The Commodity Effect

Everyday payments products (e.g. credit cards, checks, remittances, etc…) are becoming increasingly difficult to differentiate. In a free market, as the basic product in an industry becomes more commoditized, pressure from competition, regulators and technological advances will inevitably break apart the value chain. Each segment of the chain comes under attack by new market entrants leveraging disruptive new advantages. While the Energy industry is certainly the poster child for such a shift, Mobile Telecoms arguably experienced even more growing pains in their transition.

Energy: 15 years ago, under pressure from legislators and rapid technological innovation, new competitors forced apart the energy industry into 5 segments – extraction, processing, wholesale, delivery and retail. 5 years later, the gas sector further separated, followed by electricity as delivery split into transmission (big pipes / wires) and distribution (small pipes / wires), and Retail sub-divided by customer base (big business vs. mass market consumers).

Mobile Telecom: More recently, new regulations, competition and technological advancements in the global mobile telecom industry led to standardized, interoperable and essentially commoditized pipes over which data could be transmitted. Unable to differentiate between basic mobile data / voice packages, new players like Apple and Google built over the top services, without having to make any investment in new infrastructure, thereby disaggregating the infrastructure layer from the application layer.

The global payments industry is in the middle of a similar paradigm shift that will lead to a fundamental disaggregation of the payments stack (incumbents retaining the base infrastructure layer) and myriad opportunities for new market entrants to compete at the application and platform layers.