Mastercard bids to bypass own rails with Pay by Bank app promotion

Merchants are seeking alternative payments to those offered by the card schemes in order to by-pass their network and reduce the costs of card acceptance. When I was last approached by representatives of Zapp, the cost of acceptance was the same as a standard Visa/Mastercard debit card purchase, i.e. no financial benefit at all! Hearing how merchants will benefit from increase sales and conversion rates is, IMHO a load of guff. All it does it ensure that MasterCard continue to have their snout in the trough of alternative payments - hardly competitive!

A card scheme could still have an interesting role to play. As can an acquirer. Open Banking/PSD2 is a nice theory - when it comes to physical world, any change to the existing ecosystem could backfire IF not implemented properly. Merchant is just one part of the equation. There is also a consumer - who is only interested in simple, easy and secure solution, with no learing curve.

A2A mobile payment methods like Pay By Bank tend to do well in markets with low credit card penetration e.g. UPI in India where there are 900 mn debit cards and only 40 mn credit cards. However, and I remember asking this same question when Zapp was launched in 2012, in a market like UK where per capita credit card count is 2 or 3 (I don't remember the exact figure), what is the compelling reason for a payer to switch from credit card to Pay By Bank? With credit card, I get deferred payment, rewards, proof of receipt and superior fraud protection. What benefit do I get with an A2A payment product like Pay By Bank?

@KS "What benefit do I get with an A2A payment product like Pay By Bank?" As a consumer - not many (if any at all). That's part of the problem. There needs to be a compelling customer provisionion.

Seems unlikely, given that we're in December that "Pay by Bank will finally be made available to HSBC customers later this year, with others to follow.".

I also think that unless a new system is merchant led and gives benefits to consumers from cutting out the bank and its fees any new system will fail. For consumers, who don't see the cost of the card network there is no benefit. There is perhaps scope though for a challenger payment network from a retail consortium and fintech using open banking payments to cut out the card companies.

That won't be Pay By Bank of course and Pay By Retailer just isn't snappy!  Success will also depend on who owns the payment terminals and whether the terminals are open to rival payment networks as the cost of new hardware will be a barrier. 

I agree with all the above, smart move but tough task for Mastercard. They might be able to leverage their position as major sheme to achieve this goal, launching mobile App being the very first stage. It will be great to watch anyway!

@Alexander Peschkoff: 

Re. compelling value for consumer, we've gone thru' a decade of alternative rails from Retailers (CurrentC), MNOs (ISIS, M-PESA), Fintechs (Boku, Zong). Some of them have shut down and others have "pivoted" to card rails. I don't know a single one that has succeeded globally - at least not without itself becoming costlier than card networks charging 2-4% transaction fees.

Maybe it's still early days but I suspect that MasterCard's latest attempt to disrupt itself via Pay By Bank will also fail to gather steam unless MC uses its deep pockets to grant rewards to PBB users and massively reduce interchange fees for PBB merchants.

Alipay, WeChat, Paytm

@Alexander:

Granted, but they all come from emerging markets where it is much easier to change habits

@Nicholas:
During the recent trip to China, the whole UK delegation learnt to use WeChat in a day. Necessity and convenience (and easy of use) are great drivers. 

WeChat is a tremendous success story no doubt. But I agree with @Ketharaman despite many attempts we are yet to see a similar initiative be successful in Europe / North America.

In the end, I fear only Banks (who hold consumers funds) or Apple/Google (who manage our smartphone) will be able to change habits in the DM.

If you think about it, facial/voice/finger recognition will be enough to pay with your bank account in 5 years, and only the smartphone could replace our biometric identification.

In any case I don't see VISA or MC in the picture, unless their App is a success. Definitely NOT a trivial issue lol!

@Alexander Peschkoff:

I preempted mention of the success of Alipay, WeChat & PayTM in my previous comment: "A2A mobile payment methods like Pay By Bank tend to do well in markets with low credit card penetration."

