The Payments Experts Podcast
Expert payments attorneys discuss the electronic payments industry from a legal perspective.
The Payments Experts Podcast
Payment Protectionism and the Payments Police Threaten Commerce | Special Guest Eric Grover | PEP053
Who really controls the flow of money in payment systems? The answer might surprise you. In this eye-opening conversation with payments industry veteran Eric Grover of Intrepid Ventures (https://intrepidventures.net/), we uncover the fundamental power dynamics that determine how interchange fees move through the ecosystem.
Eric and Christopher Dryden, Esq., discuss how payment system economics fundamentally flow toward those who can affect transaction volume, explaining why interchange typically benefits issuers rather than merchants. He explores the regulatory challenges facing the payments industry, from CFPB restructuring to state-level interchange restrictions that threaten to create an expensive, unworkable compliance patchwork.
• Interchange fees flow to issuers because they can affect payment volume share, while merchants are typically price takers
• Asymmetric pricing is at the core of merchant and acquirer discomfort with the current system
• The CFPB is being dramatically scaled back under the new administration, potentially creating a regulatory vacuum
• State-level interchange regulations like Illinois' ban on fees for tax and tips pose multi-billion dollar compliance challenges
• Industry consolidation continues with Global's acquisition of WorldPay, though earlier mega-mergers are partially unwinding
• ISOs must evolve beyond payment processing to remain relevant, with software integration becoming essential
• Payment protectionism is increasing globally as countries develop national systems and resist foreign processors
• Central banks in countries like Brazil both regulate payment systems and compete directly in the market
Grover explains that despite merchant complaints about interchange costs, the flow of fees to issuers isn't primarily about covering expenses—it's about economic leverage. Banks can shift transaction volume between networks, giving them bargaining power that merchants typically lack. This creates what Grover calls "asymmetric pricing," where acquirers and merchants become price takers in the system. But what would happen if consumers became completely indifferent about which payment method they used? The entire economic model might flip, with interchange potentially flowing to merchants instead.
The regulatory landscape is undergoing seismic shifts as the CFPB faces dramatic restructuring under the new administration. While the Supreme Court upheld the bureau's funding mechanism, its staffing and focus are being radically curtailed. This creates a regulatory vacuum that states are rushing to fill—with potentially disastrous consequences. Illinois and Colorado are already implementing state-level interchange regulations that would cost billions to implement and create a compliance nightmare for payment processors, networks, and merchants alike.
Meanwhile, industry consolidation continues with Global's acquisition of WorldPay, though interestingly, we're seeing a reversal of the "mega-processor" trend from 2019-2020. Companies that once touted the benefits of operating across the entire payments value chain are now divesting units, suggesting that management complexity and cultural integration challenges can outweigh theoretical synergies.
Contact Eric Grover at eric.grover@intrepidventures.com to learn more about navigating these complex industry dynamics and staying ahead of the regulatory curve.
**Matters discussed are all opinions and do not constitute legal advice. All events or likeness to real people and events is a coincidence.**
Visit Global Legal Law Firm today: https://www.globallegallawfirm.com/
A payments podcast of Global Legal Law Firm
We're talking more from a cardholder perspective, which I thought was very interesting where, you know, looking at the marketplace, there is no marketplace on the acquiring side, and I think that, because we really live on the acquiring side, you know, it's interesting to me that, regardless of what innovation occurs for the users, the marketing or the acquiring side just gets stuck, because we're just stuck.
Speaker 2:Yeah, I have a different take. I mean, I know exactly where you're coming from. On that I have a different take. So I think acquiring is vigorously competitive and I would, I would argue and have argued that over the last two decades there's been far more innovation on the acquiring side than the issuing side, than the issuing side. But I think a lot of the discomfort from the acquirers and the merchant lobby comes from the fact that in some respects they are price takers in the system, the asymmetric pricing. So, and that's just a core thing, that the asymmetric nature of interchange pricing is, I think, fundamentally what torques people on the acceptance side of the network, acquirers as well, because acquirers, setting aside debit routing, have been price takers from the network standpoint. So if a large network wants to raise its licensing fees on the acceptance side of the network, usually there's not a lot of discussion about that right. And if interchange goes up and down but it flows mostly from the merchant to the issuer and then some of it onto the cardholder, well, I say mostly so for ATMs it doesn't work that way. Atms interchange flows to the owner of the ATM, which is a merchant, because otherwise no one would deploy merchants.
Speaker 2:And I would add and I love to do this because it illustrates some of the dynamics interchange in retail payment systems has occasionally, very occasionally, been paid to merchants. And it has been paid to merchants where merchants could control and shift share. So there was a there still is a the National Debit Network in Australia. So the three debit networks in Australia Visa, mastercard and the National Debit Network and for many, many years interchange for the National Debit Network was paid by issuers, the banks, large banks, to merchants. Merchants said we're not going to accept it unless you pay us. This had nothing to do with cost. So merchants said we have to, we're going to have all this cost to support it, defend interchange in the United States and elsewhere. And they say well, you know, we have fraud costs, we have a lot of credit losses, we have rewards, we have processing costs, which is all well and good. But the reason that interchange for most retail payment systems two-sided markets flows to issuers is because they can affect share. So Chase can give a network more payment volume and the networks use that to balance participation.
