Interesting stories about the credit card industry range from Bank of America’s first mail solicitation in Fresno, California under the guise of manager Dee Hock; to the launch of Discover card, a spin off of Sears Credit, first to Dean Witter, then to as a private company; and the HP-like founding of FICO in 1956.
A good Friday read in today’s WSJ, talks about how Mastercard and Visa remain essential in the structure of payments, even as the industry continues to evolve.
- A couple of years ago, the payments landscape in the U.S. looked like it was up for grabs. Hardware companies like Apple and Samsung, online ones like Google and Amazon, banks like JPMorgan Chase and retailers like Walmart were all unveiling their own new ways for Americans to make purchases, especially with their phones.
- Now that the dust is beginning to settle, it is increasingly clear that the ultimate winners are likely to be the same old credit-card companies that already dominated: Visa and Mastercard.
- Some retailers like Starbucks and Dunkin’ Donuts let you pay at the register by scanning a code on your phone. Other systems like Apple Pay use a chip embedded in a smartphone; you just pass your phone over a checkout terminal to pay in a “contactless” transaction.
PayPal helped reinforce MC & V’s relevance as internet and mobile payments took hold.
- PayPal’s decision to open up more to Visa and Mastercard in 2016 was a crucial turning point. It began to allow consumers to more easily link their accounts to credit and debit cards, as opposed to funding purchases with their PayPal balances or bank accounts. In return, the card networks began allowing PayPal to use their contactless payment technology so customers could use their PayPal mobile wallets to pay for purchases in stores.
- The fees that PayPal collects from merchants for this now account for around 85% of its revenue, and it has 50 times the volume of its closest competitor Amazon Pay
The beauty of Mastercard and Visa’s positioning is in the switch. Being able to connect any buyer with any seller, anywhere, anytime.
- No one is quite there yet, but PayPal looks closest to being able to integrate these seamlessly by bringing together Braintree, its iZettle acquisition and its online checkout button.
- Even if this Holy Grail is attained, it won’t change the fact that most transactions run over the card network rails. That would make Visa and Mastercard the ultimate winners of the quest.
The branded network payment function was rocket science when it came out 50 years ago, but even though branded cards were little more than the electronification of legacy check systems, the strength of their ability to clear and settle payment keep them relevant to the payments industry.
There is plenty of talk about WeChat Pay and Alipay being able to displace Mastercard and Visa with low cost but it remains to be seen whether the two competitors can achieve the same level of effectiveness.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group