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