How Long Will the Visa & MasterCard Domination Last?

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Visa and Mastercard have dominated the payments industry for decades. In a 2015 Nilson Report, Visa and Mastercard represented more than 82% of the global market share for transactions worldwide. Visa and Mastercard charge a transaction fee on each transaction taking place through their cards. They also partner financial institutions and charge sizeable foreign exchange fees on global transactions.

The first credit card was issued by New York’s Franklin National Bank for loan customers way back in 1951. It was issued as a symbol of trust for credit worthy customers. Today the card industry has become more cut throat. Trust became a secondary issue compared with profit. After all, credit card loans are revolving industries with high profit margins for consumer banking. Financial institutions and payment systems have worked together and charged the consumers interests rates and a host of other fees.

For decades, payment system firms enjoyed an undisturbed market free from disruptive forces. Unlike the short messaging system (sms) industry which was disrupted by data messaging applciations, payment system firms have endured the onslught of payment applications such as Square and Paypal. The rise of mobile payments startups may well challenge the traditional card payment system. Indeed some startups offer card-less convenience as well as attractive data analytics for merchants.

And yet, Visa and Mastercard continue to grow their topline revenue. Given both new and traditional forms of payment are growing, perhaps there may be a complementary relationship between the two. Unlike the Uber versus black cabs in London, mobile payment applications are not necessarily disruptive to the payment ecosystem.

Online applications such as Paypal allow users to add credit cards as well as top up an e-wallet directly from banks. Many users continue to use credit cards as a complementary service to the new wave of payment applications online. After all, a standalone system is another form of security for suers. Users can always cancel the card once they feel that Paypal or another payment application has initiated an unauthorised transaction. For many of these users, convenience is the winning factor. With mobile applications, payment becomes a quicker and more enjoyable process. The 30 second wait for the POS terminal to dail up to the network is long compared to the Visa paywave transaction which can take mere seconds. When users add these cards into a new application such as Apple Pay or Liquid Pay, the transaction can be done in a matter of seconds.

For many mobile applications, payment is the first step. Alipay started with payments then moved into investment products, microfinance and trade. Payments bring in the critical mass. Today, users do far more including trading stocks. If they could top up their stock brokerage account, pay interst and commissions, select robo-advisors all within the same application, might more defect to such applications? Mobile payment applications might just be the start of a smarter financial ecosystem.

The victims of the disruption may emerge only in later phases of this growing market in mobile payments.

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The Tech Correction is Coming

The NASDAQ index is up to 5,000 points right now, the culmination of a fantastic seven-year run – during which it has tripled in value. The only other time that it reached this level was before the dot.com crash in 2000.

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What has fueled it? Venture Capital funding. In the past four years, global VC funding has gone from just under $50 billion to $100 billion. It is not just the amount that is increasing, but the sizes of the deals are getting larger as well.

The number of unicorns, private firms with valuations greater than $1 billion has exploded during this time frame as well. There were only 4 unicorns in 2009 and by this year, there were 124 with a total valuation of $468 billion.

The only problem is that most of the unicorns are losing money. A taxi-hailing app, Didi Kuaidi that dominates the Chinese market raised $3 billion in VC funding this year. Cheng Wei, the company’s CEO proudly stated that the company has no profit plan within three to five years. He calls his own company, “the internet start-up that has burnt the most money.”

CNN Money has stated that the e-commerce site Fab.com, an ex-unicorn has mass layoffs before it was acquired earlier this year. The same happened with Evernote, who even closed three of its global offices. Even Mark Cuban has said, “There is no liquidity for these investments.”

By the end of 2016, a correction will occur. Tech stocks will tank and the broader market will suffer. Venture capital funding will disappear and hundreds of thousands of people will lose their jobs. No, it will not be good – but there will be some good outcomes.

First, it will level the playing field. No more VC funding and high valuations for unsustainable businesses who are rewarded for unproven strategies and questionable decision-making. In the mean time, rational markets are being distorted and traditional companies make poor business decisions to compete. We need to reduce this inequity.

Valuations will fall back into line. It doesn’t matter what the valuation is if there is no way to turn a profit. I’m pointing to companies like Snapchat that are valued at $12 billion with 100 million users and barely make any revenue.

The number of tech startups will trickle. Legacy companies with fundamentals and sensible strategies will have an opportunity to attract younger generations of tech savvy managers and executives.

