It’s healthy to take a step back from time to time and attempt to comprehend how much the card payments system has changed in such a short space of time.
Today’s card payments system is in a state of transformation, one not experienced since the credit card was invented seven decades ago.
To really understand this change, we need to understand the system’s evolution. Why is the payment system changing?
The interstate highway is credited with propelling the humble credit card upon 1950s America. Credit card use grew substantially in the post-WW II boom years as this huge road network branched out across the States. The credit card was a great convenience, but it wasn’t until the invention of the information superhighway in the late 1990s, and beyond, that the credit card business was truly catapulted into the financial stratosphere.
Credit card usage in the US alone has nearly tripled in a decade: from $1.4 trillion in 2003 to an estimate of over $4 trillion for 2014.
Four trillion dollars is a phenomenal amount of revenue. Unsurprisingly, there has been an explosion in the number of credit card processing start-ups (‘disruptors’ as the credit card industry refers to them): all seeking a lucrative slice of the action. The resultant marketplace has become ultra-competitive as each stakeholder bids to outdo the next in offering value to merchants and consumers within today’s rapidly evolving card payments system.
Innovators, disruptors, and smartphones
Today, banking executives face a challenge. It has been presented to them by the invention of the mobile phone. That challenge is mobile payments, it’s innovation has led to upheaval in the banking industry.
The nascent payment options such as Apple Pay, Android Pay, and Samsung Pay – in addition to many others – are a cause for concern for the banking sector within the card payments system. They are seen as threats, yet they are offering what the consumer wants: friction-less payments, tap and pay. The consumer and their smartphones are inseparable. The payments systems that we know today are changing, as our payment habits are altered courtesy of smartphone use. Apple, Google, and Samsung et al are simply offering consumers the option to pay in a more convenient manner, wrapped up in the additional entertainment-based app ecosystem that they have created.
The challenge for other card payments system stakeholders – such as those in the banking industry – is to stay relevant: to be aware of, and tend to, their customer’s payment needs.
Apple have already flexed their muscles towards US banks, having claimed a significant margin of interchange fees that they will collect at US banks’ expense for mere access to the Apple Pay wallet system.
In relation to the traditional banking challengers, a recent McKinsey report – titled ‘The digital battle that banks must win’ – had this to say: “Payments represent the beachhead for the entire banking relationship, and this beachhead is under attack. Offering a strong payments plan as part of a comprehensive strategy for digital banking is therefore an imperative for banks.”
The revenue at play is significant. A Forrester report – quoted in this NY Times Bits blog piece – estimates that the U.S. mobile payments market will hit $142 billion in volume by 2019, up from $50 billion in 2014. For reference, global mobile payment transaction volumes – according to Statista – will increase from $52.9bn in 2010 to $721.4bn in 2017.
The question is will this be retained by today’s players, or claimed by the new market entrants? It’s not all doom and gloom for credit card companies, someone will capture this market and these payments will need an infrastructure. Ryan McInerney, president of Visa, framed Apple Pay as a win-win for both Apple and credit card companies. “Buying things on your mobile phones is not as easy as it should be,” he says. Apple “wants to engage their customers on their devices as much as possible.”
McInerney’s colleague at Visa, Jim McCarthy, lauded the speed of tokenization adoption (a key factor in how payments are changing from a fraud perspective, and something we will blog on later) as a key component to the success of Apple Pay. McCarthy said: “Apple Pay specifically, I just think broadly the tokens are exceeding our expectations, just broadly… you usually talk about years, if not decades for things to kind of ripple through the network in any large degree… mass adoption on a broad scale not only from a domestic perspective, but internationally in this concept, I think, is really one of the fastest movements I’ve ever seen in the payments ecosystem.”
This speed of change is being fuelled by a growing number of consumers who are just beginning to use their smartphones for payments. A March 2015 Federal Reserve-backed survey found that “22% of all US mobile phone users made a mobile payment in the 12 months prior to the survey, up from 17% a year earlier.” It’s important to note here that global smartphone sales (the payment device of the future) have rocketed from $122m in 2007 to $1.3bn in 2014: a real sign that things are changing in payments, changing quickly.
Big four card companies still dominate
The traditional players in the card payments system, however, are not known for their embrace of rapid change. There will not be any radical overnight conversions.
The behemoths of the global card industry Visa, MasterCard, American Express and Discover are still in control of their own destiny atop this chain – especially given their powerful roles in the Payment Card Industry and its Security Standards Council.
The first national general-use credit card in the US that allowed balances to be paid over time was the BankAmericard, issued in 1958 (in 1977 it changed its name to Visa).
MasterCard began in 1966, when a number of banks formed the Interbank Card Association. In 1969, the Interbank Card Association bought the rights to use “Master Charge” from the California Bank Association. It was renamed MasterCard in 1979.
American Express launched their first credit card in 1987, two years after the major department store Sears introduced the Discover card into the market.
These four companies have dominated the US market ever since. They’re not going to concede ground easily.
Globally, however, they must handle the advances of the Japanese Credit Bureau (JCB) and UnionPay International (UPI), both eating into the market share of the big four.
JCB also has eyes on a larger share of the US market, having launched its first US-centric credit card in 2011 in partnership with Discover. The deal, of course, also gives Discover access to all of JCB’s POS terminals in Japan.
It will be interesting to see how productive JCB’s venture into US territory is and how long it will be before UPI follow suit. The Chinese credit card giant has already signed a memorandum of understanding with American Express to explore markets outside of China.
UnionPay has become the world’s largest card brand with 3.53 billion cards in circulation, just over a decade after it was founded in 2002. Its $2.5 trillion in global transactions in the first half of 2013 was second to Visa’s $4.6 trillion. UnionPay, of course, still operate as a monopoly in their native Chinese market – although Visa and MasterCard have been allowed as of May 2015 to seek licences in China.
A clear danger to bank profits
Last week McKinsey & Co. – in its 2015 annual review of global banking – stated that “bank profit from payments could slip by 35% as companies such as Apple and Google capture market share with [their] mobile payment services.”
The report is much broader than just payments, but it adds that the ambitious will survive, those banks willing – and able – to embrace the digital disruption threat facing them.
As the card payments system changes, banks have a choice: become leaders or trail in the wake of the disruptors.
“Innovation distinguishes between leaders and followers.” – Steve Jobs.
Fexco Intelligent Solutions is dedicated to continuing innovation across the entire payments value chain. Our Transaction Services solutions provide a secure infrastructure enhanced by a wide range of modular business services and client specific features which facilitate an end-to-end transaction solution for merchant’s acquirers and card schemes. Please contact us to discuss your payment transaction needs.