The Bank of Uber? Really?

Frequently, we see articles and blogs about the disruption of businesses where the example disruptor is Uber or Airbnb or a similar platform company. In these cases, the business model is connecting a consumer with a provider and leveraging a platform that the disruptor doesn’t have to fund or manage.

But is this platform model really extendable to payments? Or, are we focused on the wrong type of disruptor?

In The Beginning, There Was The App. For platform businesses, the app is fundamentally all there is, other than simple bookkeeping and a little advertising. The fact that the app is all that needs to be built and managed is why these businesses are so tremendously profitable. Unlike Tesla, which has to build cars, or Square, which has to distribute terminals, companies built on the platform paradigm don’t do any manufacturing or manage any supply chains. They don’t even have employees, as they repeatedly tell regulators.

In a payments-disruption scenario, making the customer-facing part of the app would be easy. But, to implement the platform model, one would need a pool of free agents who are in the payments business and who are willing to process for the app at a very low fee. This way, the platform can add a surcharge and still be competitive. One would need a very deep pool of companies in the payments business to provide the excess supply that governs the suppliers’ prices and makes the platform business model work.

That’s one reason platform-model competitors probably won’t disrupt banking and payments. Another is the need for short-term credit, which is essential to smoothing flows in the payments business. This capital is usually supplied by a single large pool of payments receivers or a large base of depositors. I can’t imagine trying to crowd-source the float of each individual payment. And aggregating payments worth only a few pennies each would be hard to do cost efficiently.

By this analysis, the Bank of (name your favorite company with a platform business model) isn’t likely. Maybe we can stop flinching every time someone says “disruption” and cites a platform player as the example. If the paradigm doesn’t fit, don’t fear it.

Know Thine Enemy. For banking and payments, a more likely disruptor is a non-mainstream banking and payments company. Maybe it is a tiny bank in an out-of-the-way town that seems poised to become quite disruptive.

Here’s an example: Rather than trying to mimic a business model that only works in an environment that is nothing like the payments environment, CBW, a one-branch bank in Weir, Kan., is rebuilding an actual bank from the inside out using technology from the founders’ previous careers at Google and on Wall Street.

Banks like these are disrupting assumptions about what a bank can or should do, for example by hijacking the card networks to make instant payments from anywhere to anywhere. It shouldn’t be surprising that the principal technology provider at several of these banks is Ripple, another company that is disrupting banking from within the banks.

Is There a Lesson Here? Simply put, all disruptors are not cut from the same cloth. By now, there has been enough history of disruption in payments to begin to see patterns and draw some lessons.

I would propose that one important lesson is this: that simply because a technology or a business model disrupts some other type of business is not enough to make it a potential disruptor of payments. We should first ask if the way it is disruptive is something that would work in payments.

The disruptors of payments whose business model is a reengineered bank are showing returns of 20% to 40% with few assets and fewer employees. Given that fact, I would put my money on banks that are using technology to disrupt themselves. I would not back Silicon Valley elites who are trying to apply to payments something that may work great for ride-sharing or ersatz hotels, but isn’t going to work in banking and payments.

It is often the company that is not disrupting the rest of the economy but is simply doing our job better than we do that is the real disruptor. It’s not the technology that matters. It is the business model.

—George Warfel • gwarfel@wespayadvisors.com