Intermediaries: the good, the bad, and the realities

I was at the British Museum and chanced upon the exhibit on the the “History of Money” over the past 4000 years. It was a good exhibit (especially for a nerd) and might inspire a few posts beyond this one.

First, pictures on the rise of debit and credit cards —

Image credit to the British Museum “History of Money” exhibit, July 2023 [1]

Next, and why I wrote this post today. Walking through the exhibition, a recurring theme was on intermediaries in the global exchange of monetary value.

• Before: the intermediaries were people carrying jade ~3000–1500 BC), ships carrying silver (~1540–1620), financial institutions issuing travellers cheques (~1800s). This continues today with people carrying cash.
• Now: financial institutions are exchanging data for global digital money movement.

In today’s post I focus on financial institutions, which I also deem as “intermediaries”. The three points are:

1. “The good” — how intermediaries have unlocked value globally
2. “The bad” — the costs and complexities
3. “The Realities”- looking ahead

1/ “The good” — unlocking value globally

I’ll define intermediaries as any layer that connects multiple diverse parties together. A payment network (Visa, Mastercard, Amex) or Payment Service Provide (Stripe, Adyen) are some examples.

The power of payment networks (in the dotted line box below) is how networks connect different consumers, banks, merchants all over the world and enable money movement (relatively) seamlessly.

Simplified. Image is my own

Parking cash aside, imagine if you could only buy from a merchant that

a) was in the same country as you were in OR

b) used the same bank as you

It severely restricts the ease of commerce. In contrast, because of the payment networks represnted in the dotted line box above, money can move from consumers all over the world, to merchants all over the world. In that way, value is exchanged globally via intermediaries.

2/ “The bad” — the costs and complexities

Some fair critiques of intermediaries in payment networks, especially if the networks have less competition are:

• Expensive: more fees for the merchant / consumer, especially if there are oligopolies.
• Slower: possibly slower transactions since there are multiple layers.
• More intermediaries, more coordination and operational challenges: Imagine the troubleshooting struggles when things go wrong. Is it because of the Payment Provider, the bank (which bank?), the consumer, the card network, the bank rails?
• Reliance on existing banking systems — the whimsical diagram aboves shows the deep reliance on banks for money movement.

3/ “The realities” — looking ahead

So are these intermediaries are here to stay, or might they go away?

Arguments for “here to stay”

Yes, if different parties like and trust intermediaries.

• Preferences: Consumers may prefer to pay via a trusted third party brand vs a random merchant. Merchants may prefer to accept payments from a verified consumer (if possible), so preferring a wallet like PayPal, or Alipay/Wechatpay.
• Operations: Merchants may NOT like to receive payments continuosly and directly from consumers all over the world. They might prefer to have one third party managing it all the way through reconciliation and refunds/dispute handling (primer on disputes here).

Arguments for “might go away”

Some macro trends that help cut through the layers of intermediaries.

• Strengthening of national financial systems: If a country has a robust instant national payment system that has been widely adopted, that reduces the need for intermediaries. If it is easy to pay someone by mobile number or unique company identifier (eg UPI in India, PIX in Brazil), then direct payments between consumers and businesses can happen seamlessly without any third parties.
• The connecting of national payment systems: Imagine if two countries with instant payment systems connected their systems, and allow for cross border payment between their residents. Eg UPI and Paynow.
• Even if their national payment infrastructure lags, the rise of a popular private digital payment network could cut through intermediaries. For example, any digital payment system (Alipay, Wechatpay, Paypal) that is widely adopted vs cash by consumers, and therefore merchants too, without the need to involve intermediaries. More on digital wallets here.
• Global adoption of stablecoins that consumers and merchants are comfortable to adopt: This looks further ahead, and I’ve written about it here.

My sense is that intermediaries are here to stay, especially if they are strong existing networks with high barriers to entry (scale, regulation, etc). It’s hard to cut through layers. The macro trends are there, but changes take time.

[1] On the pictures

Left hand side: the first store charge card (see the silver) and then all purpose credit card (which wasn’t too long ago <100 years). Did anyone else notice that the network logos got smaller?

Right hand side: initial advertising (“you’re out of cash, and out of town”), which I believe perfectly summarises the value a card unlocks.