Tokenization is fundamental shift: 4 corner model is dead

Tegeltjeswaarheden 4 corner modelOne of the cornerstones of my speech at the conference on the Future of Payments in June 2012 (Amsterdam), which I delivered on behalf of Enigma Consulting, was that the “4 corner model“ is not an adequate model to describe payments and in particular the changes that take place in payments and its environment.

Value Chain Myopia: Payments’ 4 corner model

The model has four relationships but the relationship between the payer and the receiver itself is taken totally for granted by the bank. But it is in that relation were major and disruptive changes take place.

Banks are so focused on their part of the value-chain that they subconsciously think this sideshow (cq. payments) is actually the main thing.
I have compared the banks to fish in a fish-bowl:

The fish in the fish-bowl know that if they protrude their little head above the waterline they will see another world which thinks differently nthen they do, but they assume then,that the world is there for them, and that the outside world can not function without their contribution. They tell each other that they are very important fish, goldfish even because they won the lottery for they are “to big to fail”.

(Note: The full text of my speech can be read in (Dutch): Betalingsverkeer 3.0)

In the Forbes Article Tokenization And The Collapse Of The Credit Card Payment Model, Bruce Updin writes:

This original logic for tokenization (keeping merchants free from hosting payments data) has been taken to the next level by Braintree … the same idea is now being used to make the payment experience quicker and easier, through their consortium model (“if you’ve paid anywhere else, you can pay here, too.)

What Braintree and Square have done is create self-authenticating tokens in a natively multi-merchant construct, and that is a frigging big deal.

The current retail payments industry rests on what is called the four party payment model. The four parties in question are: 1) cardholder, 2) cardholder’s bank, 3) merchant and 4) merchant’s processor/bank, also known as the merchant acquirer.
This structure was invented and is perpetuated by Visa and Mastercard, which serve as the information switches between the four parties.

Before Visa, non-cash transactions were done using store credit. Because most merchants knew most of their customers before the 1950s, they didn’t need elaborate authentication schemes. After the 1950s, Americans grew far more mobile, and store credit became less practical; hence Visa and Mastercard emerged, to enable transactions between strangers. If you’ve ever used Square Wallet, you’ll know what I’m talking about here: it feels like the 1940s.

I will leave it at this: in a world where everyone is known, there is no need for an omniscient middleman. That feels like a scary fact for the networks.

I could not agree more.

Screenshot 2014-01-20 12.57.56