The Future of Payments is Card-less (or why we are building Underpay)

This post lays out the ideas, beliefs, and vision that led me and my brilliant Co-Founder Melanie Asor, to starting Underpay.

TLDR: Open Banking is coming for cards’ lunch, and we want to help make that transition in e-commerce.

Money - The Lubricant of Commerce

Payments are the lubricant of commerce - an exchange [payment] of something valuable [money] must happen every single time you receive something “at arms length” [commerce].

At risk of offering (an unasked-for and third-rate) introduction to the history of humans exchanging stuff, I will start by saying only that any number of the sub-topics in this space represent a careers-worth of learnings of 1,000s of people.

Therefore, at Underpay we narrow our focus to the ‘exchange’ bit. More specifically, mass-market payments between customers and retail stores online [e-commerce].

We focus here not because money more broadly, or B2B & physical payments, are not worth working on, but because only by focusing on where we are best-placed to contribute we can hope to actually make a difference - within a time horizon that is measured by months and years, not decades and generations.

But I digress.. Shockingly, in 2021 the payments industry globally had revenues of $2.1 trillion. That is an incredible 2.2% of world GDP to essentially move records between banks’ ledgers (and I don’t want to discount the complexity of some transactions at all!).Why so much? Well..

Cards - A Digital Solution for an Analog World

In retail payments, cards solve a very specific, crucial problem for both buyers and sellers. As a buyer, carrying cash is not very practical, so, as a seller, you miss out on potential sales if cash is the only way to pay you.

Cards answer the question - how to make & accept a payment without exchanging physical money on the spot?

But, of course! I’ll give you a guarantee of some sort, issued by a party both you and I trust. I’ll walk off as a proud owner of [an item], and you know that you can exchange my guarantee for the money later. Add a bit of logic around how to correctly issue, accept, and redeem the guarantee, and you’ve got yourself a travellers’ cheque.

Notice that whether you have the money (just not with you) or don’t and need credit doesn’t really matter at this point - money is not being exchanged on the spot, it’s all credit. In fact, it’s kind of non-trivial to add an instant deduction from the balance of your account with that third-party.

For this to happen, paper had to be replaced with plastic, technology like magnetic strips, chip & pin, and NFC had to be developed, and bank records digitised. The crucial advantage was that you could now (1) encode digital information into the piece of plastic; (2) have terminals and ATMs that communicate that information back to the third party (card issuer) in real-time.This meant that you could finally leave your cash or chequebook at home and have instant access to pay with money in your bank account (or allowance in your credit account) wherever you want - either by withdrawing it as cash or paying at a terminal.

Card Networks are Born

Unsurprisingly, parties making payments rarely have an account at the same bank. For a seller to accept cards of customers from 2+ different banks, it would be somewhat unworkable (to say the least!) to open their own accounts at 2+ different banks and have 2+ sets of terminals to swipe the cards.

Given the sheer number of banks, there was enormous value in aggregating card issuing across them. In fact, that’s how both Visa and Mastercard came to be. Individual (or small groups of) banks created their own card programs, realised there was money to be made in allowing other banks into the network and eventually scaled to the point where they make more sense as standalone companies rather than units of the banks that started them.

To aggregate effectively, the card issuers need to build individual relationships with every bank - push data, perform reconciliations, settle disputes, negotiate contracts, work out the edge cases, cover losses when things inevitably go wrong (the real world is messy).

All of this requires fees, and not just for the card networks themselves. Everyone has a role, assumes some risk, and wants to get paid - the company running the terminal, paying bank, receiving bank.

That’s the cost of running a system that ‘just works’ for over 350 billion transactions per year (Visa and Mastercard combined volumes in 2020).

A Different Way to Pay

Turns out, there was an alternative payment system all along…

It wouldn’t be like the banks to incur lousy costs - that’s why when you send your mother money, you don’t use your card. All those actors would have to be involved and be paid. And for what? Unlike in a commercial setting, you know your mother’s account details. Unlike in a commercial setting, both her and you are prepared to go through some hoops to complete the transaction. Unlike in a commercial setting, you can be sure she’s not going to disappear with your money (the ultimate long con?).

For this, the banks kept the good old cheque and direct bank-to-bank transfer system running even as cards were invented. As technology advanced, this alternative payment universe improved and developed in parallel, for the use cases where cards were not necessary and incurring their costs didn’t make sense.

These days, you don’t have to write a cheque, of course. You simply go on your phone > log in to online banking app > key in the recipient’s account details > press SEND. Moments later, the money is there in your mother’s account.

No card is involved, Visa doesn’t even get to know this transaction happened. Obviously some kind of communication between banks does happen (e.g., “Faster Payments” in the UK), but it is much simpler in nature and it is completely free for both the sender and the recipient.

The banks have to take on the cost of running those connections because it is part of the service they provide. In exchange for free ability to transfer your money out to a different domestic bank, the bank gets to keep it for now and generate income by lending it out.

The alternative path your money took didn’t have all the bells and whistles of a card network with auto-expiring authentication, acceptance logic, MCC codes etc. But it works! Your money from bank A appears in your mother’s account at bank B, within seconds.

Open Banking - A Digitally Native Way to Pay

Open Banking, in essence, is your mobile banking app as a set of APIs. At some point, regulators realised that banks carry too much monopoly-like power by having exclusive access to your data. For example, your existing bank can offer you a credit card limit increase first because they know instantly when you got a raise. Or you might be in a sub-optimal investment account because your bank is the only one that can automatically allocate exactly 50% of whatever is left in your account on the 25th of the month.