Smart companies are building a foundation of digital business agility so that they can quickly adapt to this upcoming market turbulence. Prepare by digitizing processes, building digital platforms, up skilling workforces and incorporating digital transformation into your strategy.

 

Disruption in Indian Banking

download (3)Five weeks after Kolkata-based Bandhan Bank Ltd began operation, IDFC Bank quietly launched in Mumbai. Previously, the banks fought it out with two dozen contenders to get the Reserve Bank of India’s in-principle approval a little over a year ago. This is besides the fact that the bosses of both the new banks, Chandra Shekhar Ghosh of Bandhan Bank and Rajiv Lall of IDFC Bank are not bankers, they are running their banks more differently than you can imagine.

Bandhan Bank began operating with 2,022 doorstep service centers with 501 branches and 25 ATMs all across India. One-third of their branches are in rural areas and unbanked pockets. However, in the past few weeks, it has increased its branch network and substantially increased their customer base. Bandhan plans on continuing to serve this segment of the market and add small to medium entrepreneurs to its loan portfolio. They don’t want to dabble in corporate loans for now, but will collect deposits from all, including high net worth individuals and corporations.

In contrast, the IDFC bank is aiming to be a smart corporate bank. It began with 23 banks including eight in Mumbai, New Delhi, Bengaluru, Kolkata, Chennai, Ahmedabad and Pune offering corporate and wholesale banking products. The remaining 15 branches are in unserved areas. IDFC’s focus is using state of the art technology to make transactions easier.

There is a new wave of competition in Indian banking and it will continue to intensify. In the past 20 years, 12 new banks have been created, but not all of them have survived. Just in the past seven weeks, two more banks have appeared. In the next year, we can expect to see many more. Both banks are challenging the high street banks to redraw their strategies. They have to take note of Lall’s passion for technology. Some banks have already made big moves into rural India to fight Bandhan’s expansion.

The story doesn’t just end here. More than four foreign banks have approached RBI for local incorporation. Once they incorporate, they can open more branches and buy out weaker banks. RBI could also allow for some strong urban banks to convert themselves into commercial banks. Most importantly, banking licenses for universal banks and specialized entities should be in healthy supply.

Get ready to see huge disruptions in Asia’s third largest economy consisting of Rs.90 trillion. Let’s sit back and watch small banks fight pitched battles with big banks for locations and local incorporate banks lure depositors. Sophisticated corporate and personal banking products are coming to India.

A $15 Minimum Wage – Who Gets It?

The campaign for a $15 minimum wage in New York has gained incredible strength this year. But even supporter of the increase are wondering how high the wage can rise before it will begin to reduce employment and hurt the economy…

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A wage board in New York made a strong case that it would make sense to pay fast-food chain workers $15 an hour in New York City because of the high cost of living there. However, cities with lower costs of living are another case – of which the age board suggested that the increase would begin in 2018 for New York City and not for elsewhere in the state until 2021.

Economists are using the ratio of the minimum wage to the wage of workers in the middle of the income distribution or median wage to gauge the impact of the minimum wage increases. The higher the ratio of the minimum to the median wage gives a greater the boost to workers.

However, with that higher ratio, comes a greater risk of job losses. There are few historical examples of increases that are more than 60 percent. But, there is some evidence that cities have managed increases when the minimum wage is 50 percent of the median, even a little higher. Though, economists are worried about what a 60 percent range increase or higher could mean – possible significant job losses.

A few European countries had minimum to median ratios between 50 to 60 percent and they did not show many negative effects. Some are comparable to higher unemployment rates to the United States such as France and others, like Germany do not. What about other cities in the United States?

San Francisco and Seattle already have $15 an hour minimum wage laws. Washington may be implementing it next year, which has a median wage of $24.58, making a 65 percent difference in the wage. Other cities such as Minneapolis, Philadelphia, Chicago, and Detroit are around the same standing.

For a city like Detroit, the figure might be slightly incorrect. The high ratio masks the high unemployment or low labor force participation among people who want low-wage jobs, but can’t get them. If those jobs did exist, they would drive down the median wage, but they don’t. Since Detroit isn’t a prosperous city so there isn’t a demand for low-wage jobs. Thus, all the jobs that they do have pay higher.

