“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” - Bill Gates
Bruce Parker, Modo Founder & CEO, welcomed economist Eric Grover from Intrepid Ventures to the #PaymentsGeek Roundtable to debate who will win the payments volume war in the short, medium, and long term. Will it be the card networks, fintechs, banks, or alternative payment methods? Watch the full webinar or continue through this recap to find out what these #paymentsgeeks have to say on the subject!
There has been a tremendous amount of change so far this year. We’ve seen more growth in ecommerce volumes as a percentage of overall retail in the last 90 days when that same amount of growth took 5 years previously. But what does this pandemic mean for payments volumes? As Eric Grover puts it, “fundamentals still apply” in regards to banks, card networks, fintechs, and alternative payment systems. The fact that there are more ecommerce transactions likely means more card transactions, which is good news for the dominant card networks. Although, in some geographies, alternative payment systems are having their moment in the spotlight and are boxing out card networks.
But, enough on corona! Let’s dive into the winners and losers of payments volume in the short (now - 2021), medium (2022-2025) and long (2026+) term.
To kick off the card network conversation, Bruce and Eric discussed the effects of interchange realignment, EMV liability shift, and the PSD2 anchored payment system.
Eric defines interchange as a “pricing system which balances participation on both sides of a two sided payment network” that is controlled by the card networks. The interchange realignment that has been announced will raise interchange in sectors like ecommerce and lower interchange in places like education. Raising interchange means better economics for big issuers so they can give better benefits to their cardholders. This realignment, though, has been deferred due to the pandemic.
EMV Liability Shift
With the EMV liability shift, if a brick-and-mortar merchant is complying with EMV and the card used is EMV capable (has a chip) then the merchant doesn’t have any fraud liability. Good for those merchants! However, the majority of gas stations haven’t made the switch to EMV readers in their terminals because it is a much heavier lift for them. These companies will remain liable for fraud when the shift occurs, but the deadline for the liability shift has been deferred. The EMV adoption has been a slow process around the world.
PSD2 Anchored Payments System
In April 2020, an association of European smartcard manufacturers put out a whitepaper proposing a Payment Services Directive 2 (PSD2) anchored payments system. They suggest leveraging existing card and point-of-sale infrastructure to manage PSD2 payments. This payment system would use co-branded cards that would allow consumers to initiate a PSD2 payment against their bank if the merchant was enabled to process PSD2 payments. Eric believes this scheme is “cleverly designed to appeal to the EU regulators desire to have a pan-European payment system.”
Overall Effect on Payment Volumes
In the short term, for cards, it doesn’t seem like much is going to change due to both the interchange realignment and the EMV liability shift being deferred. The PSD2 payment system is in its infancy and won’t be immediately relevant, but is certainly something to keep on the radar.
Banks have been around for a LONG time, but many think that their role in the payments ecosystem is soon coming to an end. With the advent of real time payments (RTP) and the changing responsibilities of banks, Eric gives his insights on the future of banking.
Real Time Payments
In recent years, there has been a steady stream of countries implementing real time payment systems. The Clearing House was the first to go live with a traditional system in the US but there are a slew of other organizations in the mix - The Fed, Fiserv, FIS, Mastercard, Visa, and Zelle. Additionally, there are products from the networks that businesses are using to deliver real time use cases.
With all of these players, the US real time payments market is saturated. But, have companies found the value in real time payments? It certainly hasn’t been the cheap retail payments option that many regulators and merchants envisioned.
Around the globe, real time payments are coming together piecemeal. Eric believes we are going to see some of these real time national systems tied together in order to address cross border use cases, because network effects matter here.
The Role of Banks
The United States has many more commercial banks than any other country in the world. Eric explained that in 1984 there were almost 15,000 commercial banks in the US. If we look pre financial crisis, there were roughly 7,500 commercial banks. By the end of 2019, there were only 4,400. Eric doesn’t see this trend ending here. The number of banks will continue to decline.