Speaker 2:People think about it. Conceptualize it as funding issuer, innovation rewards all sorts of things, the neobanks. But imagine a world in which we all had. Every, every quote-unquote cardholder or consumer spender had half a dozen or more payment products cards, credit and debit in their leather wallet or their digital wallet. And imagine that they were completely indifferent over which card they would use and so choice, the dispositive choice would be the merchant choice. So I go to a restaurant and there, or I go to Walmart, and the restaurant or Walmart says we would prefer to use your discover debit card, and the restaurant is confident that there's no pushback because I'm really indifferent, and there's no loss of sales. Well, in that world, interchange would collapse and I argue it would be paid to the merchant. That was Danny Cross, because the merchant would be the most important player in terms of what network got the transaction. And it's also, you know, when we look at interchange pricing and look and say, well geez, the merchants are paying and the issuer, the banks, large banks are taking, or all banks are.
Speaker 2:There are lots of markets where one side pays more and the other side pays nothing. Or is subsidized Search. I use Google, I use Bing, I use Yahoo. Whoever is searching doesn't pay, the advertiser pays. It used to be, and I think it's still probably the case. You can go to a bar and the bar will have free drinks. For women, yeah, not for men, yeah, they're looking for a better ratio?
Speaker 2:Yeah, that doesn't make the market work. You know, is it fair? Is it unfair? It's, but you know these, so we look at if you ask. You know, cardholders love the stuff they get. They take it for granted. And in Canada the regulators pressured the networks to commit to reducing interchange For credit. It's not regulated but it's subject to regulatory pressure and the networks agreed to make. There have been two reductions that they've made, basically hoping that this would um forestall any formal regulation. And then the the regulator disingenuously put out a a press release and said this is great because we've lowered costs for all these small merchants and there will be no impact on the rewards that Canadian cardholders love. Well, you know that's either not true or the banks are volunteering to reduce their profits.
Speaker 3:Welcome to the Payments Experts podcast, a podcast of global legal law firm. We hope you enjoy this episode. Really excited, we got a remote podcast today In studio. Joining us is founding and managing partner of Global Legal Law Firm, that's Christopher Dryden, been doing payments for 20 years, and a very special guest, eric Grover, joining us remotely. Eric is with Intrepid Adventures is his website. You can find them over at intrepidadventuresnet. Eric, it's great to have you on the podcast, welcome.
Speaker 1:Hey Eric, how are you? It's good to meet you, even though it's not face-to-face. It's sort of face-to-face, so really happy to have you on. I have to say I've never met Eric. It was the first time I've ever spoken to him. The one thing that I got in advance were some articles that Eric has written for digital transactions and some other industry publications, and I will say that, based on my reading of Eric's articles, he has far more knowledge than I do when it comes to some serious macro level introspection on the payments industry and especially a long history to tell you what that looks like. But, eric, what is your role at Intrepid Ventures?
Speaker 2:Well, intrepid Ventures is my business. Intrepid is a consultancy and I advise firms across the payments ecosystem, so payment networks, payment processors, issuers, investors in the space, arms dealers, folks that are selling into the space private and public.
Speaker 1:Would that be similar to like Straw Hacker, except you're kind of a one-man show?
Speaker 2:show, or yeah, I would say. I mean they're, they're a consultancy um and they're focused principally on heavily on the channel, the acquiring side, and really the channel um, and I would say I'm not focused on the channel. I cover the, the whole ecosystem, but probably more focused on the, the network um. So yes, they, they provide certainly consulting in the payment space, but I think their focus is a little different.
Speaker 1:Okay, and you know it's interesting because your latest article and your articles are wide-ranging. That's what I really found interesting. I mean a lot of them have to do from. What I could glean was kind of a comparison of the risk reward associated with government intervention into private networks and how. It's probably not the greatest thing in the world from your opinion, but recently you wrote an article about the CFPB and it narrowing its focus in the wake of layoffs. Why don't we just start there and give us your thoughts on what's going on on the federal level, especially with the new administration?
Speaker 2:Yeah, so I mean, this is a sea change and you know so. The CFPB was established by Dodd-Frank and by design it was intended to be remote from Congress. It was designed to be self-funded by the Fed and it was given very broad powers authority, so consolidating regulation of consumer finance financial services in one entity and it was initially staffed by some folks that were quite partisan, had a strong distrust of industry and had what I would describe as a paternalistic view toward consumers, meaning that their view was that consumers, even given full disclosure of all the material facts around various financial products, would make the wrong decision and a beneficent regulator was needed to, to, to, to guide they're. During the first trump term, under mulvaney, acting director mulvaney, and under uh director uh, kathy kraninger uh, there was a pullback, but the cfpb remained, uh, under well, they challenged the, they challenged the funding and whether or not the funding.
Speaker 2:And yeah, you challenge the funding and the supreme court upheld, and I I frankly I was I was surprised, but I read it and I understand the rationale. But the supreme court basically held congress has the authority to set up whatever funding mechanism it wanted, um and so, and that congress, by authorizing self-appropriation from the fed, that was power of the purse by Congress. So the, so that has been held to be constitutional. The, the court also held that the director could be removed, the CFPB director without cause, which was a change director, uh, without cause, um, which was a change uh and which is one of the reasons that chopra left, almost not immediately, but was was going to leave um upon trump coming in uh. Currently, the, the admin, incoming administration, has dramatically reigned in the CFPB has fired 90%-ish of all the staff.
