Visa’s planned acquisition of Earthport is the latest in a recent series of consolidations in the global payment systems sector. The deal follows in the wake of MasterCard’s purchase of UK operator VocaLink and Worldline’s purchase of Swiss operator SIX Payments Services.
For the two major credit card companies, it’s a move into handling payment transactions that are simply from one account to another. Historically, their flows have been from consumer to merchant, as in the case of SIX Payments. The move to business-to-business (B2B) payments is growing rapidly: Visa notes that B2B spiked 10% in 2018 and now makes up 11% of its revenue.
The Check Is No Longer in the Mail
This growth is, in part, due to the demand for faster payment capabilities. Internationally, each country has its own set of payment systems to move money within the country. For global payments, banks created Swift to provide standards and move the payment instruction messages. In early 2017, Swift, working with the banks, launched its Global Payment Innovation (GPI) initiative to accelerate global payments and provide visibility into their progress. Under GPI, more than 50% of payments are credited to end beneficiaries within 30 minutes, and almost 100% of payments within 24 hours.
In 2018, Swift traffic grew 11.4%, to a total of 11.9 billion messages, with GPI now accounting for more than half of that. It’s this move to same-day (faster payments) that people and corporates want. After all, don’t we all want to be paid now and not sometime in the future.
The new payment rails being introduced in more than 40 countries are for real-time movement of payments. A look at who’s building these systems reveals the predominance of Swift and VocaLink. An alternative to a new system is to use the existing rails and coordinate the payment activities so global payments can be made in that time zone, either today (T) or tomorrow (T+1), which is the Earthport model.
The rapid movement away from cash to contactless payments is resulting in fast-increasing volume to the rails. The UK ranked the highest country in the combined European Union, with €108 trillion in cashless payments usage in 2018. The UK saw the use of cash fall by 15%.
Seamless Payments on a Global Scale
Demand for fast, seamless payment services has spread to a global scale. While the ownership of the in-country domestic payment rails is usually the local banks with their regulatory bodies, technology has given consumers and businesses access to goods and services from anywhere. Now global, seamless payment services are needed.
It’s back to the future: MasterCard and Visa started under U.S. bank ownership in California and are both now publicly traded companies. Their logos, like those of Apple and Nike, are recognizable without the brand name. In 1875, The Bass Brewery, which like most breweries has been consolidated more than once, was the first company to be recognized by a nameless logo, with its red triangle the first trademark to be registered in the UK. Similarly, Mastercard has now dropped its name from the logo, and 80% of us recognize the logo without the name.
With revenues from two sources – the payment message and foreign exchange fees – and double-digit growth in volume, the global payments market looks attractive. The move from local, next-day payments to real-time, international connected infrastructures is becoming a reality. The banks, which often were forced into consortium-owned rails, now have a valuable asset. The drive by consumers, SMEs and corporates for safe, transparent, trackable and fast payments is palpable. Consolidation of payment rails looks set to continue.
Significant Impact on Financial Services
As real-time payment rails expand geographically, there’s an underlying infrastructure that allows payments to be paid to anyone at any time, anywhere. These payments can be account-to-account (e.g., VocaLink and debit cards) or with underlying credit approval (e.g., Visa and Mastercard). The movement of money, once the preserve of banks, is now open to more lightly regulated companies, such as PayPal. Competition, aided and abetted by Open Banking and PSD2, will become much more active across banking services.
Here’s how a variety of ecosystem players will be impacted:
- Retail banks. As the payment process becomes unendingly simpler, the ability for consumers to switch banks becomes painless. In the UK, where real-time payments originated, in the last three months of 2018, 235,648 account switches were successfully completed – up 22% compared with the previous quarter, for a total of 929,070 switches in all of 2018. Retail banks now need to make certain their customer requirements are met – and at a competitive price.
International payments were once complex and costly. Retail banks had special international departments that charge 10 to 20 times the cost of a domestic payment and were expensive to maintain. Banks themselves can use the new consolidated payment rails to provide a cheaper, transparent and easy-to-use service for clients. Nonbank competition (e.g., fintechs such as Transferwise) are entering the space using the new payment rail infrastructure.
- Commercial banks. It’s here that the biggest changes are taking place, as the consolidated rails provide a much better global payments service than what corporate banks offer customers. The corporate banks can use the rails to dramatically improve service to their corporate customers while removing in-house costs. The global payments become transparent, fast (within 24 hours) and, for the first time, trackable. Efficiency is higher as the straight-through processing (STP) rates approach 100%.
The banks have to decide on which internal, international infrastructure it now needs itself. All currencies have to be cleared and settled in their own country. Each country has a set of rules, and the existing corresponding banking system is in decline. Correspondent banking went from the predominant model for global coverage to one that’s being made to look archaic with the new technologies. This is a big benefit for the corporates, as they now can, with certainty, know the amount of money being sent and its arrival.
- Merchants. E-commerce payments are almost entirely made by cards. The ecosystem enabling merchants to be paid for their goods and services has many players. A purchase may well go from a merchant to its payment gateway, to the merchant acquirer, through the card scheme (e.g., Visa/Mastercard), to the issuing (purchaser’s) bank. All parties in this chain take fees, and it’s the merchant who pays.
It’s no secret that merchants dislike this situation, but currently, they’ve got little choice given the vested interests of the parties in the card payment chain and the near universal acceptance of cards. However, the growing availability of account-to-account, real-time interbank payment services means that the combination of inventive fintechs and merchant pressure will eventually lead to alternative payment methods circumventing the card rails and intermediary players in that method.
The advantages to merchants are clear: With fewer intermediaries in the payments process, there will be a significant cost savings for merchants. The potential for real-time settlement of transactions will improve their cash flow and help their working capital. The consequences for the card schemes will be loss of revenue and transaction volume. Perhaps this explains the interest in Visa and Mastercard in Earthport, VocaLink and others.
As the demand for faster and seamless payments grows, the global payments landscape will only continue to shift. Banks, merchants and financial services organizations will need to keep up with the profound changes ahead.
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