Jul 9, 2006

Commoditized payment software, cheaper every year

Something new has been happening over the past year or so. Welcome’s XLS software is becoming the most valuable part of a bank’s payment software infrastructure. XLS is a set of add-on software modules which sit next to a bank’s core payment system, yet banks are prepared to spend as much or more on XLS than on their core system. I have been getting more and more questions on this trend. Why is an add-on module more valuable than the core system? The short answer: it's normal, it's the way things should be.

Core payment software has become a commodity, with all suppliers suffering from increasing price pressure. Low cost suppliers are becoming more mature and the quality of their products is improving, driving prices down for everyone. Banks clearly see little difference between core payment systems, forcing suppliers to compete primarily on price.

Obviously, no supplier uniquely solves major business pains that banks suffer from. If a single supplier did help banks address truly major pains, that supplier's products would be much more valuable than the competition's. And this is clearly not happening. The biggest pains facing card issuers today are low card activation and usage, low merchant processing fees and increasing pressure to cut or even eliminate interchange. That last one is a particulary huge pain. Try to think of core payment software features which help banks avoid low card activation and usage. How about features which help avoid low merchant processing fees and help reduce pressure on interchange? Core payment software was designed entirely to make transactions fast and secure, something all systems now do equally well, roughly speaking. Core payment software wasn’t designed to solve the far bigger problems that bankers face, and suppliers in many cases don't even understand those pains.

Of course core payment software is becoming cheap. It has to. Competing systems all do the same thing, so the only differentiation is price. Welcome's unique focus on very big pains helps insulate our products from commoditization and makes our products more valuable than the core payment system itself. When we drop that focus, we’ll go the same direction as everyone else.

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