The big payments success stories have increased economic access in ways we see everyday: Square for our food cart lunch, Stripe for that groovy little online business, Zelle to reimburse a friend.
It’s reasonable to ask: OK, do we really need another payments fintech?
To geek out: Many of the big strides forward have been at the surface level of payment acceptance. Virtual Payment Networks (VPNs) go deep to the level of network operation. We are continually discovering more use cases for revolutionary purpose-specific payment networks.
Payment fintechs typically build on-ramps to existing infrastructures. In the U.S. those are the card networks and the Automated Clearinghouse (ACH) network. Increased access is no doubt a good thing, yet these networks operate with one-size-fits-all network governance, and the non-average market participants are left to struggle with an awkward fit.
Virtual payments networks allow us to design governance that meets the shared needs of a specific group, typically by closing the loop of participants.
(To clarify some vocabulary, we mean “governance” in the sense of technology governance, the rules within the coding and network participation, as opposed to government regulation. Though we’ll talk about both, as VPN candidates often have specific compliance needs!)
If we can define what type of participant will be using this network, instead of a one-size-fits-all approach we can build a customized payments network that aligns with their shared needs, avoids interchange fees, and bridges to legacy technology.
The decision between the old and new infrastructures is not necessarily binary, it’s a gradient that allows for optimizations of interoperability and scalability, as well as control. At one end, VPNs can smooth the ride along those on-ramps to the legacy infrastructure. At the other extreme, in a fully self-contained VPN, Stronghold would serve as network operator, akin to the role the Federal Reserve Banks and the Electronic Payments Network play in the ACH network. Such a stand-alone network may be “closed” by mechanisms to define membership, yet the sheer scale of a loop could be quite large when a broad pool of participants share a common need.
Given that exchange is the whole point of payments, VPNs will ultimately connect to entities beyond the defined network. Their value comes in mediating transitions from past to future, and from specialized to universal.