Payment service providers Visa and Mastercard are one of the biggest brands in the payments industry. Merchants and consumers associate them both with high fees, especially in the US market, where both legislative and market challengers are hoping to curtail their duopoly, since the payments processing fees are uncapped like in the EU.
However the payments industry is more complex than just the transactions at the check-out counter. It is often overlooked that as a result of influence and pressure from the two card giants, a lot of payments industry innovation was initiated across the globe, especially in cross-border payments and e-commerce.
Frank Breuss, whose local payment Fintech company Nikulipe operates in fast-growing and emerging markets, argues that “killing” credit cards should not be the focus of market challengers and that the presence of diverse industry players in the payments industry is necessary for the payment technology to advance.
An environment that fosters competition
Visa and Mastercard’s payments industry popularity has pushed Fintechs and even governments across the globe to look for alternative payment infrastructures and methods. Most payments solutions, including A2A payments, Online Banking, Pay by Bank and Local Payment Methods were initially introduced as challengers to dominant market players. Since local payment methods are becoming the dominant choice around the world — the narrative is changing slightly, but the sense of challenge is not going away. The good news being that as in any free-market, the competition will always benefit the consumer.
A2A payment innovation
Account-to-Account (A2A) payments move money directly from one account to another without the need for additional intermediaries like in card payments. Even though this technology has been around for many years, mainstream adoption was not possible due to a lack of infrastructure. That’s why for the past 10 years around 80% of Central Banks around the world have invested in building the infrastructure that enables A2A payments. The simple reason being elimination of transactional fees or extra costs. The money travels directly from the account of the customer to the account of the merchant.
“With the goal of eliminating payment processing, assessment, and interchange fees — that only benefit the transaction operator such as Visa or Mastercard, many Fintechs started developing payment solutions with the A2A technology,” explains Mr. Breuss. “Aside from the reduction of transaction fees, such payments offer a more flexible infrastructure as well as accepting and collecting payments faster which benefits both the consumer and the merchant.”
Major ‘pay-by-bank’ and LPM adoption
Close to 59% of Europeans use online banking and this share is constantly increasing and has more than doubled since 2007 when it stood at 25%. Aside from a diversified and competitive market, online banking adoption allows Fintechs to develop innovative Local Payment Method (LPM) solutions for particular countries or regions using Open Banking technology. Solutions such as banklinq, LPM for the Baltic region, benefit the merchants and consumers alike, offering an integrated payment solution that allows consumers to pay via their favourite bank if integrated by a global merchant.
“Open Banking solutions in the form of LPMs benefit both the customer and the merchant. For both parties the fees are significantly reduced, transactions are faster and chargebacks are virtually eliminated for the merchant which is a big issue in e-commerce,” says Frank Breuss. “Furthermore, Fintechs are able to offer a more convenient shopping experience for merchants with enhanced user experience and region-specific aspects such as language or payment options.”
Most recently, banks like JP Morgan have made a strong push for ‘pay-by-bank’ alternative payments processing system, hoping to push out credit card market dominance and escape the threat of “non-banking competitors beating JPMorgan to the punch.”
Credit cards as innovation enablers
Aside from local payment methods gaining adoption over credit and debit cards, the two credit card giants themselves are acknowledging the need for innovation in the payment industry. Both Visa and Mastercard work with fintechs, digital banks, and Fintech enablers across the globe. Both companies run partner accelerator programs and provide Fintech startups guidance and investment to grow their companies.
Although the innovation is consolidated as companies who choose to enlist in these programs have to work within the frames and guidelines of Visa & Mastercard. Visa has even launched an initiative to act as a mediator between banks and Fintechs and thus increase their efficiency in cooperation.
“Legacy institutions can also drive innovation. They support startups that create solutions involving money 3.0, quantum computing, and artificial intelligence,” adds Mr. Breuss. “The downside is that innovation is often kept within a controlled environment that is convenient for both Visa and Mastercard. Perhaps Fintech-driven disruption can change this dynamic.”
Levelling the playing field
The discussion on how to balance the dependence between consumers, merchants and the card giants is still developing. Mr. Breuss suggests we don’t try to punish a party who has ushered payment infrastructure stability and facilitates global commerce.
“Rather than penalising Visa & Mastercard, we should embrace the free market and all the new technologies or players that are entering it. Whether it’s government subsidies or new legislation, it should be targeted towards fostering more innovation and not limiting one’s activity.”
He adds, “I hope credit cards don’t die for the simple reason of ensuring that consumers get the best of both worlds until the best solution within the payments industry will be found and adopted.”