Speaker 1:Well, I don't know if you saw this this morning, which the reason I wanted to lead off of this is because I saw a headline this morning that a federal judge actually put a stop to all the layoffs. I don't know if it's temporary. I mean it looks like the courts they don't really want to put up much of a challenge to some of the administration's moves that are going on right now, but they did. They did halt it, at least this morning. I don't know where it's going.
Speaker 2:I don't know where it's going either. Um and uh, uh, but I would what I would say with confidence is this administration? Clearly this is one. The administration cannot get rid of the CFPB. So there have been folks who said, weighed their arms and said the administration is lawlessly going to eliminate the CFPB. They can't do that.
Speaker 1:They can sure as heck neuter it though.
Speaker 2:Well, yes, absolutely, they can make it. They can reduce its bandwidth considerably, yeah, and they're going to do that. But absent Congress eliminating the CFPB by statute, the next, a Gavin Newsom administration or a JB Pritzker administration or any the next administration could revive and restaff. I mean the, because the CPB was created by Congress and as an administrative agency and there are different views about the power of the president. It can argue, you know, can exercise over it, but it is an administrative agency, notwithstanding being, you know, constructive with this funding mechanism from the Fed and Congress, if there is a desire to do so, can change it, can change its mission.
Speaker 1:Yeah, I was going to say well, I mean, I agree with you wholeheartedly. You know, I look at the American public and I probably shouldn't say this on a live podcast but I'm not necessarily always impressed with the engagement or knowledge base of people surrounding the things that take place in their life, literally like I hear younger people that I'm around ask me questions about taxes and the lack of knowledge. These are educated people. It's really kind of startling sometimes. But I do believe that there is a mission for the CFPB. Now I also agree with you that the initial approach and this paternalistic nature to it. I mean, obviously Trump wants to sell Trump steaks again, so you know he's got to remove all barriers about doing that. But you know Trump University could revive itself at any moment.
Speaker 1:But but, but you know, I do believe that there is a that that for a lot of people and I and I usually focus my attention on at a really good relationship with the, my grandparents and a lot of my family in that generation and they it's like the greatest generation.
Speaker 1:They went through the depression, they went through world war two. They lived through a lot of the heartache that this that we've never experienced, we'll probably never come close to experiencing, but in that level of people tech I'm a cold war kid the amount of change and you're looking a little older than me the amount of change in technology and the amount of change in the world in our lifetime is is probably overwhelming to certain people. And there's so much sensory through devices you know it's not just the television any longer which you can control a lot of, but the devices. I do believe that technology could be overwhelming to some people that might not have a background on, and so I do believe that there are things. I mean I hear these horrible stories about older people having getting bilked over like telesale schemes or hit this button because the IRS is on. You Remember those. So I do think there's a purpose.
Speaker 2:So the tools there's no question that there are horrible stories of people being defrauded and there are bad actors out there. There always have been and there always will be. They now have more tools to get to people. Arguably, there are also more tools to protect people and I think there is clearly an important role for regulators. Long has been to identify and prosecute fraudsters and prosecute them vigorously, and you know, I would, I would be of the view figuratively hang them high. I mean you get, you get bad actors and go after them and get them. But that's I don't think that's controversial. I think I mean sometimes people pay. But the notion that government, the state, should protect consumers and businesses from genuine fraud from 11 actors, I mean that's real, I think it's not controversial. You can argue about, you know what's the best means. And before the CFPB existed, the existing agencies had broad authority to regulate and prosecute fraud.
Speaker 1:It was spread over and over FTC. Yeah, I mean. Yeah, there's watchdogs.
Speaker 2:And I think we can argue that whether it's vigorous enough. But I think that element of the role, whether it's performed by the CFB, the FTC Fed, is not terribly controversial and it's important and it's very important. But the elements of the CAPB that are controversial are, you know, the policymaking by the regulator, which I would argue is on Congress, is has the prerogative to make policy, not the regular regulator, is the cop.
Speaker 1:No, I get it. I don't like the rulemaking process of CFPB either.
Speaker 2:It's so. You know we definitely we need, you know, a vigorous night watchman in the regulatory you know, regulator seat, but we don't want a political actor and under Rohit Chopra, the CFPB was a very, very political agency.
Speaker 1:I agree with you. I couldn't agree. You know it's funny because we've been talking. I've been doing a lot more podcasts this year and it's been an interesting time to talk about certain things, and I like your articles because I like to think in a bigger picture and a lot of times I'm in microcosms and what I do for my job and so at least in the payments world. But one of the things that I find interesting about where we start, where we're starting this conversation, is that I, too, agree that there's a purpose, but when the overreaction to the partisanship at the inception of this or formation of this agency being a watchdog, and you start stripping down the federal apparatus to a shell, which it's happening Right, and whether you agree with it or you don't agree with it, it doesn't really matter to me.
