Payment Disintermediation



The term "disintermediation" (dis-intermediate-ation) has been in use since 1966. However, the meaning of the term has shifted depending on the parties who were being disintermediated.

  • When Apple took just seven years to dominate the global music market, they were disintermediating the rest of the global music retail industry.
  • Google took just 18 months to disintermediate 85% of the market cap of the word's GPS vendors after launching Google maps.
  • Alibaba, China's equivalent to Amazon and E-Bay became a $16 billion lender in less than three years and China's largest seller of money market funds in seven months.
  • PayPal is now the number one payment method in some countries.
  • Starbucks is using its own loyalty cards to disintermediate banks from the payment system.

Banks are having particular challenges. Non-banks are capturing increasing shares of the banking value chain using digital innovations to erode connection between payments and banking.

  • Google and PayPal have introduced a plastic debit card.
  • T-Mobile launched a checking service with a smartphone app and an ATM card.
  • Wal-Mart's strategic alliance with American Express launched a prepaid debit-card-like account and captured more than a million customers in less than a year.

New entrants to the payment system are posing an increased threat to banks by creating distance between banks and their customers. To maintain a place in the payment system, banks cannot rely on just providing accounts and access to funds. They have to begin providing services that help customers conveniently manage their money and keep themselves in the eye of the consumer.

The present non-cash payment process involves multiple transactions. The system is clumsily adapted from outdated data transfer principles and security concerns. The process goes from:

  1. consumer to merchant,
  2. from merchant to a "merchant acquirer/sales organization,"
  3. to a "payment processor,"
  4. then to an "issuing bank,"
  5. which returns communication with the "payment processor,"
  6. (the interchange between the "payment processor" and the "issuing bank" is repeated just after the customer receives the purchase)
  7. which returns communication to the "merchant acquirer,"
  8. while the "payment processor" also issues data to the "merchant's bank."
  9.  The merchant then accepts payment and releases the purchased goods or services to the customer.

New simplified automated retail systems are designed to disintermediate the retail market, making a simple three-way process between the merchant, the consumer, and the bank to displace the complex multiparty credit card system.