Absurd? Maybe not. Visa, MasterCard and AMEX and their peers are acknowledging a serious threat in the future: the Smartphone. All of these companies make their money by taking a very small percentage of every transaction that uses their services. But what if you could complete a transaction without their services? What if you could walk into any store, restaurant, doctor’s office, or hot dog stand and buy something without using their services? What is the alternative, and who are the potential players that could make it happen?
“I hear all the time that we’re dinosaurs and that we should just make room for the new guys.” -Visa’s new head of Mobile Payments, William Gajda
THE PAYMENTS SYSTEM TODAY
Visa, MasterCard and American Express (a.k.a. AMEX) are the three dominant players in the payment system that enables you to use the credit cards and debit cards in your wallet today. The system is complex, but very mature:
On one side, Consumers want credit cards so they go to businesses called “issuers.” An issuer is typically a bank, credit union, or other company like Capital One (before they started buying traditional banks). Of course, it costs money to issue your card and manage your account, and most of these institutions also like to make a profit (credit unions do not make a profit), so issuers charge you interest and fees to make money.
On the other side of the spectrum, restaurants, stores, and other merchants want to accept your credit card as a payment for their goods and services. To do that, they go to companies called “acquirers” which typically provides a device or software for merchants to accept your credit card as payment. As part of the acquirers service, they do some of the backend processing that delivers an approval code to the merchant at the time of purchase to ensure that your card is good and your bank will pay. But, all that costs money, so the Inquirer charges fees to the merchant. These fees include something called “interchange” fees, which means that a percentage of the transaction amount will be kept by the acquirer and not paid to the merchant, typically about 2% to 4%. Another type of fee is a transaction fee, which is typically a fixed amount of money that the merchant pays the issuer regardless of the amount of the transaction, usually between $.20 and $.50 and $.50 per transaction.
In the middle of issuers and acquirers is the core of the payment system. These include visas computers, MasterCard’s computers, etc. since every acquirer does not want to have a direct relationship with every issuer, both camps use Visa, MasterCard, etc. as the intermediary.
And, the revenue is significant:
Since going public two years ago the San Francisco Company has been nearly everywhere investors want it to be. Its 1.8 billion cards made 66 billion retail transactions worth $4.8 trillion worldwide last year. In June Visa owned 57% of the combined U.S. credit and debit card markets, compared with 53% in 2007 says The Nilson Report; MasterCard had 25%. Operating revenues grew 10% to $6.9 billion in Visa’s 2009 fiscal year. Net income was $2.4 billion. –Forbes article.
What if all of that went away? Or perhaps, atrophied away. A host of upstarts with such as Bill to Mobile, Bling Nation, Boku, Obopay and Zoompass think they might be able to undermine the payments business as we know it. Their idea: If we can use the world’s 5.8 billion mobile phones for mail, movies and messages, why not for money, too?
Boku, Zoompass, and Obopay are really money transfer service which enables you to send money to other mobile phones quickly and easily, and let you buy things online using the credits from the respective company. But neither can be used to buy things at a cash register (unless you use their branded MasterCard prepaid card which is automatically attached to the account). These players do not really give Visa, MasterCard, or American Express very much to worry about because have no ability to let the user by anything at a retail store.
Bill to Mobile, however, bills your transaction directly onto your mobile phone statement along with your regular mobile charges. This is where Visa/MC start to see the real threat for several reasons: Telecom carriers – in this case Verizon Wireless – have deep pockets, are accustomed to critical issues like security, and are experienced at managing complex customer invoices. But a visit to the Bill to Mobile web site shows that a customer can only use the service for a short list of online merchants. So what. The model “T” Ford sold only 10,000 units in its first year. A strong business development plan will bring in new merchants to Bill to Mobile over time. More importantly, when Bill to Mobile begins using near Field communication, or NFC, the opportunity to use your cell phone at your favorite merchant becomes a reality. What then? You conveniently get one bill every month that has your cell phone charges, and all of your purchases. And, you no longer need any plastic in your wallet
Bling Nation is a different story. Bling already uses NFC in the form of a sticker to enable you to use your PayPal account at a cash register. This is significant because the entire transaction can be completed using no issuers, no acquirers, and no money for the payment incumbents like Visa and MasterCard. Paypal can prove to be a formidable opponent in the long run because of its deep pockets and breadth of more than 87 million active accounts in 190 markets and 24 currencies around the world, according to Paypal’s website, not to mention their parent company, eBay, which has over 16,000 employees and a market cap of over $32 Billion.
This group represents companies doing business in the United States only. Overseas there are many examples of interesting business models such as M-Pesa and others, and I will explore those in a future blog post.
