PEP Episode 053 — Payment Protectionism and the Payments Police Threaten Commerce | Special Guest Eric Grover

Introduction

Transcript

Christopher Dryden (00:00):

We’re talking more from a cardholder perspective, which I thought was very interesting, where looking at the marketplace, there is no marketplace on the acquiring side. And I think that because we really live on the acquiring side, it is interesting to me that regardless of what innovation occurs for the users, marketing or the acquiring side just gets stuck. Just stuck. Well,

Eric Grover (00:24):

Yeah, I have a different, I know exactly where you’re coming from on that. I have a different take. But I think acquiring is vigorously competitive. And 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. 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. 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. 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 the

Eric Grover (01:49):

Merchant, because otherwise no one would deploy merchants. 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 still is the National Debit Network in Australia. So the three debit networks in Australia, visa, a 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, two 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 are going have all this cost to support it as issuers. When issuers defend interchange in the United States and elsewhere and they say, well, we have fraud costs, we have 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.

Eric Grover (03:07):

So Chase can give a network more payment volume and the networks use that to balance participation. People think about it, to conceptualize it as funding, issuer, innovation, rewards, all sorts of things, the neo banks. But imagine a world in which we all had every 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 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 would argue it would be paid to the merchant notwithstanding cost because the merchant would be the most important player in terms of what network got the transaction. And it’s also Ace when we look at interchange pricing and look and say, well, geez, the merchants are paying and the issuer the large banks are taking, or all banks are. There are lots of markets where one side pays more and the other side pays nothing. Or 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 in the case, you can go to a bar and the bar will have free drinks. For women.

Christopher Dryden (05:09):

Yeah,

Eric Grover (05:09):

Not for men.

Christopher Dryden (05:10):

No

Eric Grover (05:10):

Bar has free

Christopher Dryden (05:11):

Drinks. They’re looking for a better ratio

Eric Grover (05:12):

Versus women

Eric Grover (05:13):

That doesn’t make the market work. Is it fair? Is it unfair? So we look at, if you ask cart holders 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’ve been two reductions that they’ve made, basically hoping that this would forestall any formal regulation. And then the regulator disingenuously put out 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, that’s either not true or the banks are volunteering to reduce their profits.

Speaker 3 (06:17):

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 him over@intrepidatventures.net. Eric, it’s great to have you on the podcast. Welcome.

Christopher Dryden (06:55):

Hey, Eric, how are you? It’s good to meet you, even though it’s not face-to-face sort of face-to-face. So really happy to have you on. I have to say, I’ve never met Eric. This is 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 A Ventures?

Eric Grover (07:38):

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,

Christopher Dryden (07:57):

Similar to Straw Hecker except you’re kind of a one man show or

Eric Grover (08:01):

Yeah, I would say, I mean they’re a consultancy and they’re focused principally on, heavily on the channel, the acquiring side, and really the channel. And I would say I’m not focused on the channel, I cover the whole ecosystem, but are probably more focused on the network. So yes, they provide certainly consulting in the payment space, but I think their focus is a little different.

Christopher Dryden (08:31):

Okay. And it’s interesting because your latest article and your articles are wide ranging. That’s what I’ve really found interesting. I mean a lot of them have to do, from what I could glean was a comparison of the risk reward associated with government intervention into private networks and how it’s probably not the 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 the federal level, especially with the new administration?

Eric Grover (09:12):

Yeah, so I mean this is a sea change. 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 at 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 backs around various financial products would make the wrong decision. And a beneficent regulator was needed to guide them there. During the first Trump term, under Mulvaney acting director Mulvaney and under director Kathy Clanger, there was a pullback, but the CFPB remained under.

Christopher Dryden (10:42):

Well, they challenged the funding and whether or not

Eric Grover (10:44):

Challenged the funding,

Eric Grover (10:46):

Challenged the funding. And the Supreme Court upheld, and frankly 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 and that Congress by authorizing self appropriation from the Fed said that was power of the purse by Congress. So that has been held to be constitutional. The court also held that the director could be removed the CFPB director without cause, which was a change and which is one of the reasons that Chopra left almost not immediately, but was going to leave upon Trump coming in. Currently, the incoming administration has dramatically reigned in the CFPB has fired 90% ish of all the staff.

