Ever wondered when you swipe your shiny steel framed Black Platinum card, how exactly does money travels from your account to the merchant’s account? What happens behind the scenes when you pay for a Boba tea for your friend, and she, in turn, decides to pay you using Venmo? Or when you pay your rent using a Check? Or When you get an ACH message saying your salary has been credited to your account? Or What is this new thing called Bitcoin that everyone seems to be talking about?
Of course, all these are forms of payments, but what is not apparent here is all these forms work differently and carry their own unique characteristics. Anything we buy or sell is attached to either taking or making the payment for the services received. Payments is such a critical element of our lives, but a very few understand how it all works. Most business schools have different classes on Marketing, Accounting, Financial Modeling, Behavioral Psychology, Corporate Governance, Information Technology, yada yada yada. Why doesn’t schools teach us about the payment systems?
I think business schools are missing out on both the incoming students who would want to take advantage of learning about payments systems and companies who would want to hire graduates with payments skills.
Here are three reasons I think every business school should introduce a course on payments:
- Companies are looking for graduates with payments skills – There is a ridiculous amount of need in the industry for payments talent. Afterall, there are major payment companies such as Visa, Mastercard, PayPal, American Express, and to be honest, any other big financial institution would want to hire students with these skills. Moreover, not only financial services, but a majority of technology companies are trying to hire payments talent. Some major names include Uber, Google, Apple, Stripe, Square, Amazon, my own employer – eBay – where we are building a new payments infrastructure to help buyer and seller transact more fluently on the platform. Risk management is another area where companies require people to have good grasp on the know-how of payment systems. I bet every major e-commerce platform have its own risk mitigation strategies and people with payments skill can hit the ground running from day one on such roles.
- Demand – Supply arithmetic – I’ve been working in payments and risk domain for some time now. Recently, I’ve had the opportunity to attend two-day Payments Bootcamp organized by Glenbrook Partners – a payments focused consulting firm. Obviously, company was willing to pay a stiff price for the employees to attend a two-day workshop organized by a professional consulting firm. Not to mention hours not spent on actual work while attending the workshop. Clearly, companies see this as an imperative skill development training for the employees. Hence, we can conclude companies are looking for students with payments knowledge. Students are inclined to learn these skills as well to give them a competitive edge in the market. Addressing this demand and supply gap creates a win-win situation for everyone involved: the schools, the students, and the corporations.
- The X-factor – Business schools compete on so many different metrics. By offering payments related courses, business school can distinguish themselves with most other schools. One of the most important among those metrics is employment rate after graduation. If business schools can tout companies that their graduates have the know-how of payments systems, it acts as a cherry on the pie. Of course, I’m not denying importance of other course work, but having this basic knowledge can give students advantage during the interview process. It always helps to impress the interviewer, if you know when you pay $100 using your credit card, on average only about $96 goes in the merchant’s pocket. Rest of the money is split between acquirer bank, issuing bank, processing terminal, card network, and payment service providers (PSPs). Now, for each type of payment method the math is slightly different. It is probably a topic for another article, but the importance of understanding each of those not only makes everyone financially prudent but it is a highly desired skill in the industry. More detail on that below. Simply put, business schools can leverage Payments101 course to hone their students to become more appealing to employers.
So, why doesn’t business schools teach us about payments?
Well, I’ve a good and bad news for you. The bad news is – it is complicated, and most of the information is obscure and ever changing. The good news is – I’ll try to decipher some of these questions here.
Below are some of my learning from the bootcamp. Unfortunately, I can’t share some of the specific images and diagrams that were super helpful in explaining the concepts because of copyright. Sorry! But i’ll try to cover some basics.
Core Payment Systems:
Generally speaking, every country has some core payment systems. Each of these have their own use cases and unique value proposition.
1. Cash: We’ve all heard the phrase, “Cash is King”. It is true in a way that Cash is the most versatile form of payment, doesn’t matter where you are in the world. It is difficult to carry, but good for small transactions.
2. Cards: Credit/Debit Cards are more common forms of payment in the developed world. Users just swipe the cards and don’t have to worry about carrying the cash. Germany and Italy are probably two exception here where cash is still predominantly used.
3. ACH: ACH is great for large value transactions such as crediting your salary. It is ultra-low-cost inter-bank transfer method. ACH is settled in batches and are not real-time. Mostly, it takes 1-2 business days to settle and ACH transaction. A normal ACH transfer costs about $0.006 for a standard $100 transaction. ACH transactions only account about 10% of transactions by number, but ~60% of money in the US moves through ACH (excluding wire transfers). Hence, the average transaction size is much larger than say a transaction using cash. ACH transactions are also reversible, so it protects consumers from any kind of fraud.
4. Checks: Good old-fashioned checks are still prevalent for certain use-cases. It is easy to use. All you need to know is other person or company’s name, and you are good to go. You don’t need to worry about back account number, routing number, bank branch code, etc.
5. Wires: Wire transfer is the mode of payment for really large amount transactions, generally in million and billions of dollars. Wire transfers are irreversible, so once the payment has been received, merchant can be absolutely sure of the money. It is the largest form of payment by dollar amount in the world.
6. Faster Payments: Payments methods such as Zelle in the US, IMPS in India, and IBPS in China are some examples of faster payment methods. As the name suggests, these methods provide instant transfer of money, and are generally used of relatively low dollar amount transactions.
Stakeholders in Payments Ecosystem:
Between initiation and fulfillment of a payment transaction there are multiple stakeholders and companies using various business models to provide different services. Some of the major stakeholders are as follows:
1. Consumers: Want convenience and financial return.
2. Merchants: Want to get paid and reduce costs.
3. Banks: Care about relationship and cross-selling of products.
4. Networks: Only care about volume of transactions. Some notable networks: AMEX, Visa, Mastercard, JCB, UnionPay, Discover
5. Processors: Works for banks, and provide services to bank’s customers on behalf of banks. Example: FirstData, Fiserv, FIS, The Clearing House.
6. Payment Service Providers (PSPs): Work for business and help streamline payments. Example: Stripe, Adyen, Square, BrainTree.
Each stakeholder in the ecosystem takes a cut every-time you swipe a card, and that economics is very interesting. Visa and Mastercard have operating margin of ~60% i.e. on every $100 in revenue, these companies make a whopping $60 in profit!
No wonder Stripe, Square, and Brex are unicorns.
These numbers are unheard of and are highest in any industry around the globe. That’s what makes payments an interesting field to learn.
With every company jumping in payments, it will be interesting to see how the payments landscape will change in next few decades!
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