I recently saw a very well backed fintech unicorn exclusively promote an article linked to the pricing of a competitor, highlight it, give a really complicated explanation, couple it with a narrative that was not entirely true of said ‘competitor’ and then provide no explanation as to why such price topic was relevant. I can only assume that it was to simply jive at their competition. It was a strange approach, to say the least… And let me tell you why.
People have been buying things since the turn of time, not because of the price, but because of its perceived value. The reason you buy an iPhone is not that it has better features than a Huawei, it’s because of what it stands for. You buy an iPhone because you are buying into the idea of product excellence; knowing that people at Apple turn up asking themselves how can we make something awesome for the consumer. Huawei’s approach, asks how can we be cheaper and better than an iPhone so that our shareholders will like us? Apple’s iPhone costs 3-4 times more and generates more revenue than Samsung and Huawei combined. There are countless examples of this; The same reasoning explains why we pay 5 times more for a pair of Nike’s compared to Gola’s. It is the same reason for spending £4.00 for an Italian barista made coffee or in a B2B setting, the same reason we choose to use Salesforce over Pipedrive. Because frankly price, has nothing to do with value and how value is perceived. And it never has done.
As a payment professional, this has been happening for years and the above reasons are why the recent fintech revolution, will have very little impact on price, but rather provide the consumer with a far better range of choice. Since the only successful products to have really disrupted the payments space in the last 20 years nearly ALL cost far more than the competitor they are looking to disrupt. Those who have discounted and played on price have always suffered.
Paypal’s cheapest pricing in the UK is 1.40% + 0.20, whereas the equivalent VISA and MasterCard cost can be 3 times cheaper than this for the typical medium-large retailer. But why do merchants pay this high pricing? Because merchants who accept Paypal can be trusted, innately the consumer knows that they can request a refund at any point during the transaction lifecycle directly via their Paypal wallet. And the Paypal payment is free from entering credit card details. Not to mention the high spending customer base, PayPal customers typically attract.
Klarna and buy now pay later (BNPL) products are also similar. As an example, Klarnas fees are nearly 20 times more than the standard interchange/scheme fees for VISA or MasterCard issued credit cards in the UK. Or roughly twice the price of accepting American Express. Crazy you might say? But clearly not so, as people who wish to use Klarna are not buying ease of payment or transaction, but rather they are buying into a whole new way of thinking and experiencing purchase via credit. Vice versa for the merchant. They enable Klarna, not because it is cheaper, but because it enables those people who wish to pay in such a manner, or they risk losing the customer altogether. Because they know the customer has a preference. The power of the brand, emotion and experience is clearly alive and well at Klarna with the introduction of Smoooth Dogg (Snoop Dogg’s latest alter ego)
You may argue that such examples are both old (Paypal was founded in 1998 and Klarna in 2005), but let’s take a look at open banking and cryptocurrency… Open banking is a recent government-led initiative that has been born out of the recent PSD2 (payment services directive), that provides better customer data access, helping customers to enable direct bank payments and enable the sharing of credit data, account information and some basic identifying information of the user.
Such solutions require an incredible amount of investment in order for such experiences to be created, with many features such as refunds, payouts, collecting bank accounts, foreign exchange, risk, fraud etc not available without an attached cost. All such features and activities carry an associated cost (similar to any other payment ecosystem). Adding to this issue so far, these products have only really been able to fit themselves into a very selective number of use cases, with many of the banks also complaining of the socialistic terms in which they must provide/support. Such banks receive no remuneration for providing such services. Due to the added layers of complexity, meaning that enabling access to such services comes at an incredibly high price, particularly due to the calibre of employees that are required to run such an operation. Whilst the current investors have covered the cost, for now, it is difficult to see how any money can be made from the originally proposed 3-5x savings that were first talked about 2-3 years ago. Given my most recent price analysis, such claims would also confirm this also not to be true. With many incumbent providers still being far more cost-effective across a wider comparison.
In the decentralised world of finance and cryptocurrency, we have a similar story, with most crypto remittances and wallet transfers between FIAT and Crypto costing us far more compared to the typical payment/remittance costs we experience through our banks today. My Coinbase account recently charged me 1.50%, plus a disadvantageous spread + transaction costs for transferring a USDT (stable coin) to a FIAT currency. Nearly 5-6 times more expensive than my business banking fees that I pay for standard FIAT currency exchange.
But why is this important to understand?
Buyers and companies have always had to answer the same question; Is this product/solution going to deliver value to my company at a fair price? What is the price implication of this product? And what is the added value of this product? And the answer to that question… Can be a very similar reason as to why we wear Nikes… And for this reason, we buy with our heart as we want to look cool like Smoooth Doggs, Klarna as this is synonymous with giving consumers a fresh approach to facilitating a credit function. The other reasons will in fact remain secondary to Smoooth Dogg; An uplift in basket size, additional conversion and providing a credit option to the customer.
In summary, the question of price has never changed and it never will. But the way in which it is presented does. So let’s all start talking about the value and context of such products, or risk looking rather silly in a never-ending race to the bottom. Where nobody wins and value is confused for a discount store packet of crisps. Yucky.
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