By Patti Murphy
Banks have been grousing about disintermediation for as long as I've been working in the financial services space. I'm talking decades. And financial institutions (FIs), although fewer in number today than before the post-deregulation thrift crisis, continue to be leading providers of key financial services, including lending and payments. But their dominance is being whittled away.
Alternative (nonbank) lending platforms are making inroads, particularly among small businesses and consumers with thin (or poor) credit histories. And the leading card brands – Visa Inc. and Mastercard – once owned by FIs, have become financial technology companies intent on staking claims on banking's payments franchise.
Two recent actions illustrate this trend: the recently disclosed partnership between Visa and PayPal Inc., and Mastercard's purchase of a majority position in VocaLink Holdings Ltd.
VocaLink is an international payment services provider created by a group of U.K. FIs that developed and operates several real-time payment systems, including the U.K.'s Faster Payments Scheme. VocaLink also operates BACS, an automated clearing house (ACH) network in the U.K.; LINK, an ATM network serving the U.K.; and Zapp, a mobile payments app that leverages the ACH.
Last year VocaLink inked a deal with The Clearing House, a payments consortium owned by many of the largest banks in the U.S., to help TCH build a real-time payments network here. Mastercard described the purchase deal as a great way to grow its footprint in the payments space.
"We're excited about the opportunity to play a bigger role in payments in the U.K., a very strategic market for us," Mastercard President and Chief Executive Officer Ajay Banga said. In discussing the purchase, Mastercard said it expects to help boast VocaLink revenues by more than $220 million a year. Mastercard paid $920 million for a 92.4 percent ownership interest in VocaLink.
"Acquiring VocaLink will make Mastercard a very different payment network," Tristan Hugo-Webb, an analyst at Capco, wrote in a recent blog post. "Mastercard will have the means to process a range of new transaction types and capitalize on existing VocaLink supported products," he added.
Gareth Lodge, a London-based analyst with Celent LLC, elaborated: Mastercard, he said, now owns the technology to support true, real-time global ACH services, including decoupled debit, and robust business-to-business transaction capabilities, pretty much anywhere. (Decoupled debit cards are issued by nonbanks; here in the United States, Target's REDcard is the most notable example. Payments made with decoupled debit cards clear through the ACH, not the card networks.) "[J]ust think about the possibilities," Lodge wrote.
VocaLink processes about 90 percent of all paychecks and 70 percent of household bills in the U.K. The U.K.'s Payment Systems Regulator is in favor of the sale. The PSR contends that common ownership of this important piece of payments infrastructure by a handful of banks is stymieing competition and innovation in payments in the U.K.
While the Mastercard-VocaLink deal establishes Mastercard as a major player in the ACH space (and enhances its mobile payments position), Visa's partnership with PayPal aims to diminish the role of the ACH in facilitating retail payments (and boost mobile payments). PayPal came to prominence with the ecommerce revolution as a low-cost ACH alternative to online merchant acceptance of credit and debit cards.
PayPal claims 184 million accountholders and 14.5 million active merchant accounts, including accounts with such retailing giants as IKEA and The Home Depot Inc. It reported handling $81.8 billion in payments during the first quarter of 2016. According to published reports, about half of those transactions were cleared through the ACH; the other half went through the card networks.
"The partnership puts PayPal and Visa on a new path," Visa said about the arrangement. The agreement calls for Visa cards to be given parity with ACH payment options during the PayPal enrollment and payment processes. In exchange, PayPal will receive "economic incentives" to move more payments to Visa's network – volume discounts, for example.
PayPal also gains access to Visa's tokenization services, which means the PayPal Here mobile wallet will now be accepted at any merchant location that accepts Visa payWave transactions. (Both mobile wallets are built on near field communication technology.)
Some analysts have said the deal is a coup for PayPal, and for merchants. "Without any additional hardware or software costs, merchants can now accept another form of payment," Jesse Atlas, an analyst at Waterman Research wrote in a recent analysis published by Seeking Alpha. Atlas described the deal as "a match made in heaven."
As for PayPal, the deal with Visa "allows PayPal to pretty much lock up the NFC market," Strubel Investment Management wrote in a post at Seeking Alpha. "With PayPal's huge user base it's going to be even more difficult for NFC solutions like Apple Pay, Samsung Pay, etc., to break into the payments market. It also puts the 800-pound gorilla in the room, Visa, back on PayPal's side, and the threat of a Visa-backed competitor is now removed." Strubel added that Mastercard, and perhaps American Express Co., can be expected to follow Visa' lead and ink deals with PayPal as well.
But not everyone thinks the partnership is grand. "Letting consumers link debit card to PayPal and giving equal prominence to credit cards has analysts worried that PayPal's business model will crater as increased processing costs eat up profits," Strubel wrote.
Bottom line: Mastercard and Visa are not bankcard companies; they are publicly traded technology companies that are obliged to drive value to shareholders. And they are accomplishing that by jockeying for dominant positions in the payments space.
FIs – card issuers and acquirers alike – no longer own Visa and Mastercard. Some FIs have found ways to partner with the card brands. One obvious example is the exclusive arrangement between Visa and JPMorgan Chase & Co. that led to the creation of the acquiring giant ChaseNet. Most, however, are only customers.
The card brands continue to compete with each other, as well. The fact that Mastercard is going after ACH businesses while Visa works to move more ACH payments to the card networks, are the most recent illustrations of this. And to the extent that competition is good for customers, FIs will benefit from these strategies. But FIs have ceded their dominant position as intermediaries between consumers, merchants and payment systems.
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at firstname.lastname@example.org.
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