To change this, the government mandated the banks to create a way for consumers to give the ability to perform basic account functions to third parties on their behalf. E.g., check account balance, view transaction history, transfer money. All in a secure, customer-centric way.

It’s like the API boom in tech in mid-2000s but 10 years late because… banking 🤷‍♂️

For payments, this is revolutionary - you can now send money directly to a seller’s account, like you would to your mother but without spending minutes filling out all the account details and shuffling between apps on your phone.

A third-party (us) will do all of that for you based on the context (e.g., basket information at an online store). You only need to authenticate your online banking (Face ID) and press “SEND” to confirm. [watch a demo here]

The benefits over cards are multiple:

• Much much cheaper vs cards - the actual payment is (completely!) free. Only software costs to build and maintain those journeys. These costs are not proportional to transaction value and decrease over time.

• Much safer - every single transaction is authenticated with mobile banking verification & no card details ever exchange hands.

• Seller gets the money immediately - card payment processors may transfer the money to the seller’s bank account up to a week after the payment was actually made (minus all the fees).

After many years of development and improvement (turns out government-mandated systems are not eagerly adopted!), the APIs are now robust enough and the journeys are slick enough for this technology to credibly challenge cards and start scaling and handling mass-market volumes of payments.

According to UK Finance, payments via Open Banking grew from 320,000 in the whole of 2018 to 2.5 million a month in 2021. That is a 9,275% increase! And volumes continue to grow steadily at 10% MoM.

That’s still tiny in comparison to cards (2.1 billion a month), there are many improvements to be made, and you probably haven’t made a payment like this yet - but blink, and it’s going to be right here. The benefits and the cost savings are just too huge.

It is also a trend that extends beyond the UK (who are the leaders). PSD2 in the EU is almost on-par, with many countries around the world like Brazil working on bringing the benefits to their markets. The biggest western market, the United States, is slow but will also get there.

The Future of Payments We Want to be a Part of

Early-stage startups are ‘propositions’ about how the world in the future may differ from now.

The best ones are contrarian in nature, not immediately obvious and, if proven true, represent a significant shift from the current way of doing things.

Here is ours:

5 years from now, card-based payments will be reserved to the pockets of transactions that are particularly hard to do via the industry-standard method of bank-to-bank.

That is, card payments will become somewhat similar to cash nowadays - an annoyance for most commerce to be backwards-compatible with, yet super valuable for some very specific types of transactions and very difficult (and probably undesirable?) to completely do away with.

Underpay’s mission is to help make this happen.

How Do We Contribute to This Vision of the Future?

Underpay is based on a deep understanding of e-commerce, carefully acquired over months of focused research and having 100s of conversations with people in the industry:

Retail e-commerce is different from other transactions. It’s fast, immediate, emotional and impulsive. It is all about acquisition, conversion, retention, drop off. Metrics, KPIs, throughput, funnels. And the buyer is the undisputed king of this particular jungle! (countless alternatives are a mere click away)

The seller-focused benefits of Open Banking (primarily, lower processing fees and instant cash flow) just won’t cut it to penetrate e-commerce in any significant way.

Best case scenario: Customers will see the option at the checkout, not find any benefits for themselves and proceed to pay with their tried-and-tested one-click Apple Pay.

Worst case: Customers will see an unfamiliar payment option, get confused, lose trust, and buy from a competitor.

What we do is apply Open Banking in a different way, designed specifically with e-commerce and mass market retail in mind.

Instead of the retailer keeping all of the savings of Open Banking (a strategy that doesn't work anyway), we pass some of the margin on to the consumer, directly incentivising them to select Underpay at checkout.

That is, for the first time you don’t need to engage in the credit system if you just want to earn rewards. Rewards on purchases, the holy grail of any current account (hi Chase 👋) - but for any and all current accounts out there. And not a promotional period.. forever! No coupons codes, weird cashback-tracking shopping windows or 14 day hold periods either - just see our button at checkout, pay with your existing bank account, get valuable points instantly into your Underpay account.

We are bringing rewards to the 50% of e-commerce transactions that happen on debit cards. Saying to the people unwilling or unable to participate in the debt-fuelled credit card rewards schemes that they can also be savvy with their purchases and get some value back.

We hate that you need to play the credit game when you have the money just because it is the “savvy” way to pay, and sympathise deeply with people who are underserved or completely excluded from accessing these benefits.

Underpay exists to change that.

Our vision is that Underpay will become the consumer-facing brand that brings Open Banking payments to mass market in e-commerce by breaking credit cards’ poisonous monopoly on purchase rewards.

What About the Sellers?

By adding the Underpay option to their checkout, we enable our partners to delight their customers at no extra cost, increase checkout conversion rates, get exposure to our consumer audience and target specific segments of our users with custom offers.

Keeping customers happy, moving them through the purchase funnel and attracting them back for re-purchase are key components of success in e-commerce - and we help our partners do just that.

What the Future Holds

Starting an alternative payment network is pretty tough. Visa, with 80 million locations worldwide, has somewhat of a head start…

Our plan is to get in the game with our unapologetically consumer-first vision, first with tens of launch stores. If we delight our customers, there is no reason we can’t grow to hundreds, then to thousands, and eventually millions. You’re never as far away as when you start.

We will do that by creating the most inclusive and accessible purchase rewards programme in the UK that works for every consumer - not just for those with a credit card. And on the seller side, a payment method whose number one priority and incentive is to help your business grow - not collect a sales tax.

And, most importantly, we will be very attentive to the kinds of opportunities that present themselves only to those who try.

Follow our journey by signing up to our waitlist, or reach out directly on LinkedIn (Dima, Melanie) to chat!

Have an amazing day 💜

Dima