Speaker 1:I think the machines in place to start to do this, and what I've said is is that I've had this conversation going around my house with the kids a lot the last month about when you do something, you need to pay attention to what you're communicating, because there are a lot of time there's unintended consequences to your communication, because a lot of time there's unintended consequences to your communication, and I think one of the unintended consequences to what's taking place right now is that you're going to get states who, I think, know far less about some of the subject matter wading into the regulatory watchdog space in a way that's not always well refined. That is going to produce a boatload of inconsistent or unintended consequences because they're not going to act uniformly. Now I've got potentially 50 different regulatory frameworks to deal with versus one, and I think that this is coming. I don't know how fast that wave is going to come, but it's. I always point to the Illinois case on credit on on surcharge, right Like, go ahead.
Speaker 2:Well, chris, we're seeing it already, and and and we're seeing it. And what first jumps to mind is, in terms of what we were talking about earlier interchange price regulation. The state of Illinois last, was it June or July passed the Interchange Fee Prohibition Act, and this is the first state level. There have been attempts in a number of states over the years. This is the first one to pass and it bans interchange fees from being assessed on sales tax and tips. Yep, and that takes effect this coming july. Uh, and the and there's a, there's a backstop that the industry has to support manual refunds, which is practically what's going to happen, because the industry is simply incapable of responding, you know, with automated systems by that date.
Speaker 1:Look, I'm not a technical person. Conceptually I understand technology as it relates to what we do, but when you get down to it, I was thinking that it would be a Herculean task to carve out one state's consumers and merchants related to this to reprogram a system that's been in place for a really long time to operate not the way it was intended to operate. Now I don't know if it would be, but my thinking is that would be a Herculean task. I don't know what time frame they could do it in.
Speaker 2:There's no question it will be, and it will be because the data that you need to comply with it isn't captured and isn't passed up. Today, and of all the payment card networks, only a few of them, for some transactions, capture sales tax data, and then only for B2B transactions, but the data isn't captured. The assessment of interchange fees is different. Um, so it's enormously. Point of sale providers will have to make system changes. Merchant acquirers and processors will have to make system changes. Isvs will have to make system changes. All the payment networks will have to make system changes. Issuers all of them, and there are over 9,500 issuers in the United States.
Speaker 2:The bill, as I read it, would cover issuers worldwide. Now, enforcement is another matter. But if a China UnionPay card user or a JCB card user was at O'Hare Airport, that transaction would be covered and the acquirer that was captured, that would have to respond. And if the merchant submitted a manual request for a refund, they would have to get it. But that's Illinois. Colorado has a bill Fair Swipe Fee Act and Consumer Security or Protection Act which does something very similar but slightly different. So it also would ban interchange fees on sales tax and tips. It would ban default interchange for all politically unsympathetic issuers with over $50 billion in assets, which is about 50 of them covers most transactions. It wouldn't do that for the 9,500 or so small guys. It would impose, imitating the European structure, it would impose caps of 30 basis points on interchange for credit and 20 basis points for credit on debit for charitable contributions.
Speaker 1:So it's a whole kind of a cocktail of different stuff, again enormously expensive to comply with I was going to say at what point do you think the card brands and the networks push back and just like look, this is impossible for us, like you guys have no replacement, or it would drive up the expense associated with accommodating this legislation and that, where items weren't capped, the other area would just become extremely expensive. I mean, you're you're just talking about rewards maybe going away. I'm talking about, like, the actual cost to use the credit systems becoming this cost will be there again.
Speaker 2:So this is, um, you know, I did a back of the napkin estimate on on just compliance, trying just to provide automated compliance for the illinois uh interchange fee prohibition act. Um, and many, many billions of dollars and I thought it would take at least four to five years at least to in an automated fashion comply. But there will always be a long tail anyway of manual merchants that aren't complying and are sending in emails, faxes, fedex. So this reintroduces a manual set of operations that we really haven't seen in the 1970s. And if you imagine, let's say, that all 50 states have their own flavor of this.
Speaker 1:Yeah.
Speaker 2:You know the cost on the system and the system merchant acquirers, processors, isvs, isos, point-of-sale system providers, networks and some of them traditional but also non-traditional network, alternative payment systems and issuers enormous, and you know each. No one, of no one breaks the system, but the cost of this stuff gets baked in and ultimately, I would argue, everybody suffers and instead of trying to make the system better, innovating, trying to make it safer, the, the payment system ends up spending lots of money complying with this onerous patchwork, and an onerous patchwork that, once it's established, every one of these state legislatures is going to be adding, you know its wishes of the year, whatever is in vogue for the next, you know ratchet or the next cut.
Speaker 1:Yeah, I mean, the dangerous side to this is, I kind of look at it in relation to employment law. California's a heavily regulated state and what I learned is we started to represent businesses, because we represent businesses in every capacity. We're payments lawyers, but we are a business, so we have employees. We're very aware. You know, the Fair Labor Standards Act sets a floor, but then you get a place like California, illinois there's certain states where they're very pro-worker and so the employee rights are far in advance of that floor at the FLSA.
