Mobile payments, blockchain, regulation: Card schemes face many challenges but still have time to reposition themselves to maximum advantage if they know where to look
For more than 50 years card networks have played a central role in the growth of electronic payments in the U.K. and around the world. As the electronic payment ecosystem grew, Visa, MasterCard and to a lesser extent American Express (among many other card networks) have developed a payment infrastructure that connects consumers, businesses and financial institutions along with all other players in the payments value chain.
Today, consumers around the world and in the UK use their payment cards for a significant share of everyday transactions. In 2013, the global share of non-cash transactions via payment cards reached 62.8%, up from 60.9% in 2012. While card growth is expected to continue to increase in the near future, it is already slowing, falling from 13.3% in 2012 to 11.5% in 2013. This trend will gain momentum as card-based mobile payments such as Apple Pay, Android Pay and Samsung Pay gain traction.
Reduced growth is also due to the rise of alternative payment methods and new technologies including blockchain. These technologies bypass the traditional card rails and offer consumers and merchants more convenient and cost effective methods of payment. By some estimates, in 2017 alternative payments including mobile and blockchain-based could account for as much as 59% of e-commerce transactions worldwide.
Regulation adds to the complexity of this increasingly competitive environment. Regulatory bodies consistently target card schemes and their operating business models, including interchange fees, because of the perceived high cost of card payment acceptance.
When one door closes, another opens
Despite these challenges, card schemes still have time to reposition themselves to their advantage. The sector enjoys a reputation for innovation not least through its investment in financial technology that could complement existing business models.
However, investment in fintech is only a stopgap. As the payments ecosystem evolves, card schemes will have to undergo fundamental changes. Fortunately external forces are creating new pportunities that offer a shortcut to the future.
MasterCard has entered into exclusive negotiations to acquire VocaLink. VocaLink is a bank-owned interbank technology provider that operates the UK’s real-time payment network (Faster Payments). It is also the main ATM operator through LINK, the UK’s cash machines network. Under pressure from the Payment System Regulator (PSR), UK banks are being pushed to sell VocaLink in a move designed to increase competition in the market by improving access to the core interbank infrastructure.
Acquiring VocaLink will make MasterCard a very different payment network. MasterCard will have the means to process a range of new transaction types and capitalise on existing VocaLink supported products such as Paym and any products in the pipeline.
The acquisition comes at a time when the Faster Payments network is growing rapidly (as of Q3 2015 annual volume and values on the Faster Payments grew by 13% and 14.6% respectively over Q3 2014) and demand for real-time payment networks is increasing around the world.
VocaLink in particular has been at the forefront of real-time network expansion in Singapore and the US where it is involved with recently launched and proposed real-time networks. While the acquisition of VocaLink in the UK does not guarantee access to other international interbank networks, it ensures MasterCard will be in a competitive position to provide real-time interbank infrastructure services around the world.
What it all means
For the UK, the acquisition of VocaLink will likely result in very few changes. The regulatory push for open access to the Faster Payments network for new fintech companies and challenger banks is likely to continue under MasterCard ownership as the card network looks to recoup its investment through connectivity and transaction volume usage fees. In addition, MasterCard will look to drive new revenue by encouraging UK banks to shift the vast majority of their debit card portfolio from Visa to MasterCard.
While existing Faster Payment participants will see no change in their connectivity status, the increasing openness of the network will remove opportunities to provide agency services to smaller players while also increasing the competitiveness of payment products offered by financial technology companies and challenger banks. As a result, existing Faster Payment participants will have to review their payments strategy further (in addition to PSD2 considerations) to ensure their future competitiveness in a more open and challenging retail banking environment.