August 19, 2016
Guest Perspective: Who Really Needs Visa and MasterCard? (Reprise)
By Ralph Bianco, Payments Industry Veteran
As a senior vice president at MasterCard in the late ‘90s and early aughts, I had a ringside seat for the rapid and significant consolidation of U.S. financial institutions and payment processors. At the time, to create a sense of urgency within the company and a call to action in response to the rapid changes in the payments industry, I wrote a thought piece titled “Who Needs MasterCard?” In it, I wondered if MasterCard was really focused enough on the underlying business and the opportunities and challenges that our ever-changing environment presents.
More than a decade later, we continue to bear witness to change in the industry, whether it’s driven by new technology, consumer demand, competition or regulation. Whatever the reason, change is continuous, but my question from all those years ago still stands (albeit from a different perspective). Are the card brands responding effectively and appropriately to a changing environment?
In a new era, with new challenges and new opportunities, the question is no longer “who needs MasterCard?” It’s “who needs MasterCard or Visa?” To be clear, I am not suggesting that no one actually needs these payment brands. Over the years I have worked for and/or very closely with MasterCard and Visa. I have the highest regard for their products, capabilities, brand strength and global reach. I am suggesting there is some value in looking at these institutions in light of the current business environment, from a global perspective and within the context of the worldwide and real-time processing capabilities that exist today. Because American Express and Discover are three-party systems that (for the most part) directly control issuing and acquiring, they’re not part of this discussion.
To fully appreciate my point of view, it is imperative to understand the U.S. is a very different market structurally than the rest of the world. Unfortunately, many in the U.S. payments business look at the U.S. and assume this is a template for the rest of the world. Importantly, the U.S. is the only country in the world where Visa and MasterCard set domestic interchange. Also, despite the bank consolidation that we have seen over the years, debit is still spread among many issuers both large and small and credit, while highly concentrated among few issuers, remains very competitive.
By contrast, in nearly every country, debit- and credit-card issuing is typically consolidated among three to five very large domestic or global issuing banks. What’s more, in most countries, credit is typically only available from the financial institution that you bank with and, even then, is not a mass market product. If available, it is often offered as a line of credit against a deposit account. Outside the U.S., the practice of offering a credit card to an individual that has no current relationship with a financial institution is extremely limited. Direct mail, as we know it in the U.S., and other bank-initiated solicitations targeted to consumers are typically U.S. phenomena. Even in those countries where credit-card marketing is practiced, it is on a significantly smaller scale and far more restrained.
From a processing perspective,despite the consolidation that we have seen in this space over the years, there remain a number of robust processors in the U.S., in addition to many banks that do their own direct acquirer processing.
By contrast, outside the U.S. in nearly every country, card acquiring is typically consolidated among two to three banks (using proprietary or third-party processors), and these banks (not Visa or MasterCard) set domestic interchange that is typically established through bi-lateral agreements directly among the issuing and acquiring institutions.
Changes in the Processing Environment
There was a time when there were thousands of issuing banks and hundreds of processors in the U.S. The need for payment networks not only to set rules and interchange, but also provide the infrastructure to enable ease of authorization, clearing and settlement was much easier to understand and justify. Over the years, issuing and processing became significantly consolidated mostly through mergers and acquisitions. Large processors such as First Data among others, appeared.
First Data is a unique study since they were the largest issuing processor and the largest acquiring processor in the U.S. Cobranding had also burst onto the scene and First Data frequently found itself on both the issuing and acquiring side of the same transaction. It did not take them long to realize that they could create an “on us” environment. In doing so, they could bypass Visa and MasterCard and complete all authorization and settlement processing in house. When they implemented this plan in 2002, Visa sued to stop the “on us” arrangement. This case was ultimately settled in 2006.
What is really interesting and in what can only be termed “what’s old is new again” is that in February of this year, Chase and Visa announced a program that has the apparent look and feel of what First Data did in 2002. While all the details have yet to be disclosed and there has been no shortage of broad speculation, it is clear Chase can work directly with merchants and an issuer-specific private network is running over Visa’s infrastructure. Chase appears to have decided they don’t need MasterCard and only need Visa’s rails, at least for now.
Considering these developments, the basis for the old model in the U.S. (the card brands decide domestic interchange as a result of rules and not a result of the need to do so by the communities they serve) appears to be much more difficult to justify, if not obsolete.
Do We Really Need ‘Em?
It is against this backdrop that I ask the question “who really needs Visa and/or MasterCard?” Outside the U.S., Visa and MasterCard are essentially cross-border brands and domestic banks and acquirers process domestic transactions directly. Both brands have the capability, for example, to perform domestic authorization processing but when they do so, it is the result of a competitive process and not a rules-making process. Meanwhile in the U.S., by rule, authorization processing must be routed through MasterCard’s and Visa’s infrastructure unless you are like Chase and strike a different deal.
As public companies, Visa and MasterCard must grow to increase shareholder value. Growing will require Visa and MasterCard to expand their services, create new business models and develop new products. These initiatives will likely increase the level at which Visa and MasterCard will compete with processors, particularly acquirers. Both brands have evolved to be far more than just custodians of a global acceptance network and compete head-to-head with their processing customers while setting the rules for how those same processors (customers) process their transactions. It seems reasonable that the U.S. market should look more like non-U.S. markets, at least from a processing perspective. Processors should be able to process (and compete with) Visa and MasterCard for domestic and cross-border transactions, particularly in the U.S., unencumbered by yesterday’s rules that are increasingly becoming disconnected from the realities of today’s rapidly changing environment and competitive mix.
Additionally, let’s not forget that new entrants have emerged, some in a very big way, and are picking away at different parts of the payments business, totally unencumbered by a model that was established 50 years ago. Think PayPal and what they have done to take their brand to the physical point of sale and how quickly they did it. Think about the different services offered by (or being acquired/developed by) Google, Apple, Facebook and many more. Think also about how these and other companies as well as the mobile channel and mobile carriers have the potential to disrupt how payments, payment processing and loyalty programs could work in non-traditional models that have no connection to Visa or MasterCard. Perhaps that will be the subject of my next guest perspective.
Ralph Bianco began his career as an engineer, but moved into payments nearly 30 years ago. As the COO of Adaptive Payments he helped lead a movement to leverage PIN debit networks to create innovative authentication solutions for the e-commerce and mobile channels. He has worked for and advised companies representing virtually every link in the payments value chain including issuers (US Bank), networks (MasterCard) and processors (Gensar/TransNet, which became Paymentech).