The Green Sheet Online Edition
December 28, 2015 • Issue 15:12:02
Will new payment schemes bump card brands aside?
Two recent developments are noteworthy because they lack any participation from the card networks. First, on Oct. 26, 2015, Early Warning Services LLC revealed it will acquire clearXchange, creating a bank-owned, real-time payments network. Second, JPMorgan Chase & Co. partnered with Merchant Customer Exchange (MCX) to enable Chase Pay in CurrentC wallet and allow Chase Pay to be accepted at CurrentC merchants. Historically, revolutionizing payments has been as profitable as producing the DeLorean automobile. Bling Nation, Revolution Money, Debit Man/Tempo Payments, Pay by Touch and Isis/Softcard were all ahead of their time. Countless lesser-known companies have met similar fates. The reasons they didn't gain traction are numerous, including:
- Enormous investment in current existing infrastructure
- Ubiquity and accessibility of cards for consumers
- Relatively inexpensive, marginal costs for established solutions
However, it's worth considering why this time might be different and become a tipping point for new payment schemes. First Annapolis Consulting did an excellent job summarizing the actions of both Early Warning and JPMorgan. The firm's analysts provided the following overview for Early Warning's acquisition:
"Under an agreement announced October 26th, Early Warning will acquire clearXchange, creating a bank-owned real-time payments system. The transaction is expected to close by the end of 2015. Seven banks will own the combined entity, with PNC Bank joining the existing owners.
Will new payment schemes bump card brands aside?
"The new integrated platform will be available to all U.S. banks and credit unions in early 2016. The combined solution will deliver secure, real-time, non-card payments through a single platform that merges immediate funds availability with integrated real-time authentication and fraud management capabilities. Early Warning has indicated that a real-time bill pay solution will be offered by the combined company."
First Annapolis' complete statement may be found here: www.firstannapolis.com/news/tracking-real-time-payments-ews-acquires-clearxchange?utm_source=Tracking+Real-Time+Payments%3A+EWS+Acquires+clearXchange_15Nov11&utm_campaign=EWS+Acq+clearXchange_+15Nov12&utm_medium=email.
First Annapolis also provided the following bullet points on Chase's news, extracted verbatim below:
- A digital wallet designed to simplify the payment experience for Chase customers in-store, in-app, and online.
- Operates via barcodes or geofenced in-app payment in a proximity context and branded pay buttons in-app or online.
- Partnered with MCX to enable Chase Pay in the CurrentC wallet and for MCX's 40 merchants and over 100,000 locations – driving 1/4 of U.S. retail spend – to accept Chase Pay.
- Key piece of JPMorgan's strategy to build an integrated payments business.
The firm's complete overview and analysis may be found here: www.firstannapolis.com/wp-content/uploads/2015/11/Chase-Pay-A-Notable-Entrant-to-US-Mobile-Payments_by-First-Annapolis-Consulting.pdf.
Now I'll discuss why these investments may pay off.
Visa, MasterCard now independent
Prior to both Visa and MasterCard becoming publicly traded organizations, they were associations owned by their bank members. When the IPOs took place, all of the member banks received both cash compensation and stock in the new corporate structures, but they were no longer on either company's board of directors.
Previously, it benefited all banks to keep the cost structure of Visa and MasterCard to a minimum as that squeezed out the margin which could be earned by the bank members. Since Visa and MasterCard became public companies, they introduced a host of new fees, including the transaction fee both companies charge referred to as the Acquirer Processing Fee and the Network Access Brand Usage Fee. These fees range from $0.0155 to $0.0195 per authorization. Visa introduced a monthly fee called the Fixed Acquirer Network Fee. Both companies have also significantly increased assessments. When they were associations, assessments were 9 basis points; now assessments range from 11 to 13 basis points.
Combined with all the additional, less frequent fees, the amount of costs that have been introduced since the card networks became publicly traded is staggering. Couldn't banks now form a new association and perform the services for less than Visa and MasterCard's fees?
If all the banks mentioned in the Early Warning announcement got together, including Chase, Bank of America Corp., PNC Bank, Wells Fargo & Co., Capital One Corp. and U.S. Bancorp, they would collectively represent approximately 75 percent of all checking accounts. They could join MCX or some entirely new association, which would solve the authorization issue associated with the automated clearing house (ACH).
Other factors favoring new alternatives
Also, consider the following:
- Issuers are issuing chip cards: Chips can carry far more information than the traditional magnetic stripe. When chip cards first came to the fore, there was discussion that they would be ideal to maintain health records. Instead of health records, however, chip cards could be enabled to carry MCX data or some other payment mechanism. I realize this statement is naïve, but at least admit it is technically possible.
- Merchants may not need new equipment: A corollary to chip card issuance, if additional information could be placed on chips and merchants are EMV compliant, would this not allow transactions to be facilitated without additional investment in equipment?
Same-day ACH is now a reality: This could allow for faster and less expensive transaction processing and settlement. With banks becoming larger and larger, a smaller number are needed to surpass the tipping point required to make a network.
- Durbin pricing is costly: Durbin pricing makes small transactions very expensive. This is one reason why Square Inc.'s pricing is attractive to merchants (and why Square loses money on some of its processing). Small-dollar transactions could bypass Durbin pricing (through one of these other solutions) and be more appealing for merchants.
Don't count Visa, MC out
Despite the above, I wouldn't bet against Visa and MasterCard. Here's why:
- They could lower their pricing: Though this would be painful, it's better than the alternative and a tried and true strategy.
- Merchants require instruction and support to accept a new payments type: Somehow, there needs to be compensation for educating the merchant, and that will be difficult to introduce while simultaneously lowering costs.
- Large banks are the biggest beneficiaries of interchange: Though interchange is a merchant fee, it is paid to the issuers. Big banks would be harmed by reducing or eliminating interchange fee income. Further, consumers do not seem to be demanding another payment type.
According to an Oct. 27, 2015, article by Megan Geuss, Staff Editor of Ars Technica, Phoenix Marketing International "surveyed 3,000 people who identified as financial decision makers for households and also owned a personal credit card or charge card. In February, four months after Apple Pay launched, 11 percent of respondents said they had signed up for Apple Pay. But by September, the number of respondents who had signed up for Apple Pay had only increased to 14 percent." Pulling your credit or debit card out of your wallet does not appear to be a problem needing a solution.
- Chip cards aren't open source: There are precise requirements for how chips must handle transactions and routing. It would be expensive to retrofit the chips and get the processors to route transactional information differently than it is currently set up.
Eventually someone will surpass Visa and MasterCard. The question is, when will this occur and what are the early warning signs? I believe there are at least two signs all ISOs should monitor. Stay tuned to The Green Sheet for follow up.
Ken Musante is President of Eureka Payments LLC. Contact him by phone at 707-476-0573 or by email at email@example.com. For more information, visit www.eurekapayments.com.
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