Christopher Dryden (11:50):

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 halt it at least this morning. I don’t know where it’s going.

Eric Grover (12:13):

I dunno where it’s going either. What I would say with confidence is this administration clearly, one, the administration cannot get rid of the CFPB. So there have been folks who’ve said, wave their arms and said the administration is lawlessly going to eliminate the CPB. They can’t do that.

Christopher Dryden (12:36):

They can sure as heck neuter it though.

Eric Grover (12:39):

Well, yes, absolutely, they can reduce its bandwidth considerably and they’re going to do that. But absent Congress eliminating the CPB by statute, a Gavin Newsom administration or a JB Pritzker administration or the next administration could revive and restaff the, because the CPB was created by Congress as an administrative agency, and there are different views about the power of the president can argue, can exercise over it, but it is an administrative agency not withstanding being 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.

Christopher Dryden (13:40):

Yeah, I was going to say, I mean I agree. I agree with you wholeheartedly. 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. 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 stakes again, so he’s got to remove all barriers about doing that, but Trump University could revive itself at any moment, but I do believe that there is that for a lot of people and usually focus my attention on, I had a really good relationship with my grandparents and a lot of my family in that generation, and it’s like the greatest generation.

Christopher Dryden (14:52):

They went through the depression, they went through World War ii, they lived through a lot of the heartache that we’ve never experienced, we’ll probably never come close to experiencing, but in that level of people, I’m a Cold War kid, the amount of change, and you’re look a little older than me, the amount of change in technology and the amount of change in the world in our lifetime is probably overwhelming to certain people. And there’s so much sensory through devices. 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. And so I do believe that there are things, I mean I hear these horrible stories about older people having getting built over telesales or hit this button because the IRS is on you remember those? So I do think there’s a purpose,

Eric Grover (15:58):

The tools, so there’s no question that there are horrible stories that people are 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 I would be of the view figuratively hang ’em high. I mean you get bad actors and go after ’em and get ’em, but I don’t think that’s controversial. I think sometimes people pay lips, 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 you can argue about what’s the best means. And before the CAPB existed, the existing agencies had brought authority to regulate and prosecute fraud. It was spread

Christopher Dryden (17:09):

Over F. There’s watchdogs

Eric Grover (17:14):

And I think we can argue whether it’s vigorous enough, but I think that element of the role, whether it’s performed by the CAPB, 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 the policymaking by the regulator, which I would argue is Congress has the prerogative to make policy, not the regulator, the regulator is the cop.

Christopher Dryden (17:51):

No, I get it. I don’t like the rulemaking process of C FPB either.

Eric Grover (17:58):

So we definitely, we need a vigorous night watchman in the regulatory in regulator seat, but we don’t want a political actor. And under ROI Chopra, the CFPB was a very, very political agency.

Christopher Dryden (18:15):

I agree with you. I couldn’t agree. 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. 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’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 and whether you agree with it or you don’t agree with it, it doesn’t really matter to me. I think the machine’s in place to start to do this, and what I’ve said 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 are communicating because there a lot of times there’s unintended consequences to your communication.

Christopher Dryden (19:25):

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, and you’ve got people who know far less about this subject matter waiting 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’s going to come, but I always point to the Illinois case on surcharge. Right. Yeah,

Eric Grover (20:14):

Go

Christopher Dryden (20:14):

Ahead.

Eric Grover (20:15):

Well, Chris, we’re seeing it already and we’re seeing what first jumps to mind is in terms of what we were talking about earlier, interchange price regulation, state of Illinois last, was it June or July passed the interchange fee prohibition act, and this is the first state level. There’ve been temps 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, and that takes effect this coming July. And 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 with automated systems by that date.

Christopher Dryden (21:06):

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 test 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 is that would be a Herculean task. I don’t know what timeframe they could do it in.