Speaker 1:And the longer that you let somebody like Colorado come up with this cocktail of a whole bunch of restrictions on the payment system, what kind of floor can you come in? Cause I, I personally think the cascading effect is deregulation to state regulation, back to fed regulation, so that we've got one standardization of a set of rules and we're not all over the place, right, but then that's only. You're only preempted to a certain respect. You know, at a certain point in time a state can choose to have greater regulation than what the federal level is. And the longer you let the states kind of come in and decide what they're going to do, you run the risk that the federal legislation that comes behind it, if it comes, would in essence, be fairly restrictive too. What are your thoughts on that?
Speaker 2:Yeah, well, I think there's a real federalism issue here about if the payment system and there are state-level regulations like money transfer business, almost every not every state has its own licensing.
Speaker 1:Yeah, I mean that's a cluster, right. I mean, yeah, that's the thing that I go to and where people are trying to make profit in the payments system, at least from our clients, is finding nooks and crannies in there. But you skirt the line of being a money transmitter a lot of times in there. But you skirt the line of being a money transmitter a lot of times. And you know, no, everybody throws around the word pay fact but there's like only six pages of registered pay facts, you know. So like, and just cause they've got the ability to do stuff doesn't mean you've got the ability to do stuff, so it's it's not the easiest thing to comply with.
Speaker 2:No, and and you know the, if I'm a, a bank and and I, and you know the, if I'm a bank and, and I can you know we have federal preemption, I then I get around that and we have, I mean, just like, just over 4000 commercial banks still and close to 5,000 credit unions so they're a lot out there still. But it doesn't serve consumers, doesn't serve the businesses using the payment system. Do you have an overly complex and burdensome regulatory patchwork? It does serve incumbents in some respects right, because the entry cost of getting in is high, because the entry cost of getting in is high and existing systems have the resources to be licensed and to comply.
Speaker 2:This is a cynical view, but if I'm a large, if I'm a PayPal, I have the resources to comply in every state. If I'm a Western Union, I have the resources to do that and I'm already doing it. And I'm a new fintech and I've come up and I've got what I think is I've got a putatively better mousetrap. But now I've got this burden, I've got to go out and undertake this Herculean effort to comply across the country and the risk of failure is that much higher the cost of getting in I'm watching people buy their way in these days like it's interesting.
Speaker 1:so this is another thing I wanted to lob up to you because it came out and I heard about it yesterday, in fact, on our podcast yesterday with a gentleman named alan copelman who's been in the the industry for a long time. He said, hey, did you hear about? And I don't know if it was on the air, but he said, hey, did you hear about the merger? And I'm like what happened? He said Global bought WorldPay and then I saw the actual the alert come out this morning on it and more consolidation in our industry. And one of the things that I've seen is that, as there's been further consolidation, some of the relationships that used to be out there like retail, registered ISO with Fiserv you have to buy your way into that. These days they're not just giving them away anymore. What I'm seeing in our little neck of the woods is some of these relationships that have traditionally been there. You can't even establish those from the ground up any longer. You've got to actually go find somebody who's willing to offload that to you.
Speaker 2:Well, and and and and that that development is. It's fascinating because, as you said, so the it is creating that transaction or set of transactions will create increased concentration in merchant acquiring and processing because global gets bigger. Fis is picking up the old total systems issuer processing business, so their issuer processing business gets bigger and both of those I mean issuer processing in the US and in Europe is kind of an oligopoly Merchant acquiring certainly the large guys have a huge share, but there's still a lot of players. But there's an interesting observation I would make. Back 2019, 2020, there were a series of M&A transactions that had analysts in the industry saying that colossi fintech payments processors were the future. We had Fiserv acquiring First Data.
Speaker 1:We had WorldPay acquiring Bantam yeah.
Speaker 2:Bantam, WorldPay, Global Payments acquiring Teasers. We had WorldLine acquiring Genico and then we had Nexi, which rolled up a couple large merchant processors in Europe and the idea was that these five had such scale and such a breadth of processing assets and in the case of FIS and Fiserv and Worldline, and actually also payment network assets that that created something that was almost unstoppable. This is where the industry is going. No, it hasn't really panned out, because now we've seen that FIS has reversed course in terms of the breadth. So they've gotten out of the merchant acquiring business Global payments. They sold off net spend, their prepaid business, which was an awkward fit anyway. Anyway, now they've sold off the issue of processing asset, which at the time they contended there were going to be compelling synergies participating on both sides of the network, as did FIS, as did Fiserv, and of course Worldline retreated from the point of sale terminal business. So I think it's an interesting reversal of what a lot of folks publicly declared was the future.
Speaker 1:Yeah, I think part of it's scale too right. I mean bigger isn't always better. I mean we're in a very ever-changing landscape and I think being nimble is a benefit and I think the larger you get it's. And some of these acquisitions too, culturally like I go back to this one. But when, when Vantive acquired Mercury, I thought that that was a great acquisition. But then culturally the organizations were so different they never were able to consolidate the organizations and they distinctly left them standalone. And I always found that very interesting. And I asked somebody in the Mercury legal department like hey, why aren't you guys really working with, with Fanta, and why are you guys still separate? And they said you know what Our companies, just culturally, are so different?
Speaker 1:They got to the point where they thought it was better that we just remain on our own, even though we're trying to cross-pollinate as much as possible where there's synergies associated with us, because we make sense in a lot of regards operationally, but there's just certain things that it's just not a connection.
