The Fifth Paradigm

In my previous posts about Payment Paradigms, I had articulated three broad based mobile payment paradigms.

  1. Carriers or MNO Based
  2. Payment Network Based
  3. Financial Institution based

And then, there was also the Fourth Paradigm in the form of Square, PayPal, Boku, Google Wallet, OboPay etc. These are all disruptive in that they are essentially app-based mobile payments schema’s that take advantage of existing infrastructure and strategic partnerships with either the MNO’s, Payment Networks or Financial Institutions.

That said, there may be a Fifth Paradigm.

And the Fifth Paradigm could be a Merchant based paradigm.

Retail is tough business. Margins are wafer thin and profits are even thinner. If you think about the retail business, all the retailer is doing is to provide a store front for various consumer products such as apparel, electronics, books, furniture, home appliances etc. Products, those are essentially manufactured by someone else. They are basically resellers. Depending on their size, the retailer gets a discount from the manufacturer. The retailer then bears the inventory risk and merchandises the product. Manufacturers are often asked to share merchandising fee(s). Long story short after all the bills (wages, insurance fees, rents/leases, warehousing/freight, infrastructure costs, marketing/sales expenses, interchange/banking fees, etc.) are paid, if there’s money remaining, the retailer gets to keep it. Retailers look for ways to cut down their variable expenses to help their bottom line. For example, New Jersey’s Bergen County has a Blue law that does not allow for retailers to conduct business on Sundays. This actually has helped the retailers since the retailer does not have pay for wages and infrastructure costs on Sundays. It also helps that Sundays are typically slow days for retail.

The point, being that the retailer will take any bone thrown at them that’ll help them save money. The retailer has always had a tenuous relationship with the payment networks and their interchange fees. There’s no relief there.

But there can be some relief in the form of the Fifth Paradigm. What if the retailer develops their own app that enables mobile payments? That is entirely possible. The large retailers certainly have the resources to do so. Retailers such as Target, Wal-Mart, and Sears have sizable IT departments and corresponding IT budgets. Yes, it will be an investment in the beginning, but it could payoff in the long run.

For example, a Target payment app could help foster loyalty among customers and it could serve as an excellent platform for targeted advertisements and deals.

Apart from all the fluff like customer loyalty and so forth, this has the potential of helping the retailer bottom line. If the retailer choses to partner with, say the carriers or perhaps a Square like phenom, chances are that they could negotiate a better interchange fee. And if the retailer drives more payment traffic to their mobile app vs. the POS, it will improve their bottom line and take away some fees from the payment networks.

So, this does have legs. It also could also be very strategic in that the retailer could use the app as a bargaining chip to get some broad discounts on the interchange fee. Just the threat of developing a compelling and captive app, could increase the retailers leverage.

If it is not already happening, I suspect it will soon happen. The Fifth Paradigm does present some interesting opportunities for the retailer.

I’ll rest my case here. What do you think? Is this a plausible scenario?

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