So, to avoid extinction, visa hired Bill Gajda as “head of mobile innovation,” away from the GSM Association (GSMA) where he had spent seven years.
Says Forbes magazine in an article that will be published in their November issue:
So far mobile payments represent a minuscule portion of all U.S. commerce: only $2.2 billion this year, according to ABI Research. What’s more, no one knows exactly what a future U.S. mobile payment system will actually look like. It could be as simple as coordination between a traditional credit card and a cellphone, so that text messages can be sent out with security alerts or frequent-shopper rewards. But it’s also possible for the phone itself to replace a card, with the number that’s ordinarily embedded in a card’s magnetic stripe transferred to a radio-signal-emitting microchip inside the phone. A new breed of “contactless” systems is slowly being introduced, usually in high-volume operations like McDonald‘s or part of the New York City subway. You authorize a payment by holding your phone next to the unit; Visa is pushing the new system hard.
According to the Forbes article, but Gajda is focusing his efforts on Silicon Valley startup companies. His argument is that moving money from the buyer to seller is extremely complicated, and he has already figured that out. So, he argues, why would a Silicon Valley startup try to reinvent the wheel? Instead, he says, partner with Visa and we will solve that issue for you.
Some will buy the Gadja argument, and some will not. In any event, the battle lines have been drawn between very large companies with very large resources and a very big interest in being at the center of consumer payment transactions for the next few decades. This is a high stakes game and may the best plan win.
© 2010 David Schropfer
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4 thoughts on “Can Visa, MasterCard and AMEX Become Extinct?”
Thanks for the response. Appreciated the references you provided. There’s no doubt that the far more mature mobile market outside the US is witnessing a sea change in mobile transactions–you’ve probably read Thomas Friedman’s NYTimes Op Ed on EKO India Financial Services (http://www.nytimes.com/2010/11/03/opinion/03friedman.html?_r=1&src=me&ref=homepage). Based on your information, it also appears that there’s real interest by the wireless carriers. It’s just not happening here (or the West generally). I suspect that some of the hesitation may be derived from the lack of a regulatory & consumer protection regimes. The potential risks may be unchartered and significant. What’s your theory?
Thanks for your reply. My theory is that the Mobile Network Operators (MNO’s) in the US were worried about two things: (1) they needed a standard that they could agree on, otherwise merchants would be reluctant to sign on to four different standards for each of the four major US MNO’s, and (2) they need to find a way to use the MNO’s network as much as possible in mobile commerce, and they are not sure how to do that. I think my first point was proven correct with the announcement Wednesday of ISIS (http://www.paywithisis.com/), which is a joint venture between AT&T, Verizon Wireless and T-Mobile. ISIS represents about 200 million of the 285 million active mobile phones in the US today. Only Sprint was left out, probably because they announced their own ‘mobile wallet’ standard this week. Click here for more detail. Regarding #2, time will tell. I think that ISIS’ best bet is to find a way to put the Smartphone in the transaction, that will use the MNO network, and thus make the partners in ISIS much happier.
Agree that the world of transactions is changing rapidly and there is real risk to all the incumbent players. That said, if you think the networks have been slow to move, I would characterize VISA, MC, and AMEX as dynamic when compared to their wireless carriers competitors. The wireless carriers have had an extraordinary opportunity to become transaction networks but have lacked the vision or entrepreneurial chops to seize the moment. I believe these carriers will ultimately be the great losers in this game as the money transfer plays get weeded out and the survivors get gobbled up by the transaction networks. It’s already happening.
From the perspective of the US market, the market activity proves your point. As you said, VISA, MC, AMEX appear “‘dynamic when compared to their wireless carriers competitors.” However, overseas is a different story. Verizon Wireless is not completely owned by Verizon. It is a joint venture with a UK company called Vodafone. Vodafone is driving a heavily involved in a program called M-PESA in Africa. If you have a few minutes, watch this video: http://bit.ly/ckiEml It is long and overproduced, but it tells a story of a carrier market testing mobile payments. In Kenya, Safaricom (a mobile carrier) is so successful with M-PESA that their CEO has more influence over retail banking than the banks (http://www.nation.co.ke/business/news/-/1006/1031974/-/view/printVersion/-/oj3rmoz/-/index.html). The carriers have a long way to go to catch up with the activity of VISA/MC/AMEX set – I agree – but the sector is not without activity. Now let’s see if they can translate their success in Africa to the US/EU market. The activity in Japan is also interesting: http://bit.ly/aY1k9w
Thank you for your comment, and I would be interested if any of these links changed your mind about the carriers’ level of interest in Mobile Payments.
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