Eric Grover (21:38):

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. 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. The bill, as I read it, would cover issuers worldwide. Now enforcement’s another matter, but if a China Union pay card user or a JCB card user who at O’Hara airport, that transaction would be covered and the acquirer that was captured that would have to respond.

Eric Grover (22:52):

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 there’re 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. So it’s a whole cocktail of different stuff. Again, enormously expensive to comply with.

Christopher Dryden (23:55):

I was going to say, at what point do you think the card brands and the networks push back and just are like, look, this is impossible for us. 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 just talking about rewards may be going away. I’m talking about the actual cost to use, the credit systems becoming wait,

Eric Grover (24:24):

The whole system, this cost will be again. So I did a back of the napkin estimate on just compliance just to provide automated compliance for the Illinois interchange fee, prohibition act, 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 and comply, but there will always be a long tail anyway of 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,

Eric Grover (25:13):

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. 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 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 its wishes of the year, whatever is in vogue for the next ratchet or the next cut.

Christopher Dryden (26:05):

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. We represent businesses in every capacity like we’re payments lawyers, but we are a business, so we have employees. We’re very aware 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. 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? Because 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, but then you’re only preempted to a certain respect 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 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?

Eric Grover (27:31):

Yeah, well, I think there’s a real federalism, central, real federalism issue here about if the payment system there are state level regulations and particularly money transfer business, almost not every state has its own licensing requirements.

Christopher Dryden (27:50):

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, and everybody throws around the word pay fax, but there’s only six pages of registered pay fax. So just because they’ve got the ability to do stuff doesn’t mean you’ve got the ability to do stuff. So it’s not the easiest thing to comply with.

Eric Grover (28:21):

No, and if I’m a bank and we have federal preemption, then I get around that and we have, I mean, just over 4,000 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. 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 and existing systems and have the resources to be licensed and to comply. This is a cynical view, but if I’m 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 got a putatively better mousetrap, but now we’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,

Christopher Dryden (29:48):

I’m watching people buy their way in these days. It’s interesting. So this is another thing I wanted to lob up to you. It came out, I heard about it yesterday, in fact, on our podcast yesterday with a gentleman named Alan Copeman who’s been in 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? 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 ’em away anymore. And so what you are kind of describing to me sounds very similar to 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.

Eric Grover (30:56):

Well, and that development, it’s fascinating because it is creating that transaction or set of transactions will create increased concentration in merchant acquiring or processing because global, it’s 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. There’s an interesting observation I would make back 2019, 2020, there were a series of m and a transactions that had analysts in the industry saying that Colossi FinTech payments processors were the future. We had Fiserv acquiring First Data. We had

Christopher Dryden (32:04):

Worldpay acquiring, yeah,

Eric Grover (32:07):

Worldpay, global Payments acquiring thesis. We had World Line acquiring genco, and then we had NEX E, 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 War Annex also payment network assets, that created something that was almost unstoppable. This is where the industry is going now. It hasn’t really panned out because now we’ve seen that FIS has reversed chorus in terms of the breadth. So they’ve gotten out of the merchant acquiring business, global payments, they sold off NetSpend, their prepay business, which was an awkward fit anyway, now they’ve sold off the issuer 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 World Line 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.

Christopher Dryden (33:31):

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 and some of these acquisitions too, culturally, I go back to this one, but when Vantiv 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. 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 Vantiv and why are you guys still separate? And they said, you know what? Our companies just culturally are so different. 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

Eric Grover (34:39):

Connection. Well, I think that was an instance where they acquired Mercury because they wanted the model that it had 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 economies of scale and complexity.

Christopher Dryden (35:09):

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 started to look at. The inefficiencies of First Data have started to shore up holes and they are been, I don’t mean to speak ill, but they’ve been ruthless about how they’ve worked with people and it’s a take it or leave it. They’re like, look, this is how it’s going to be. We really care. We understand that this may have been a mistake you’re going to have to pay for. It doesn’t really matter. 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 a go forward with them.

