zack Miller on a Deep Dive podcast to discuss a recent article she wrote on push payments. In It's a simple idea with extraordinary impact: Inside the growing world of push payments, Sara describes what this form of payment is, how it works, and how entire fintech ecosystems are being built around push payment providers, like Visa and Mastercard.
What are push payments?
Push payments are using the credit card system in reverse. Normally, with a credit card, the merchant swipes a card and pulls money through the card. With push payments, it works in reverse. Someone who wants to pay her friend, for example, actually approves the sending of money to the details of the person she's sending to.
Why are push payments important?
This is the infrastructure behind a lot of fintech and payment apps, like Square, PayPal, and Venmo. It's what allows the money to be sent nearly instantaneously.
The credit card companies
The big credit cards companies, like Visa and Mastercard, play a big role in this market. I spoke with both firms, and push payments have become a big part of their businesses. Shari Krikorian, senior vice president of push payments at Mastercard, told me that push payments "is a simple idea with extraordinary impact". I thought that was very telling of the situation.
Visa and Mastercard are driving push payments. And while a lot of attitude surrounding fintech is disrupting the big guys and going around them, in this case, it's the established credit card companies driving this. They are also partnering with lots of players in the industry to develop new solutions.
Why credit card companies are interested in push payments
If they tap into this new ecosystem, which includes P2P and lending, it gives the card companies another opportunity to be involved in the financial system. They now have a hand in this. Both Visa and Mastercard have opened up departments dedicated to push payments, with Visa Direct and Mastercard Send.
In the field of corporate payouts, for example, like when when an insurance company needs to pay a policyholder after he had a fire, that money can come via push payments. American Family, a large insurer in the U.S., has started offering instantaneous cash payouts powered by Visa Direct. It's a way for Visa to get involved in an industry that they may not have been involved in before.
The same goes for government payouts. Tax refunds are sometimes done this way. And we're seeing some of the emergency programs for the coronavirus, like government loans and grants for small businesses, incorporate push payments. A few fintech firms that use push payments were approved to help distribute government money. The credit card companies become more relevant.
Expanding the market for push payments
The credit card companies have these specialized divisions that frequently partner with fintech startups to come up with new products. For example, Uber partners with the credit card companies so their drivers can get paid up to five times everyday. They can cash out immediately and not wait until the end of the month.
More established companies like MoneyGram and Western Union are working with Visa Direct and Mastercard Send to launch similar services. So a customer could go physically to a store to receive her money or the services can push the funds on to her credit or debit card.
Fintech's role in push payments
Fintechs are thinking more about the user experience and what consumers want regarding sending and receiving money. Push payments are in the background. Take Request to Pay technology, where someone can say to a person or client, you owe me money for dinner last night or you owe me $200. Whatever it is, a user can send a mobile message to another requesting payment and the other person just needs to click to send the money. It's convenient and tech savvy.
At the end of the day, it's Visa and Mastercard rails behind it and fintech firms are building new apps on top of them. The fintechs don't need to worry about building the rails -- they're already there. Fintechs can focus on the UI to make their service easy and convenient to use.
Push payments in the COVID-19 era
I think this is the first time the government is working with PayPal and other fintechs to help them distribute money. It puts them in the same category as the big banks. That's interesting. I was looking over a survey from Lightico, a platform to verify identity and provide e-signatures used by a lot of auto lenders. 49 percent of respondents said they wouldn't take a bank loan right now if it required them to step into a bank branch. People are afraid of being exposed to coronavirus. 63 percent of people said they are now more inclined to try a new app of digital bank to take care of their finances. I think it speaks to a growing awareness and role for fintech and push payments. It could be a moment for the industry to get more attention.
There are also bigger concerns. With massive disruptions to the economy and so many unemployed, it will hit consumer spending. Business has slowed down and even though there may be more awareness, consumer spending will slow and that will affect the performance of many of these companies.
Fintech firms getting into government assistance programs
With programs making such big headlines, I'm sure fintech firms are thinking that getting involved will be good for their business longer term. There are statistics like once someone uses an app one or two times, it's a good way to draw them in for a longer term relationship. Especially, if we continue with social distancing, push payments can continue to be popular for people who can't meet in person. It may be the only choice they have.
The push payment market grows
I think it's fair to say that a rising tide floats all boats. Credit card companies have more power and influence with push payments. At the same time, smaller startups and fintech firms are building creative products and services that could end up with many users. From the consumer perspective, there are more choices out there. Everyone can benefit from push payments and it's definitely driving creativity in how we deal with money and our finances.
It's worth mentioning in Europe, there are growing concerns about fraud. Using a credit card is pretty secure way to pay. If there is fraud, card owners get reimbursed. There isn't really anything like that with push payments. The person paying the money is really signing off when they click. There are complex and creative scams where people get a text from a merchant or a person that looks like something real and believable. It's pretty hard for a person to say that this was an accident or someone stole their credentials when he himself approved the payment. That continues to be a challenge and hopefully we'll see better legal and tech solutions for that.