Insights Into the Current Global Payment Industry
This article was written by Nirav Patel, CEO of Intercash Financial Services, Malta.
June 3, 2020
Oligopoly - /ˌɒlɪˈɡɒp(ə)li/ noun a state of limited competition, in which a market is shared by a small number of producers or sellers.”
The current global payment industry is dominated by just a few networks; the most familiar are Visa and Mastercard, who together enjoy a dominant market share. The landscape, however, is beginning to alter and there has been a rise in domestic processing of payment transactions. UnionPay in China has seen widespread adoption and many other countries are now considering launching their own networks domestically.
The key drivers leading to the increased interest in domestic networks is based around the inherent features an Oligopoly brings to a market; namely, high costs of transaction settlements, skewed market pricing, and lack of choice or competition. On the other hand, and even in light of the opportunity, the sector poses challenges for any new domestic network. What we do know is that the entry of incumbents will lead to more competition and, therefore, a change in the current cost structures. As a result, the pre-existing dominant players will need to ensure they make the necessary adjustments in order to maintain their elevated position.
Growth in Developing Countries and Domestic Network Demand
Developing countries are continuing to see a rise in population of middle income families and greater financial inclusion through new technologies (MPESA [Mobile Phone payments] in Kenya, for example). With a greater number of households over the poverty line and more millionaires per capita than ever before, access to card payments as a means of transacting has seen immense growth in percentage terms, year on year.
Before a deeper dive, it is important to understand the landscape and how a payment transaction is processed; please refer to the following short video.
Barriers to Enter the Payment Card Network; The Playing Field and Self -Fulfilling Prophecy
On the premise that the Card Network is oligopolistic, why has it been so difficult for other players to enter the market and take a market share? The reliance of the other ‘players’ in a given transaction to the established networks means it is difficult to move away from the status quo. Consumers want to use their card with as many merchants as possible and merchants want to accept cards that are used by the majority of cardholders. The established names continue to attract new cardholders (issuing banks) and merchants (acquiring banks), thus creating a self-fulfilling prophecy.
There is the burden of technology and the surrounding infrastructure that is required in order to operate as a network. Future growth is very much focused on mobile payment technology, therefore heavy and prolonged investment in maintaining and updating technology is a necessity.
It might not be feasible for a new entrant to shake things up globally, but there is definitely scope at the domestic level as long as there is support from the local regulator and domestic banks, as well as the central bank.
The Opportunity for the Incumbents
As mentioned earlier, the dynamics of an oligopoly create opportunities that invite further competition in the form of new entrants. The domestic networks are targeting existing discrepancies which are as follows:
· Fees – International Schemes are anywhere up to 40% more expensive than domestic networks on card fees.
· Economies of Scale – Larger merchants benefit from lower fees, however smaller merchants end up bearing the brunt of fees. Domestic networks should aim to narrow the fee differential while maintaining the margins required to remain operational and, most importantly, viable.
· Sector Difference – Merchant fee structures vary from sector to sector. Typically, higher margin merchants such as restaurants pay much higher fees. Again, the aim here should be to narrow the gap as much as possible.
CARNET (Card Network) is a very popular domestic network in Mexico. Their cards are accepted in more than 600,000 domestic merchants throughout the country. This is made possible as all Point of Sale Terminals in the country are enabled to accept payments with CARNET cards, without any other contract or additional license.
From a merchant standpoint, if they wanted to attract Mexican consumers, they could in theory begin accepting CARNET cards. Countries who are heavily reliant on tourism can also benefit via a domestic card network. This subject is out of scope for the purpose of this paper, but is something I will revisit later this year.
Any network, international or domestic, should set forth a robust and well-tested rule book to ensure that operations are carried out to the letter of regulation. The aim should be to eliminate fraud or any other type of financial crime that is associated with card payments. Support needs to come from the domestic banks and central bank to ensure the rules are implemented effectively. Furthermore, the rules must be presented so that they be fair for all parties.
Similar to CARNET, the aim for any new domestic network should establish an internet payment facility, the ability to withdraw funds from ATMs and the option to use the card in as many point of sale terminals as possible. The more visible the network becomes, the more likely it will have mass take-up. Alongside mass take-up, there must be enough expertise to educate the consumer on the rules and regulations of the new payment network. That will ensure safe usage habits are implemented immediately and lowers the risk of merchants and consumers being exploited or defrauded.
A key infrastructure requirement is a vigorously tested telecommunications network. It must be able to support authorizations for all stakeholders of a transaction in real time. If this network were to go down, it would cause disruption to all payments on the network. Therefore, resources in maintaining and innovating the technology is of paramount importance.
The oligopoly will not be broken anytime soon, however with the right approach to implementation and continued investments, we have seen the rise of many domestic players. UnionPay is unique in that global merchants have decided to accept UnionPay in order to attract the Chinese consumer. The most populated country now has 310 millionaires per 100,000. These kinds of numbers go a long way to explaining the uptake of the infant network. UnionPay is the only domestic network to venture out on a global scale; we will have to wait and see if any others will make a similar foray and this will be vastly dependent on whether global merchants have an appetite for attracting a niche of consumers.