Eric Grover (35:53):

Yeah, they are. I mean that’s an industrial strength processor. I’m not sure anyone would have 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.

Christopher Dryden (36:28):

No, I agree with you. I just know from a partner centric perspective, right, because 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 bar really quickly and it hasn’t been very friendly.

Eric Grover (36:52):

Yeah, economics are shared across the channel, and I think if I am the Goliath processor and if I could push a button and control everything and 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 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 and much more of a problem.

Christopher Dryden (37:50):

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 dating back to, I can’t even remember the name of the company, but I didn’t realize the digit currency came out in 89 and there was some sort of player up until 98, and then you kind of went through a little bit. I like always looking at a historical and seeing where we were, what worked, what didn’t work, 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 wouldn’t be beneficial necessarily. But then it also went back to stablecoin, which is one-to-one, which I think is the next iteration of digital currency that’s going to take hold primarily.

Christopher Dryden (38:44):

I mean, I may have a cynical view, it’s the banks are going to be involved and so that they’re going to figure out how their value is involved in it. Trying to cut out the banks is something that Bitcoin just, 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’s going to come as there’s less sale options out there for the iso, because I do believe 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?

Eric Grover (39:24):

I think stable coins, so we think about Digi Cash was in some respects the first digital currency and it failed, but it was early. We had got Bitcoin, the first distributed digital ledger crypto, the mother of all cryptocurrencies. There were like 25,000 cryptocurrencies that have been launched, about half of which have failed. And I would argue in almost every case, however they have yet, well, 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 play a role. Having said that, stable coins address one of the big problems as a payment system that crypto has had of volatility of the underlying asset that’s being used to make payments. 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, a dollar back stable coins in markets with weak existing payment systems could be quite compelling. If you’re a consumer or a business and you can have dollar stable coins 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,

Christopher Dryden (41:15):

That can be quite, 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 hundreds of thousands of worth of chargebacks related to the 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.

Eric Grover (41:52):

But 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

Christopher Dryden (41:59):

Purpose? Agreed. 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. Look, 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 card issuers, there was 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, and I have to say I learned a lot about cryptocurrency just from reading about FTX and Sam Bankman freed and kind of what the crypto markets look like. And from his time at Jane Street doing jump trading, and it was pretty fascinating. I mean, it was a world that I can’t say that I’ve stepped too much in 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.

Christopher Dryden (43:43):

And his whole approach was, look, all these other guys are shady. I want to be the landmark. I want to be the flagship of this is how we’re supposed to do it. And kind of get this

Eric Grover (43:56):

Introduced. Chris, I’m reminded of Ralph Waldo Emerson’s Quip that the louder he spoke of his honor, the faster we counted our spoons.

Christopher Dryden (44:06):

Yeah, no kidding. No kidding.

Eric Grover (44:09):

So FDX and open kimono and want to be regulated, and we had the LAD at Wirecard. We had,

Christopher Dryden (44:18):

Oh, the German company,

Eric Grover (44:20):

The German company, and

Eric Grover (44:22):

Angela Merkel was publicly advocating on the behalf and the German regulator was tried to get the British regulators to cut clamp down on the hedge funds that said it was a problem. We had Moto and Michael Lewis, we had M Powell, and there is a, so a dialup of skepticism, but which is, and those are the exceptions clearly, and they’re always going to be, the system is somewhat open to newcomers, which I think we should be, and that’s good for us all. They’re going to be problem actors that get in and the idea is that they get caught. We have transparency.

Christopher Dryden (45:08):

So look, from a macro perspective, I’m interested to ask you this, 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 we haven’t spoke of today that might be something that’s coming into the world that they’re just not aware of.

Eric Grover (45:48):

That’s a hard one because I think our market is mature. It’s competitive, it’s reasonably well-served payment. The existing systems are habit. I think in the channel, small ISOs have to struggle for relevancy. I mean, you got to say, what value do I bring versus the ISV is a channel has the wind at its back, whatever. There are different models, but the idea of embedding payments in a broader offer, stickier offer, that’s quite compelling. There’ll be struggle over the economics. How much economics do the ISVs get? How much economics does the backend processor and the bank get?

