Payments Incumbents Can’t Rest on Their Laurels, Researchers Say

Payment-industry incumbents, particularly the global credit card networks and their allied banks and processors, can’t rest on their laurels lest fast-growing mobile and non-card payment systems in much of the world leave them in the dust.

That was the conclusion of payments researchers Friday who spoke at the Mobile Payments Conference in Chicago. As millions of people in Africa, emerging parts of Asia, and Latin America plug into electronic payments, the majority are going to do so without plastic cards linked to the U.S.-based general-purpose card networks, according to Thad Peterson, a senior analyst at Boston-based Aite Group LLC. 

These so-called emerging markets generated 139 billion electronic payment transactions in 2015, less than half the 294 billion transactions from North America, Europe and other “mature” payments markets, according to research from Paris-based Capgemini cited by Aite. But in 2022, emerging markets will surpass the mature markets with 457 billion transactions versus 423 billion, says Capgemini’s World Payments Report 2017. From there, emerging markets will continue their much-faster growth trajectory, hitting 715 billion transactions by 2025, 47% ahead of the 485 billion for mature markets, Capgemini predicts.

“Every part of the developing world is growing faster than the developed world,” said Peterson. “A lot of this is not network card based.”

Widely used mobile-phone examples include the M-Pesa money-transfer service, founded in 2007 in East Africa and now also operating in India and some other countries, and China’s WeChat (which provides the WeChat Pay service) and Alipay. We Chat had a billion users last year and Alipay 520 million, according to outside research cited by Aite.

Meanwhile, 39 countries, including the U.S., now have faster-payments initiatives, Aite reported. These systems already deliver or promise to deliver real-time or near-real-time payments, and none is card-based, said Peterson.

Credit and debit cards, however, remain the center of the U.S. consumer-payment universe. Yet the decades-old interchange-based pricing models Visa Inc. and Mastercard Inc. use doesn’t fully reflect the impact of new technology that’s replacing old magnetic-stripe cards, according to Peterson and Jordan McKee, a payments and technology analyst at 451 Research in Boston. For example, many mobile-based transactions are charged card-not-present interchange rates, which are higher than card-present rates. But more commerce now involves online ordering and in-store pick-ups, and Apple Inc.’s Apple Pay for one uses tokenized credentials and biometrics.

“It’s a real hit for merchants when it comes to pricing,” McKee said, later adding: “How are we still able to charge a higher fee for that type of payment when it’s arguably significantly more secure than the way we’ve doing it at the point of sale for years?”

Card payments alone have become relative commodities, which threatens the profit margins of networks and processors, according to the analysts. To broaden their revenue bases, Visa and Mastercard are moving into adjacent markets such as data analytics, security, and related services. “They’re desperately trying to add value,” said Peterson.

Whether such moves will assure that the card networks remain relevant in the long term is uncertain, but given their huge market positions today and hefty margins, it’s way too soon to count them out. “They’re certainly not sitting on their hands,” said McKee.