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.)
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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