Speaker 2:Well, I think that was an instance where they acquired Mercury because they wanted the model that it developed. Part and parcel of that was the culture that was necessary to develop it, but that culture didn't fit, and we see that a lot. I think with all of these mega payment processing slash fintech mergers, there have been some management diseconomies of scale and complexity.
Speaker 1:Oh, fiserv, the Fiserv First Data thing is huge to me. I will tell you that Fiserv, when they came in, didn't know what they had and started to look at the inefficiencies of First Data, have started to shore up holes and they are have been. I don't mean to speak ill, but they've been ruthless about how they've, uh, worked with people and it's just more. It's a take it or leave it. You know they're like look, this is how it's going to be. We don't really care. We understand that this may have been a mistake. You're going to have to pay for it, doesn't really matter. Like they've, they've come in and as far as there being an idea of having an iso channel, I'm not really sure that's going to be on to go forward with them yeah, they're, they are.
Speaker 2:I mean, that's, that's an industrial strength processor. Um, I'm not sure anyone would have, uh, in recent history, declared it as a super client-friendly, flexible, innovative entity, certainly, but scale processor if you want to do anything at scale, good place to go. If you want speed, innovation, a high touch, I'm not sure that's where I would go.
Speaker 1:No, I agree with you. I just know, from a partner-centric perspective right, because you know they inherited a ton of partners it almost feels like they either don't want them or the term dictation that's going to happen about what it's going to be like to work with them. They're setting the the bar really quickly and it hasn't been very friendly yeah, that's.
Speaker 2:You know they're, um, you know the economics are, are shared across the channel. And and I think if I'm, if I'm, the goliath processor and if I could push a button and control everything to capture all the economics, many of them would do just that. But the choice historically has not been that. The choice has been if I don't work with partner, with support, this channel partner, iso, isv, somebody else will. So my choice is do I get a piece of it and help or do I get none of it? And that's healthy, I think you know, because we get competition to serve folks that are adding value in the channel. If those folks don't have choice, well then the scenario you're describing, or if that choice is reduced, the scenario you're describing starts to become much more real, much more of a problem.
Speaker 1:You think that'll push innovation, because one of the things I read that I liked in one of your articles was really talking about the attempts of innovation outside the traditional, you know, dating back to like I can't even remember the name of the company, but I didn't realize the DigiCurrency came out in 89 and there was some sort of player up until 98. And then you kind of like went through a little bit I like always looking at a historical and seeing where we were, what worked, what didn't work, what you know, and one of your articles kind of did that didn't work, what you know, and one of your articles kind of did that. It talked about potentially the Fed buying up a bunch of Bitcoin but that might artificially inflate the value of Bitcoin, which would be, which wouldn't be beneficial necessarily. But then it also went back to stable coin, which is one-to-one, which I think is the next iteration of digital currency that's going to take hold primarily, I mean I mean I may have a cynical view it's just because the banks are going to be involved and so that they're going to figure out how their value is involved in it. You know, trying to cut out the banks is something that you know.
Speaker 1:Bitcoin. Just you know I don't see how you get around the barrier of the bank obstruction to that in the marketplace. But stablecoin makes a lot of sense to me. I mean, where do you think the innovation is going to come, as there's less sale options out there for the ISO? Because I do believe, like some of the stuff you touch on is fascinating. I just think it's still so much in its infancy who knows where it's going to go.
Speaker 2:Stablecoins its infancy. Who knows where it's going to go? I think stable coins so you know we think about DigiCash was, in some respects, the first digital currency and it failed, but it was early. You know, we had Bitcoin, the first distributed digital ledger crypto, the mother of all cryptocurrencies. There are like 25,000 cryptocurrencies that have been launched, about half of which have failed, I would argue. In almost every case, however, they have yet, while some are interesting speculative instruments, there have yet to have been compelling mainstream use cases and certainly in the more mature markets North America, europe the existing digital systems work pretty well, so it's hard to see where they would would play a role.
Speaker 2:Having said that, um, stable coins address one of the big problems as, as a payment system, the crypto has had of uh, volatility of the underlying asset that's being used to make payments. Um, they also, in theory, address some of the regulatory concerns that if the stablecoin is issued by a regulated entity, there's transparency. There should be greater comfort with those. They still have the issue of where is the compelling use case or use cases. I think that we will see. We may see interesting use cases for cross-border payments, I think, outside the US, dollar-backed stablecoins in markets with weak existing payment systems could be quite compelling If you're a consumer or a business and you can have dollar stablecoins issued by Tether, by Circle, by Citibank, and you're in Venezuela and you can deal in dollars, or you're in Zimbabwe and you can pay and hold payments in dollars.
Speaker 1:I've seen problems. It's interesting We've got a guy that we've represented and he was buying USDC and he was selling it internationally and he just had like hundreds of thousands of dollars worth of chargebacks related to sale of USDC to Italian cardholders, went through the entire chargeback process, had all of the supporting documentation, had purchased the USDC, had circulated it and he lost universally.
Speaker 2:It doesn't sound like this isn't a payment system use case. It sounds like it's more of a he's buying me. What was the?
Speaker 1:purpose Agreed, but I still think that there's a lot of skepticism associated with that actually being something that's fungible right. I mean to me just the fact of what he was doing. He was finding a place in the market where, based on exchange rates, he could sell something, make a little bit of a cushion on arbitrage.
