What is the Pine Labs Model: Queens of Disaggregation

Continuing from last week, let me share with you this week the model for Pine Labs, but before I go there, let me explain to you the elements that are involved in a payments around any sale.

Let us first take a look at the parties involved.

1. Buyer: Uses a Credit/Debit Card for Purchase
2. Bank/Financial Institute that has issued the Credit Card
3. Bank/Financial Institute that has issued the Point of Sale (PoS) Machine (Card Swipe Device or App)
4. Visa or MasterCard or equivalent Settlement Provider
5. Merchant or Retailer  who is selling the product or service to the Buyer
6. The Vendor has produces the product in the first place, represented by a distributor in some cases

Now let us look at the roles that each play and the dynamics of the equation.

All percentages I use are hypothetical.

Merchant needs the card machine to ensure he gets all the sale he can at Credit, so he is willing pay some charges to get the money from the Bank/Financial that is offering it to the consumer usually at about 45 day credit (At a minimum). But he cannot tie up with all the banks that provide the credit cards so he takes the PoS from one Bank and pays about 2.5% to that bank. Now since the bank that provides the PoS may not be the one that provided the Credit Card, this money is shared, 1% goes to the PoS provider, 1% goes to the Card Provider and 0.5% goes to Visa or MasterCard or equivalent who help make the settlements between various banks and make it possible for any card to be swiped on any machine (almost!).

Now let us look at the behaviors this process may drive.

1. Banks want more people to have their cards, if more people use their card, they get more money
2. Banks want more merchants to have their PoS, so they can get more money
3. Merchant’s want to lower the fee they pay to get the money
4. Vendor and Merchant and Bank all want consumer to spend more money using cards
5. Vendor and Merchant want customer to buy “UP”
6. Cards give consumer some power to buy, various people are looking at a way to give more buying power to consumer.

Now let us look at one special case today and what that leads to: What happens if we swipe the card sold by bank, on the PoS provided by the same bank? The Visa or MasterCard is then bypassed, the Bank can offer a subsidized cost to Merchant, let us say 2%. 

How can a merchant make that happen? Have you seen multiple machines at some merchants? Have you seen the staff looking at the card and then choosing a machine? If the staff is trained well and merchant can afford the multiple machines, well he can save 0.5% of sales, and that is a great motivation.

But

• How many machines can one merchant have?
• How can he /she continue to train the staff?
• Each bank that provides the machine will require a minimum sale or will charge a retainer to let you have the facility, so the merchant cannot have enough volume, he cannot afford more machines.

What has Pine labs done to make this case simple?

They dis-aggregated the machine from the bank profile. They created a software that can apply a bank profile to the machine, so as long as you have their machine, the machine can assume any bank profile based on the tie ups that you have. Once you install their software, the merchants:

• Do not have to train the staff to pick the right machine, the software picks up the profile that is best for the card.
• Do not have to pay rental for multiple machines, nor keep multiple machines that clutter your billing desk.
• Do not have to punch the sale price into the machine, the software links to your billing software and the price is already punched into the machine. This eliminates manual errors that the staff may commit.
• Do not even have to talk to multiple banks to figure out what is best for you, based on your billing profile, they can suggest the best combinations for you.

They started building the platform by getting the merchants on line, then they worked on the banks, there are many benefits that they brought to the banks as well, and I will continue this story next week. So stay tuned.