Alternative payment methods are threatening the traditional interchange business model, and as a result, card networks are responding by offering value-added services.
Merchants now have more payment options that could help them lower or avoid interchange fees, which they pay to issuing banks when customers use cards for transactions. This threatens the business model of the exchanges and is forcing them to adapt. Payments Analyst Matthew Gaughan explores the current landscape in his recent Javelin Strategy & Research report, “The Case For Card Networks’ Embrace of Interoperability.”
According to Gaughan, networks will likely move to a modular, service-based model that packages network and value-added solutions (i.e. risk management, identity, or acceptance solutions) into subscriptions. Given the complex web of technology, regulations, and counterparties, merchants and FIs are faced with, he recommends networks build out a transaction orchestration layer.
“An orchestration layer would help networks essentially quarterback the authorization, clearing and settlement of a transaction in a way that provides maximum benefit to merchants and FIs,” Gaughan said.
As payment rails become more commoditized, the networks are competing with fintech companies in certain areas while also collaborating with them in other instances. Value-added services such as inventory management or fraud mitigation will be the new payments arena in which fintechs and legacy networks clash—even as both parties work together on traditional network solutions.
“Fintech companies like Marqeta and Zeta have their own full-service card programs, but still run transactions over card rails like Visa and Mastercard,” Gaughan said. “Expect networks to replicate this ‘frenemy’ strategy as fintechs increasingly come to market with more white-labeled card solutions that further decouple parts of the card experience.”
By embracing interoperability and working with fintech companies, card networks can expand their business models beyond traditional network solutions. Card networks possess valuable transaction data, and by providing accessible APIs, they enable third-party developers to integrate these proprietary software products into their own applications, significantly broadening the reach of a network’s own solutions.
“Interoperability is the key to success for card networks as more alternative payment methods emerge,” Gaughan said. “In a world characterized by localized rules and regulations, networks’ products need to be easier for their clients’ developers to implement. As such, interoperability must be the ethos of this era of technological modernization.”
Learn more about how card networks’ legacy positions are being challenged by fintechs and other upstarts, and the challenges standing between card networks and greater interoperability with competitors here.