Speaker 3:And when it came look.
Speaker 1:I thought I thought it was very innovative. No worries, I thought it was very innovative what he was doing and yet, when it came down to it, the, the card issuers, they just they. There was no, no defense form whatsoever. So I agree with you. I think that there needs to be use cases that would make things supported. On a total aside, I'm a big fan of Michael Lewis. I just read Going Infinite.
Speaker 2:And.
Speaker 1:I have to say I learned a lot about cryptocurrency just from reading about FTX and Sam.
Speaker 1:Bankman Freed and kind of like what the crypto markets look like and you know from his, you know from his time at Jane Street doing jump trading and like it was. It was pretty fascinating. I mean, it was a world that I can't say that I've stepped too much in. You know, past the shallow end of the pool. I thought that he does a very good job of taking very complex subject matter and delivering it in a way that's easily digestible, and it was for me and I thought it was really fascinating. The interesting thing about Sam was that his approach, regardless of how it ended up, was to come to America to regulate FTX.
Speaker 2:Yeah.
Speaker 1:And you know his whole approach was look, all these other guys are shady, I want to be the, the landmark I want to be.
Speaker 2:You know, the flagship of this is how we're supposed to do it, and kind of get this want to be you know, the flagship of this is how we're supposed to do it and kind of get this. I'm reminded of ralph waldo emerson's quip that the louder he spoke of his honor, the faster we counted our spoons yeah, no kidding and you know we had. So you know fdx and and open kimono and want to be regulated. You know we had the, the lads at Wirecard we had.
Speaker 1:Oh, the German company.
Speaker 2:The German company and Angela Merkel. Angela Merkel was publicly advocating on the behalf and the German regulator was trying to get tried to get the British regulators to cut, clamp down on the, on the, on the hedge funds that said it was a problem. We had mozito, um uh, and michael lewis, we had empower and all you know there is a, so you know, a dollop of skepticism, but but, um, which is, and those are the exceptions. Clearly, um, uh, it is, and and they're always going to be. You know, the system is somewhat open to newcomers, which I think it should be, and that's good for us all you know they're going to be problem actors that get in and the idea is that they get caught. We have transparency.
Speaker 1:So, from a macro perspective, I'm interested to ask you this perspective. I'm interested to ask you this you know from the world that we play in, which is everybody below the member banks and the larger payment processors, or even the super ISOs. To a certain degree, we represent a lot of FSPs, but what do you think is something that may be just coming onto the horizon, that might not be something that is in full view yet, that the people that we assist, or merchants I think merchants is another good category that that we haven't spoke of today?
Speaker 2:that might be something that's coming into the world that they're just not aware of well, that's a hard one because I think the, the our market is, is mature, um, it's competitive, it's reasonably well-served payment. The existing systems are habit, I think in the channel. You know small ISOs are going to have to struggle for relevancy. I mean, you got to say what value do I bring versus? You know the ISD is a channel that has the wind at its back. As a channel, the has the wind at its back, um, whatever the different models. But you know the idea of embedding payments in a broader offer, um, stickier offer, um, that's quite compelling. There's, there'll be, you know. Struggle over the economics. How much economics do the isvs get? How much economics does the back-end processor and the bank get?
Speaker 1:I think it depends on the sharing of the SaaS fees too. If you've got people out there independently selling, it depends on what they get to share in. That's what Alan was saying on our podcast yesterday. If you're not selling software, you better figure that out really quick or you're not going to be here very long.
Speaker 2:You've got to have something. If it's just a pure sales model, there's a long tail, but that is not a place to be. I mean, if you don't have something else, some hook. It doesn't have to be your own software you're selling, it can be white labeled, but it's got to be something that's bundled around your payments, otherwise, you know, the attrition rates, the fee erosion, are just not sustainable. Right, it is, I think you know.
Speaker 2:I fear that, and this is not so relevant for you know, a US domestic ISO. But at the macro level, with our budding global tariff war, payments protectionism, which has been a real festering issue for decades, but has been the exception, which is to say that there are countries that have resisted US payment systems, payment networks, payment processors participating in their domestic markets and have favored national champions. We've seen those, you know, China, russia. But most countries in the free world, most countries in the non-free world or semi-free world, it hasn't been an issue using American payment systems, letting American payment processors operate or acquire national players. And I think, in a world where we're lobbying terrorists right and left, that payment protectionism is going to get much worse, which is ultimately bad for everybody. I think and this is, you know it's not new, but it's going to get worse.
Speaker 1:You think it'll disconnect the marketplaces more.
Speaker 2:It makes, it'll increase the burden of transactions and therefore increase the burden of commerce and increase the cost of goods and services. You know a world where we have you know we're talking about a patchwork of regulations within the US states. In a world in which blocks of countries or individual countries all have to have their own payment systems and don't want to rely on any other country's payment systems. It's a lot of making payments to out. It becomes more difficult.
Speaker 1:You know, though, I've dipped my toe into this one too, and what I find very interesting is that in a lot of other jurisdictions, the central bank just controls everything, so your entryway is through the Central Bank, and they limit, and I don't know how much they necessarily understand. I know Asia and the Middle East is very much like this, but if you don't know somebody at the Central Bank level or in government, you're never getting in, and so I think the ability to enter into those marketplaces is much more difficult.