Christopher Dryden (46:36):

I think it depends on the sharing of the SaaS fees too. If you got people out there independently selling it depends on what they get to share in. But that’s what Alan was saying on our podcast yesterday is like, if you’re not selling software, you better figure that out really quick or you’re not going to be here very long.

Eric Grover (46:52):

You 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, the attrition rates, the fee erosion are just not sustainable.

Christopher Dryden (47:22):

Right.

Eric Grover (47:26):

I think I fear that, and this is not so relevant for a US domestic iso, but at the macro level with our budding global tariff for payments protectionism, which has been a real festering issue for decades, what 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, 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 tariffs right and left, that payment protectionism is going to get much worse, which is ultimately bad for everybody, I think. And it is not new, but it’s going to get worse.

Christopher Dryden (48:46):

You think it’ll disconnect the marketplaces more?

Eric Grover (48:50):

It’ll increase the burden of transactions and therefore increase the burden of commerce and increase the cost of goods and services will a world where we are talking about a patchwork of regulations within the US states. Well, 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. Making payments to becomes more difficult.

Christopher Dryden (49:23):

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 in 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.

Eric Grover (49:57):

Well, it’s getting, in some markets it’s been very difficult. It’s very political, but many markets, Andy Bear 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 in 2001, as part of its succession 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 we’re now in 2025.

Eric Grover (51:10):

And at the time in 2001, China UnionPay, which didn’t exist, Alipay didn’t exist. WeChat pay didn’t exist. We in 2025, MasterCard has a domestic processing subsidiary in China. It’s a joint venture with the 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. Europe has been a different animal. In Europe, specifically the European Union, the dominant pan-European retail payment systems are MasterCard and Visa. So the dominant wallets or 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 card bank air, but Visa and MasterCard are the largest pan-European systems. The European regulators, European Commission in Brussels, the ECB and 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.

Eric Grover (52:32):

And I think we’re going to see a change there. There’s going to be more. They’ve been talked about, they want payment strategic autonomy or strategic autonomy and 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. 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, which is now the biggest P two P and payment system in Brazil. It’s a major retail payment system, major B2B payment system. Six months before the central bank launched that system, they told Facebook that they took Facebook’s WhatsApp pay, which was a PayPal like wallet out of the market, and they said they were worried about financial system stability.

Eric Grover (53:50):

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, but then still there are a bunch of private sector actors, both domestic and foreign in that market. So it’s kind of a hybrid.

Christopher Dryden (54:30):

Yeah, that’s interesting. That’s interesting. Well, look, I want to tell you, it’s been 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 listenership?

Eric Grover (54:48):

So easiest way to contact me would be at Eric dot grover@intrepidventures.com. That’s Eric dot grover@intrepidmeasures.com. And I bring a comprehensive understanding of the payment system, competitive landscape and dynamics. And I maybe sounded a little gloomy during some of my remarks.

Christopher Dryden (55:16):

Oh no, you were great, man. You kidding me? I really appreciate a stark perspective on what’s going on. I think people, knowledge is king. Knowledge is power. The more people know, 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. I don’t necessarily understand. So that’s great.

Eric Grover (55:54):

So I mean, the industry is much more open, much more innovative. I’ve been in this industry long time.

Christopher Dryden (56:04):

Yeah, no, I know. It’s very obvious.

Eric Grover (56:07):

When I started, it was 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. Almost every sector is more competitive than it was 30, 40 years ago. And that’s a good thing, I think. And I hope that it continues to be, get more competitive, more innovative. I worry.

Christopher Dryden (56:44):

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. Alright. Alright, sir. Thank you Eric. Have a great

Speaker 3 (57:09):

Weekend. Absolutely. Thank you for listening to this episode of The Payments Experts podcast. A podcast, a global legal law firm. Visit us online today at global legal law firm.com.