The Secret Life of your $5 Latte

Your $5 latte is living a secret (financial) life.

Think back to the last time you walked into your local coffee shop and paid for your latte. You tapped your phone or your card, grabbed your coffee, thanked the barista, and headed out for your morning commute. Easy, right?

In reality, as you walked away from the counter, you set off a chain of events that sent your digital payment bouncing between providers, banks, wallets, card networks, and processors. The end result of your — and millions of others’ — daily lattes is a vast web of payments steps that, though effective, still offers room for improvement.

Today’s Payment Rails

Your latte payment starts with your account and your digital wallet. When you tap your phone, your wallet and payment information are sent to the payment processor. The third-party payment processor is responsible for securing authorization from your payment instrument’s issuing organization (e.g. the bank that issued your card) through the appropriate card network. These processors are responsible for the first line of fraud prevention and implement complex fraud engine processes to help protect merchants and consumers alike.

By the time you walk away from the counter, the payment processor has submitted your transaction to your card’s network. The card network manages the authorization and transfer of money from your bank (the “issuer” bank) to the business’ bank (the “acquirer” bank). As a final step, the merchant transfers money from their acquirer account to whichever business account they want their money to ultimately end up in.

This sequence of events, while complex, facilitates transactions are secure and reliable. They’re designed to enable instantaneous commerce while also protecting both parties from fraud. Critically, today’s process does not place the burden of payments technology on the consumer or the merchant; theoretically, no matter what bank you or the merchant use, you can easily transact with each other without needing to worry much about the system that stitches together banks, services, and technologies to make that payment moment seamless.

Transactions vs. Payments

The latte analogy reveals something crucial about today’s payment rails: there is a nuance between a transaction and a payment. A transaction can be thought of as the simplified experience of buying a latte. You see the cost debited (technically ‘pending’) from your account. The merchant sees the sale as completed on their end. You walk away with your coffee.

A payment is the actual movement of money from your hands to the merchant's hands. As illustrated above, a payment is still happening long after you leave the coffee shop. There are two outstanding areas of improvements with payments.

  • Time: Payments can take 1-3 days to settle. For the average consumer and merchant, this settlement period may not matter; at the end of the day, the system is trustworthy. However in certain cases, such as for small businesses and for larger value purchases, complex and expensive liquidity management solutions are necessary the longer it takes to get money into an account.

  • Cost: Payments acquire fees as they move between intermediaries — which each needs to cover the cost of servicing that transaction. Transaction fees can add up, compounding the payment cost (i.e. the service of moving money).

The reality is today’s system works. You can walk away with your latte before the money technically reaches the merchant’s bank. You know if that jacket you took a chance on doesn’t fit, you can return it at the store and you’ll get the money back in your account. In other words, the overall payments ecosystem works. It allows us to exchange at scale, whether mere cents to tremendous sums, and with sufficient trust that it’ll all happen the way we expect.

Globally, we have come to expect and value these types of payment services that add value, convenience, and innovation to merchants and consumers. These types of value-add services can include: fraud protections, invoicing capabilities, customer service, reporting tools, rewards programs, returns support, and others. As finance evolves, any payments future should endeavor to retain these types of services that are needed, valued, and trusted.

While this system works effectively and these types of payment services will likely always incur a cost, innovations like crypto payments offer an opportunity to streamline the process, making it faster and driving costs lower and lower.This is where crypto, stablecoins, and PYUSD fit in.

PYUSD and the Future of your Latte

Transacting with crypto could allow us to streamline the steps in the secret life of your latte. Instead of a transaction moving through multiple third-party banks, networks, and processors, a crypto transaction could prove far more direct.

A crypto transaction starts with stablecoins in your digital wallet, which are then sent directly to a merchant’s digital wallet with the support of a virtual asset service provider (VASP). The nuance here is that a stablecoin is real, discreet value — not the representation of value.

By transferring the actual asset itself from one digital wallet to another, settlement times are eliminated and transaction costs can be reduced. What’s left is the VASP and the additional services it provides so that you and your coffee shop can both remain confident in the payment, while benefiting from more streamlined transactions.

By introducing PYUSD to consumers and merchants alike, PayPal envisions a future where money can move nearly instantaneously and fees can be reduced. This leads to greater choice for how consumers pay and merchants accept payments.

We’ll Say It Again: Pay How You Want

We believe crypto introduces a new way to send money between people and businesses that can benefit certain sectors of the economy today and in the future. Crypto has the potential to become a new payments rail - helping reduce the costs associated with moving money. Competition drives innovation and a new payments rail would drive all ecosystem players to focus even more on providing and charging for services that create a better payments experience for everyone. And enabling everyone to pay how they want.

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