Speaker 2:Well it's getting in. Some markets it's been very difficult. It's very political. In many markets it's been the anteberries have been pretty low for foreign actors and some. India is kind of an interesting case because it's mixed. The regulators understand the value of competition. They understand the value of American payment processors and networks competing in India, but they don't want them to be too successful. There's a notion that they prefer some national players to be dominant or to be the major players. But the market has been open, albeit with requirements for in-country processing, contrast that with China, which is the second largest electronic payments market in the world, the largest e-commerce payments market in the world.
Speaker 2:In 2001, as part of its accession to the WTO, china made a commitment to 100% open up its domestic payments market by 2006. As of 2006, there was not a single visa, mastercard, paypal, amex, discover or jcb transaction in china. Um, we're now in 2025 and, and and at the time in 2001, chenny union pay, which is, didn't exist. Alley pay didn't existay, which didn't exist. Alipay didn't exist. Wechatpay didn't exist. Where, in 2025, mastercard has a domestic processing subsidiary in China. It's a joint venture with a subsidiary of the central bank. They've done a handful of transactions, but effectively. Us companies and actually non-Chinese companies, simply haven't been able to compete so much more severe.
Speaker 2:Europe has been a different animal and Europe, specifically the European Union. The dominant pan-European retail payment systems are MasterCard and Visa. The dominant wallets are Google Pay, apple Pay, paypal. There have been, and continue to be, national payment systems in many markets. So, for example, in France the largest card network is CartBank Air, but Visa and MasterCard are the largest pan-European systems. The European regulators the European Commission in Brussels, the ECB in Frankfurt don't particularly care for that, but they have been to date, unlike the Chinese government, not willing to do more than encourage banks to participate in more European systems, and I think we're going to see a change there. There's going to be more They've talked about they want payment strategic autonomy or strategic autonomy in payments, and we may see more aggressive action from European regulators, which I think ultimately will harm Europeans, but it's certainly going to harm some US payment systems and wallet players.
Speaker 2:Central banks, as players in many markets, are the primary regulator In many markets, but not all, but many markets. The central bank also competes. Brazil is a very vivid example of that. The central bank is the primary financial system regulator. The central bank launched a payment system called pix um, which is now the biggest p2p and payment system in brazil. It's a major retail payment system, major b2b payment system.
Speaker 2:Six months before the central bank launched that system, they told Facebook that it had to. They took Facebook's WhatsApp Pay, which was a PayPal-like wallet, out of the market and they said it was. They were worried about financial system stability. Then they waited until they mandated that all major payment service providers support the central bank system, which got them around the problem of you're building a new payment system. You don't have any relevance until you have a critical mass of entities that are willing to use it on both sides. But if you mandate, you can tell people you have to use it, you have to support it. You get around that. So there's a case of the central bank is the regulator, the central bank is a competitor and still there are a bunch of private sector actors, both domestic and foreign, in that market. So it's kind of a hybrid.
Speaker 1:Yeah, that's interesting. That's interesting. Well, look, I want to tell you this has been a fascinating discussion. I really appreciated your articles. If people want to get ahold of you, how would they go about doing so, and what is it that you think that you could offer some of our our listenership?
Speaker 2:So easiest way to contact me would be at Eric Grover at intrepid venturescom. That's Ericgrover at intrepidventurescom. That's ericgrover at intrepidventurescom. Um, and you know, I, I am a. I bring a a comprehensive understanding of the payment system, competitive landscape and dynamics. Um, and I maybe sounded a little gloomy during some of my remarks, oh no you were great man.
Speaker 1:Are you kidding me? I I I really appreciate a stark perspective on on what's going on. I think people look, knowledge is King, knowledge is power. The more people know, the more, the more information that people can truly gather to make critical choices, do critical thinking and then come up and make some good choices based on that. I'm pro that all day, and so I love hearing things that are first impression and that maybe I need to ask a follow-up question because I don't necessarily understand. So that's great.
Speaker 2:So that's great. No, I mean, the industry is much more open, much more innovative. I've been in this industry a long time, yeah.
Speaker 1:No, I know, I know it's very obvious.
Speaker 2:When I started, you know it was kind of slow moving. I would suggest that it wasn't massively innovative. There weren't a lot of new entrants and the barriers to entry have come down in most parts of the payments industry. Almost every sector is more competitive than it was, you know, 30, 40 years ago. That's good, that's a good thing. I think it, and I I hope that it continues to be to get more competitive, more innovative. You know I worry.
Speaker 1:Well, we'll see, but, look, make me this promise as you see things in the marketplace, reach out, because, look, I would love to have you back on, really appreciate your time and coming on and sharing your perspective and your knowledge. It's been wonderful to have you on. It's Eric Grover, and when you find something that you think is worthwhile, we're always willing to, even if it's 20 minutes. Man, you just let us know Super, all right, all right, sir. Thank you, eric. Have a great weekend.
Speaker 3:Absolutely. Thank you for listening to this episode of the Payments Experts Podcast, a podcast of Global Legal Law Firm. Visit us online today at globallegallawfirmcom.