It makes sense to single out prosperous cities like New York City or Washington where there is a demand for low-wage jobs, helping to eliminate inequality. Though, we will have to wait and see New York State’s ruling.

North Korea’s New Time Zone – Is It a Big Deal?

Korea announced on August 7th that it will create its own time zone when it pulls back its current standard time by 30 minutes. The switch to the new time zone will occur on August 15th – the 70th anniversary of Korea’s liberation from the Japanese at the end of World War II. The establishment of “Pyongyang time” will be8.5 hours ahead of GMT instead of 9 hours ahead like South Korea and Japan.

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“The wicked Japanese imperialists committed such unpardonable crimes as depriving Korea of even its standard time while mercilessly trampling down its land with 5,000-year-long history and culture and pursuing the unheard-of policy of obliterating the Korean nation,” is the reason given by the North Korean Central News Agency.

It is believed that this is an attempt for young leader, Kim Jong Un to bolster leadership and gain popularity by using the anti-Japan, nationalistic sentiments. A large majority of Koreans, young and old and on both sides of the border still has bitterness against Japan over Korea’s colonial occupations. During the war, hundreds of thousands were forced by the Japanese to fight as soldiers, work as slave laborers or serve as prostitutes.

Even though this is North Korea’s political jab at Japan, they are not the only nation to have anomalous time zones. Nepal is one of them at 5.45 hours ahead of GMT and 15 minutes ahead of Delhi. In 1956, Kathmandu adopted Nepal’s time zone in 1956 to balance its involvement with western and eastern worlds.

As recent as 2011, Samao didn’t change its time zone, but its date, skipping December 30th and jumping a day ahead to December 31. The move was economic to synchronize Samoa’s dateline with that of New Zealand and Australia, its two primary trading partners.

In the end, there is no governing body for allowing or banning time zone changes, so for now they are accepted by the world. Any sovereign state can make their own changes for political, economic, or any other reasons possible. Until it becomes a problem, most likely, no one will step in to say this has to end.

However, this will still be a nuisance for South Korea. Unification Ministry official Jeong Joon-Hee said, “In the longer term, there may be some fallout for efforts to unify standards and reduce differences between the two sides.” For a nation that is already lacking friendly relations, North Korea is further distancing itself even further.

In Today’s Economy, What is Corporate America Doing With All This Cash?

According to a FactSet analysis of S&P 500 companies, the collective total of cash reserves in corporate vaults for US nonfinancial companies reached a historic high $1.4 trillion during the fourth quarter. This total is nearly double its value from 2006, which was an estimated $820 billion. Quite naturally when you hear these figures, it would seem fair in asking what these companies are doing with so much cash in reserves.

Many would think it makes sense that these companies should give the economy a boost, right? Go on an economical spending spree so to speak. But not so fast. While it may seem like the most logical answer would be to take the funds and attempt to distribute them as far as they might reach, it’s not that simple. Corporate America faces a few dilemmas with these large cash totals. While of course they would like to kickstart job creation and invest in major projects for the future, the courage to spend isn’t there, but more importantly neither is the ability.

Source: Moody's

Source: Moody’s

One reality is that the cash reserves isn’t all money amassed from profits earned by the corporations. Quite a bit is money that has been borrowed. Alongside the $1.4 trillion in reserves, is a whopping $4.8 trillion in debt. Over the course of approximately six months, companies increased their cash reserves by more than $30 billion. However, during the 12 months that followed this increase in reserves, these same companies increased their debt by more than $201 billion. According to an interview with Richard Lane, senior vice president at Moody’s, “… companies increased their debt by a factor of six relative to cash growth.” Another important reality is where these reserves are located and the impact of movement. An estimated 60 percent of the cash reserves is located outside of the US and bringing it back over would mean being subject to as much as a 35 percent tax. This action alone would decrease their total reserves by nearly one-third.

The bigger picture is what the American corporations need to do with their cash reserves, but essentially aren’t going to be able to do. At least not to the extent they would prefer. They would like to increase their spending, create new jobs, invest in research and massive infrastructure updates. These are the actions that would spur growth and generate earnings, increasing their odds of reaching financial goals and most importantly keeping both their shareholders and stakeholders happy. Unfortunately, what’s most likely to occur is the cash reserves will be applied to the debt owed and odds are high that more money will be needed to pay towards the debts, leaving the American economy to foot the remaining bill.