One of the most interesting trends that I have been following for the past several years is what I call the “unbundling” of payments, which is the exposure of services through open application programming interfaces (APIs) that had previously been bundled into a single product.

To think about the scope of services that could be unbundled, it is helpful to take an example. A credit card, for instance, is really several distinct products and services bundled into a single solution:

  • A line of credit – the cardholder can borrow up to a certain limit without paying it back immediately. This can either be settled on a month to month basis (what is sometimes called “deferred debit,” as in the traditional American Express model) or can revolve, with the cardholder making minimum payments each month.
  • An authorization service – this verifies that the card is being used by the legitimate card holder, and that there are sufficient funds available in the account to cover the purchase.
  • A payment guarantee – the card issuer guarantees payment to the merchant, provided that the rules regarding authentication of the card (via signature and/or EMV token exchange and/or PIN) are followed. If the cardholder fails to pay back their debt, the card issuer assumes responsibility for collection.
  • A clearing mechanism – the card network keeps track of debits and credits between issuing and acquiring banks throughout the day, maintaining a running balance, which is settled on a nightly basis.
  • A settlement mechanism – the card network transfers funds to the merchant through a merchant account held at an acquiring bank. This is usually done overnight.
  • A transaction fee, also called a “discount fee” because it is deducted from the amount transferred to the merchant. This is itself a bundle of at least three separate fees: an interchange fee, which is paid to the issuing bank to cover its expenses in administering the card product; a network fee, which covers the costs of the network switch; and an acquirer fee, which covers the costs of the acquirer, or merchant bank, which underwrites the participation of the merchant in the card network.
  • An overdraft line, or “overlimit” line in the case of credit cards, which gives the issuing bank the option of authorizing a transaction for which sufficient funds do not exist in the account.
  • A rewards and loyalty program, in the form of points for every dollar spent on the card. This is usually funded through the interchange fee, which has been the source of much litigation and regulation over the years. Interchange regulation is explicitly aimed at unbundling the rewards program from the interchange fee, forcing the issuer to bear the costs itself and in many cases leading the issuer to discontinue the rewards program altogether.
  • An insurance or warranty program, which reimburses the card holder for purchases that turn out to be defective, subject to certain claim procedures and limitations
  • A digital wallet, which stores a token in place of the actual card number and makes it easier for the card holder to make purchases online by removing the need to enter the card number, expiration date and card verification value (the three or four digit number printed on the card).

Most payment schemes do not bundle all of these features. For example, the automated clearinghouse system (ACH) is limited to clearing and settlement, with none of the other features. If there are insufficient funds in an account to cover a transaction, the bank may choose to honor the transaction as an overdraft or may return it, leaving the initiator responsible for collecting the amount through some other means. To address this problem, companies sell the payment guarantee as a separate product, most commonly in the case of checks. Basic payment schemes such as the ACH are much cheaper than credit cards, but are riskier for merchants to accept.

The basic nature of the ACH lends itself to the creation of value-added services such as PayPal and Venmo, which add back features such as the payment guarantee and warranty service (which PayPal calls purchase protection).

A key supporting trend for unbundling is the growth of open APIs, which allow third parties to access payment services outside of the usual service bundle. For example, Mastercard has a series of APIs available through its developer portal that include its Masterpass digital wallet, personalized offers, its MDES tokenization service, its MoneySend person-to-person (P2P) funds transfer service, and more. The partnership between PayPal and Mastercard that I wrote about previously is based on these open APIs, which allow PayPal to use MDES tokens, integrate Masterpass into its Braintree e-commerce platform, and use MoneySend to transfer funds directly into a Mastercard debit card account.

Companies such as PayPal are engaged in what we might call “rebundling,” which is repackaging these discrete services into a larger platform. The result is easier integration between what were previously separate companies with separate services.

Another example of rebundling can be seen in the announcement this week of bank-owned P2P network Zelle’s US rollout with over 30 participating financial institutions, which will be adding the service to their mobile banking applications over the next 12 months. The test here will be how smoothly the integration goes, and how seamless the user experience is. According to an interview with Early Warning Service’s group president for payments, Lou Anne Alexander, on, Zelle will be launching its own app using the Visa and Mastercard rails to reach banks that are not part of the initial launch. Thus, the Zelle app is explicitly using the Open APIs that Visa and Mastercard have established, as well as providing its own for its client banks to use in integrating the service into their mobile apps. This would not have been possible if Visa and Mastercard had not first unbundled their payment networks so that they could be used in stripped-down form, disconnected from legacy credit and debit cards.

Unbundling is how payment networks will compete and collaborate in the coming years, while rebundling is how payment service providers (including banks) will compete. Looking at the list above, it is clear that there is a lot of potential for expansion beyond the basic transfer of funds from place to place. I expect we will start to see more ancillary services added over time as the various P2P networks compete for market share.