Credit-card companies - War of the virtual wallets

2012-11-20 07:26:56

Visa, MasterCard and other big payment networks need not be victims in the

shift towards digital cash if they play their cards right

Nov 17th 2012 | SAN FRANCISCO | from the print edition

ANOTHER milestone on the journey towards digital cash was passed on November

13th. That date marked the emergence from beta-testing in America of V.me, a

digital wallet that holds multiple payment cards in a virtual repository.

Instead of providing their personal details and card numbers to pay for stuff

online, customers just enter a username and a password. The service is provided

by Visa, a giant card-payment network whose headquarters is in the heart of

Silicon Valley, close to a host of technology firms which would love to get

their hands on a chunk of the global payments business.

Card companies make a tempting target. Some, such as Visa, MasterCard and China

s UnionPay, manage credit, debit and prepaid cards issued by their members;

others, such as American Express, pump out their own plastic. The amounts of

credit and cash they process are mind-boggling. Last year some $6.7 trillion

was channelled through credit cards managed by the networks, according to the

Nilson Report, an industry newsletter. Throw in debit and prepaid cards and the

number exceeds $15 trillion (see chart).

Such sums explain why so many firms, from telecoms companies to retailers and

start-ups such as Square, a new payments firm based in San Francisco, are

determined to transform the way people pay for things. Some upstarts foresee a

post-plastic world that will put a dent in card giants earnings. But the

payment networks are not going to let that happen without a fight.

In the short term new technology is actually boosting usage of plastic.

Smartphone apps often require users to enter their card details to pay for

services. Firms such as Square and PayPal have developed tiny card readers that

plug into smartphones and allow small traders using their software to accept

payments cheaply. Ed McLaughlin, who oversees emerging payments technologies at

MasterCard, reckons such developments have added 1.2m new businesses over the

past 12 months to the card firms list of merchants.

But even if plastic cards eventually go the way of vinyl records, card networks

should still prosper because they too are investing heavily in new technology

and have several built-in advantages. Visa is betting its member banks can help

it to narrow the gap with rivals like PayPal, for instance, which is part of

eBay and has grown to 117m active users thanks in part to its use on the

auction site. Over 50 financial institutions are supporting the launch of V.me,

which accepts non-Visa cards in its wallet, too. MasterCard and others are also

touting digital wallets, some of which can hold digital coupons and tickets as

well as card details.

Before long all of these wallets are likely to end up on mobile phones, which

can be used to buy things in stores and other places. This is where firms such

as Square, which has developed its own elegant and easy-to-use mobile wallet,

and Google have been focusing plenty of energy. Jennifer Schulz, Visa s global

head of e-commerce, predicts there will be a shake-out that leaves only a few

wallet providers standing. Thanks to their trusted brands, big budgets and

payments savvy, one or more card companies will be among them.

Card networks are also taking stakes in innovative firms to keep an eye on

potentially disruptive technologies. Visa owns part of Square, which recently

struck a deal with Starbucks to make its mobile-payment service available in

7,000 of the coffee chain s outlets in America. Visa has also invested in

Monitise, a mobile-banking specialist. American Express, for its part, has set

up a $100m digital-commerce fund, one of whose investments is in iZettle, a

Square-like firm based in Sweden.

So far few have tried to create new payments systems from scratch. Those that

have toyed with the idea, such as ISIS, a consortium of telecoms companies in

America, have concluded it is far too costly and painful to deal with

regulators, set up anti-fraud systems and so forth. (Last year all four big US

card networks joined ISIS.) Fears about the security of new-fangled payment

systems also play into the hands of established card firms.

Still, they cannot relax. Bryan Keane, an analyst at Deutsche Bank, points out

that rival digital wallets could promote alternatives to credit and debit

cards, including stored-value cards and direct bank-account-to-bank-account

payments. Big retailers in America have clubbed together to create their own

digital wallet and are likely to prompt users to choose the payment options

that are cheapest for the chains, by offering them incentives like coupons.

Jack Dorsey, the boss of Square and a co-founder of Twitter, agrees that

digital wallets will make the trade-offs between various payment options

clearer to consumers and reckons this will force card networks to up their

game. They had a major innovation 60 years ago [when the charge card was

created], he says, and there have been very, very few innovations since.

Some in the payments world might quibble with that but one thing they can all

agree on is that the spread of mobile payments will bring many more customers.

MasterCard s Mr McLaughlin claims that 85% of commerce still involves cash and

cheques. As mobile purchases take off, more of this activity will move online.

The biggest prize of all lies in emerging markets, where a lack of financial

infrastructure is hastening the rise of phone-based payments systems such as

M-Pesa, which serves Kenya and several other markets. Visa has snapped up

Fundamo, which specialises in payment services for the unbanked and underbanked

in emerging markets; MasterCard has set up a joint venture called Wanda with

Telef nica, a Spanish telecoms firm, which aims to boost mobile payments across

Latin America. The payments world is changing fast but the card firms are not

about to let rivals swipe their business.

from the print edition | Finance and economics