If you are building a two-sided commerce network or a supply chain finance company (and who isn’t doing the latter these days?), you will benefit from understanding the history and economics of the credit card and procurement-card (p-card) markets.
You can learn about the credit card market by reading Paying with Plastic, reading the prospectuses of Visa and Mastercard, or reading the financial statements of the public merchant acquirers, such as Global Payments, First Data (private, but still publishes financials), and TransFirst which just filed for an IPO.
Among the lessons you will learn from the credit card networks:
- How to solve the “chicken and the egg” problem
- How to massively enable “suppliers” (merchants)
- How much mature networks get paid for standards setting and providing the commerce rails (20-30 bps)
- How much mature merchant acquirers (supplier enablers) get paid for providing enablement technology, training, and taking on a little solvency risk (10-50 bps)
- How much issuing banks subsidize the use of their cards by buyers
- How many networks can survive in the long run–not many
The P-card market, the B2B cousin of the credit card market, is one of the original forms of supply chain finance. It is a little harder to study than the consumer market, but is well worth the effort. The best sources of information on p-cards are: RPMG Research, NAPCP, as well as literature from American Express, USBank, and the other large P-card issuers. The procurement card industry processes about $200 billion in spend annually and generates net fees (after rebates) of about $2 billion, so it is small relative to credit cards, but nothing to sneeze at.
The p-card industry perfected the art of subsidizing the buyer by providing corporations with rebates in return for spend. The industry has struggled to make supplier and transaction enablement as easy as in the consumer world (partly due to the expensive fee structure–2%+ 45 days early payment), but recently the industry has tried ways to gain share in larger dollar size transactions, making p-cards even more a part of the supply chain finance game. In fact, one way to view the current trend in the supply chain finance market is as an attempt to extend credit to the large, “middle class” of transactions and vendors.
Banks have traditionally focused their programs on the gigantic buyers and suppliers, while P-cards mop up the smaller transactions for these same credit-worthy buyers. Figuring out the right legal structure, rules, rails, and funding sources for the vast middle of the supplier market and higher credit risk buyers will take some thinking. Much of that thinking amounts to adjusting the approach successfully modeled by the credit card industry!
- big data,
- a great transactional platform,
- a legal structure that allows “click-through” participation
- a smooth supplier enablement program and
- access to competitive, elastic financing
and someone will create a giant business. So far there are some contenders, but no one who has solved all of the pieces of the puzzle.