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Incumbents Put up a Brave New Front for Payment Startup Innovation Tsunami, Join It


January.13.2015 0 Comments

mobilepaymentsThe payments industry is being presented with numerous innovations driven by startups. The new companies in the payments arena are working hard at disrupting the entire payments ecosystem. A number of startups have emerged in recent times challenging the established players. The traditional reaction by incumbents such as banks and credit card companies had always been to play defense. But now times have changed and it’s wiser to create fruitful partnerships.

Let’s Talk Payments has tracked the funding received by the 42 most popular payment companies operating in the payments space and found the total investment received by these companies to be $1341 Mn. This itself is proof that startups are indeed offering that differentiator in the payments space that incumbents need to leverage.

Here are some prominent partnerships that incumbents should really look into:

MasterCard partnered with Behalf

Behalf is a venture capital backed startup which provides lending service to small businesses and makes credit decisions within short time spans. Seeing a drop-off in credit card volume, MasterCard saw Behalf as a prominent influencer and decided to work with the startup to help enable its customers to use MasterCard’s system to pay their vendors.

SunTrust Bank acquired FirstAgain

Prior to its acquisition, FirstAgain was a lending upstart providing direct unsecured loans to borrowers via the Internet. The bank acquired this startup to gain new capabilities in the direct online lending market. FirstAgain’s technological prowess and expertise as a nationwide online lending platform was a key reason behind SunTrust buying it completely. By acquiring FirstAgain, SunTrust started a new lending business dubbed as LightStream offering unsecured loans up to $100,000.

Lending Club’s partnership with Multiple Banks

One of the emerging lending companies in recent years, Lending Club really made waves in 2014. The company went for an IPO and got its investors almost 100 times returns. A couple of years ago, small community banks had started working with Lending Club, investing in loans on the online platform. Lending Club had partnered with MUFG Union Bank which involved offering unsecured loans to Unions Bank’s mortgage customers using Lending Club’s platform. Lending Club has indeed been one of the disruptive players in transforming the banking system.

MasterCard partnered with Zwipe

MasterCard launched the world’s first biometric contactless payment card in partnership with Zwipe. MasterCard saw great promise in the ability of Zwipe’s secure biometric authentication technology to hold the cardholder’s biometric data. Although, MasterCard could have made massive investments in establishing a biometric technology system of its own, it went ahead and partnered with a startup that had already mastered the feature.

Visa invested in LoopPay

Instead of competing vigorously against disruption, Visa decided to team up with new entrants to further extend its own business. Visa had invested in LoopPay which offers a technology that allows mobile devices to transmit payment data even to traditional magstripe card readers. In an exclusive discussion with Let’s Talk Payments, Will Graylin, CEO of LoopPay, cited three big reasons that attracted Visa towards LoopPay’s solution:

LoopPay being the first scalable payment solution that works with existing POS infrastructure
Ability of the LoopPay fob/case to work with a variety of devices and platforms
LoopPay meets up with the security requirements expected by a player like Visa by enabling EMV like security and uses tokenization as well
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CardSpring gained partnerships with First Data & Verifone

The startup focuses on “closing the loop” between online and offline transactions. It offers a payment infrastructure platform which claims to enable app developers to add applications to the payment network. The CardSpring web service API facilitates payment companies and point-of-sale vendors to get card-linked services. These services, created by developers using the API, enable merchants to connect with customers and expand their businesses. This powerful offering by CardSpring led to its partnership with incumbents such as First Data for payment network enhancements and Verifone for POS solution enhancements.

CloudPay partnered with Western Union, Citicorp & Wells Fargo

The startup provides cloud-based SaaS solutions for payroll processing. Western Union had formed a strategic alliance with the company to offer an automated payroll payment solution. Moreover, Citicorp and Wells Fargo work actively with CloudPay to enable local or international ACH or wire transfer payments which get directly authorized via CloudPay’s platform.

Apple Pay racing ahead in Partnerships

Who would have thought of a new payment system by a tech giant driving banks to integrate it right from its launch. The launch of Apple Pay saw big banks such as Wells Fargo promoting it from day 0. Today, Apple Pay has established partnerships with more than 30 banks. Although Apple itself is a well-established brand, Apple Pay is something new and traditional banks are seeing it as a prominent influencer in the payments space.

Examples of such partnerships show how established financial players are seeking partnerships with challengers equipped with new technologies. Incumbent players were aware of the disruption from startups, but hadn’t realized earlier that the disruption would reach such a massive scale so rapidly. A change in attitude has emerged resulting in disruptive startups now being taken more seriously.

However, incumbents have been cautious in approaching startups for partnerships. For example, American Express works with partners in mobile payments, social networks and online retailing but still keeps a close check on the platform control, especially the access to data. But such incumbents do wish to embrace the business models that these startups bring and learn from the entrepreneurial ecosystem.

Disruption has become a potential threat to established incumbents and they are ready to work with new emerging companies to serve their customers’ needs. Companies such as Citigroup and Wells Fargo have gone ahead and established venture capital arms and accelerator programs to invest in startups that are developing tools for the financial industry.

The big wave of startup driven payments innovation is heading our way and it’s high time that incumbents look into the ideal decisions to share that bit of the spotlight.