“It is likely that most of the banks are at risk, slowly in the near term, and long term of having eroding payment transaction economics, and having eroding relationship or engagement capital than other parties standing in between.” - Eric Grover, Principal Intrepid Ventures
Eric argues that banks may become a backend payments utility instead of a primary portal into consumer finances. That is not good either for the bank shareholder or for the bank economics. The bank will become less sticky, and won’t be able to capitalize as well on consumer data.
Overall Effect on Payments Volumes
In the shorter term, we can expect to see expanded real time payments coverage around the globe. Eric has no doubt there will be fewer banks in the longer term. He also expects to see continued consolidation. The real question he has for the future of banks has to do with what role they will play in the payments value chain in the longer term. His guess is banks’ transaction economics on payments and the amount of data they receive from the customer is going to decline.
Another thing to note, says Eric, is that in the longer term real time payments between accounts and consumers will start to become assumed. It will not be a differentiator for your company.
In the past decade, there has been a wave of fintechs who have come on the scene trying to enhance payment systems. These fintechs have caused incumbents to think more innovatively and ultimately deliver better experiences. But, where does that leave the fintechs in the payments volume game?
The most successful fintechs of the last decade have been the ones who have managed to tweak or enhance ubiquitous business models. They’ve made processes more nimble or created better payments experiences, but they haven’t reinvented the wheel.
“Look at Square. People were talking about it as a tech disruptor upending the ecosystem. Baloney. The fundamental business model is providing acquiring and payment acceptance to all merchants. They were very innovative in underwriting and providing mobile acceptance. In building a brand. Big deal.” - Eric Grover, Principal Intrepid Ventures
Overall Effect on Payments Volume
Right now, Eric doesn’t see the fintechs taking any meaningful revenue from the large incumbents. They are working on the fringe of the markets and snatching up smaller, nontraditional players, and Eric doesn’t see that changing anytime soon. Fintechs will certainly continue to enrich their offerings and push the “goliaths,” which is very healthy for the market.
“They’re doing things quicker and more flexibly than what you would expect the boys at TSYS and First Data to do.” - Eric Gover, Principal Intrepid Ventures
Alternative Payment Methods
Alternative payment methods (APMs) are a very buzzy topic, but what does Eric see happening with them in the short, medium, and long term?
There are markets today where you could say an APM has already “won” the payments volume game. Look at China with Alipay and WeChat Pay. Between those two APMs, they make up 95% of all mobile payments and ecommerce in China. In the Netherlands, iDeal has about 60% market share. Eric believes APMs that are already established don’t have anything to worry about in the short, medium, and long term. There are also emerging markets where APMs are building scale like PayTM in India.
Not all APMs will continue to scale. Eric points to Brazilian payment method Boleto, which allows consumers to pay online with cash at the physical point of sale. He believes the long term prospects for these APMs is bleak. Short term, there may be value in the payment method, but long term he doesn’t think their value will hold.
“As a category, alternate payment systems will do okay. Of the global players, there are at least three that are semi-multinational - PayPal, Alipay and WeChat Pay. I don’t think any of those three will be genuinely global in 10 years. They may be bigger in their home markets, they may be bigger in some adjacent markets, but the path to achieving critical mass globally for them, I think, is difficult.” - Eric Grover, Principal Intrepid Ventures
Overall, Eric sees APMs continuing to grow and slowly steal share from traditional card systems.
Who Wins & Who Loses
Let’s break down all of Eric’s points on the winners & losers:
- Cards will continue to dominate around the globe.
- The number of banks will shrink, and they will turn into a backend payments utility.
- APM volume will slowly gain momentum globally.
- Fintechs will remain a helpful force for pushing innovation, and some of these companies will end up as winners in the long term (although most will not).
With all of the systems at play, it seems the true winner will be companies who focus on payments flexibility and keep their infrastructure open to rapid change. Interoperability is a key piece of the puzzle here - being able to use whatever system makes the most sense for your consumers - whether that be a new, dominant payment method or a fintech player that hops on the scene offering better prices or services than the traditional player you’re tied to.
Watch the full webinar
If you have any additional questions about Modo’s enterprise payments orchestration platform, we’d be happy to answer them. Reach out to us at www.modopayments.com/contact!