Friday 9 May 2014

Why Alibaba's Alipay And PayPal Will, And Should, Destroy Physical Banks (forbes.com)

Who needs banks? I’m not questioning the basis of our financial system—I’m talking about  physical (high cost, low service) bank branches.
  
Banks these days are just big databases—digital depots where our paychecks flow in electronically and out quickly to cover credit card and utility bills. Simply put, banks are just expensive and antiquated payment processors—especially since stashing cash in a savings account earns you zero interest. As for checking accounts–how many checks do you write a month? The banks that pay the most interest on savings are online-only banks (GE Capital, ING Direct, Ally) that can afford to do so only because they don’t have to operate branches.

Someone will truly digitize the entire experience—and when they do, the product will look a lot like China’s Alipay. Controlled by Jack Ma  and other Alibaba executives, the PayPal-like company processed $519 billion worth of digital payments in 2013 (Paypal processed $180 billion). Alipay offers a lot more than easy e-commerce payments. An in depth Wall Street Journal piece outlines how  the Alibaba’s payment platform is morphing into all-in-one banking tool:  a savings bank, wire service and investment house. Most importantly, it’s all done via mobile device. Load cash into you Alipay app and you can buy things online and in brick and mortar stores, send money to friends, make cross-border transactions, invest in stocks, and earn a healthy interest on your balance (at 17 times more than the going bank rate). Alipay turns your iPhone into a financial Swiss Army knife.

This broad, mobile service doesn’t exist in the US, at least not yet. And when it does arrive, I bet it will come via PayPal.

When I spoke to Elon Musk and David Sacks this February, they were calling for PayPal to transform itself into something that looks very much like Alipay does today. Musk and Sacks predicted that if PayPal became a full-service bank it could eventually hit a market cap worth $100 billion. “If you allowed PayPal to pursue its destiny there are moves it could make to become the largest financial company in the world,” Sacks, PayPal’s former COO, told me over the phone.

But to pursue this destiny, PayPal needs to offer all the services of a bank: accept direct deposit, offer checking accounts and, most importantly, pay interest. If that happened you could combine the simplicity, security and wide-reach of PayPal with easy banking and enticing interest rates (since PayPal won’t have to spend money running physical branches, it can offer the highest interest rates around.)
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PayPal once did pay competitive interest on money in held in its accounts. It stopped a few years back. Now there is little incentive to keep cash in your account—better to fund PayPal purchases with a Visa and reap the reward points. But PayPal makes money when you have cash in your account (it charges sellers about 3% the total transaction amount). When you fund your PayPal account with a credit card, PayPal must turn around and pay Visa or Mastercard a vast majority of the fee—that’s why Square is rumored to be in trouble. But when funded with cash, PayPal keeps the entire 3%.


PayPal’s new president David Marcus is not standing around–he’s revamped PayPal’s design, mobile app, customer service and is making a big push in providing credit (Bill Me later) and moving mobile payments into physical stores (PayPal Beacon). It will be interesting to see if, and how, he get’s PayPal back into the banking business. If PayPal doesn’t make the move, someone else will.

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