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My business model is such a hard drug that I can't quit

The 1st credit card is 70 years old. But it’s business model is so interesting that it’s worth to take a look at it. Think about it for a minute Francois. You are in the 1950s. Grocery stores keep track of their customers’ credit lines in a big paper book. Banks have to manage physical distribution of money (ie stocking coins and notes in high street branches’ safes, which is costly and risky), so that their customers can get it back, when they need cash to pay in shops. At a dinner party, a few banks CEO spot an opportunity and appoint you, a promising Intrapreneur, to start Visa, then Mastercard. Now, how do you go to market? Well, on the Merchant side, you’ve got a simple story to tell: Hey Grocery shop, if you accept a credit card as method of payment, you’ll save on costs (credit book management), and we’ll take the risk if the customer defaults on their debt (ie we’d pay for them). And on the product side, you build a credit risk model. On the payer side, though, you’ve quickly spotted that Banks would be ideally placed to distribute your cards to their millions of customers: But how could you incentive them to do so? And in a creative stroke of genius, you come up with the dirty little secret of card payments.

  • Merchant will pay ~2% for accepting a payment by credit card, which will be funded by their cost savings (managing their book, chasing bad debt, ..). Lots of people don’t realise that, but it’s the Shop who pays for the “payment cost”, not the Customer/Payer.

  • Banks will then share this money (we’re talking about these 2% of the payment amounts) among themselves : ~80% will go to the “ issuing” bank, the one who gave the card to the customer who paid in the shop. And ~20% for the “acquiring” bank, the bank of the Merchant. And the card scheme (Visa, Mastercard, UnionPay,..), which is the business you are starting, will get some crumbles. Like ~2% of the 2% merchant fees.

So your story for pushing Banks to distribute your cards goes like that: Hey banks, issue these cards to your customers, and you will make 80% of 2% of everything your customers will pay (what a fantastic value proposition isn’t it, it’s almost as beautiful as a governmental VAT). And icing on the cake, if this payment method catches up, you’ll have less and less physical coins and notes to manage, which we know is costly and risky.

Roll forward 70 years, and I let you google the revenue, EBIDTA level, and market caps of banks vs card scheme: Not bad for tiny crumbs isn’t it :D

Banks now struggle to let go this revenue line, when they are undercuts by Fintech companies. In most of Europe, regulation capped these fees, so the pricing model is now a fixed annual subscription for owing a card (vs a free bank account, where your bank makes money in the background anytime you pay with their cards). This business model became a hard drug they struggle to get off. And a bunch of Fintech payments businesses are rubbing their hands.

Up to you now Francois: Can you think about an incumbent business model, that is such a hard drug that they can’t quit? If so, get in touch and I’ll peer you up with one of our mighty advisors, to help you explore if you could be on to a disruptive new business idea.

K̶e̶e̶p̶ ̶t̶h̶i̶n̶k̶i̶n̶g̶, Start doing.

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