In addition, PayTM makes whopping losses year after year, so its success is driven by the strategy I'd preeemptively suggested for MC in my previous comment: 

"MC uses its deep pockets to grant rewards to PBB users and massively reduce interchange fees for PBB merchants." 

@Nicolas & Ketharaman

I concur. At the same time, I think the payment landscape could see new interesting players and initiatives over the next couple of years.

@Nicolas Saubié:

Nice to know that mine is not the only voice in the wilderness on this issue!

Why 5 years - India already implemented fingerprint-bank account-based payment system called Aadhaar Enabled Payment System (AePS) two years ago. BUT, it hasn't taken off - despite my aforementioned point about low credit card penetration in India and despite getting massive amounts of free publicity from the government's drive for #CashlessIndia. And, now with the recent Supreme Court diktat banning the use of Aadhaar Biometric ID by banks, fintechs, et al, the fate of AePS suddenly hangs in balance.

You're also probably aware of a fingerprint-bank account based payment system in the US called PayByTouch. It was one of the most high profile casualties of the dot com crash of the late 1990s, since it raised over $100 mn, which was one of the highest VC fund raises in that era.

In short, fingerprint-bank account-based POS payment has been threatening to kill V / MC next year for the last 20 years. Not saying the threat won't succeed in 2019, though:) As I said before, if a new method of payment offers 2X the rewards and charges 0.5X the interchange fees as credit / debit card, it can kill card networks overnight.  

Apples and oranges. We are working on a wearable payment solution with biometrics that allows to make unlimited contactless payments (just like Apple Pay). It's a different use case to Aadhaar. 

So, as usual, it's not about WHAT or HOW, it's about WHY :)

Have a nice weekend, Ketharaman.

@Alexander Peschkoff:

Before #WC2018, I'd have crudely paraphrased Gary Lineker's famous saying to this context: "Payments is a simple business where interesting players and initiatives happen every year but, in the end, Visa and MasterCard always win". But, seeing as what happened to Germany in the latest world cup, I'll content myself with the hope that waiting for interesting players and initiatives in payments won't be like Waiting for Godot in the eponymous play by Samuel Beckett!

According to Bloomberg, US retailers are having another go at saving credit card MDR aka swipe fees by launching their own bank account-linked payment apps and incentivizing consumers to switch to them from their credit cards by offering discounts, easier returns, line jumping and other benefits. We know what happened to their first round payment apps like CurrentC. Only time will tell how their second attempt will pan out. On a side note, according to this article, the Starbucks mobile payment app "now represents 14 percent of the coffee chain’s transactions." That's a far cry from the grandiose predictions made by the digerati a few years ago.

It’s like the second Brexit referendum - voting for the same vague dream again will not produce a different result, unless there is a FUNDAMENTAL change to the equation.

True dat but, to be fair, the second round of retailer apps seem to be better thought out. Instead of trying to provide purely monetary incentives by way of discounts, which is not a sustainable strategy in a low margin sector like retail, the second round of retailer apps seem to trying to drive adoption by throwing in non-monetary incentives like easier returns and line jumping, which are (arguably) more sustainable. Of course, these apps will qualify even less to be called payment apps than the first round of apps but, as long as they help retailers save on the MDR they pay to banks, what's in a name?

WSJ doesn't buy my argument about #WC2018. In a recent article, it echoes my aforementioned paraphrasing of Gary Lineker's famous saying thusly:

"Despite a bewildering proliferation of digital payments over the past 10 years, the old payment champions Visa & MasterCard continue to be the new payment champions because most new ways to pay for things still lead back to Visa and Mastercard." 

I was asked to answer the following question on Quora today: "Are there any online payment programs that don't take a percentage of sales?" I answered that there was none in my knowledge. Obviously you (probably) can't run a payment business profitably in that manner. But this got me thinking about my earlier comment that a new payment rail with 2X Rewards & 0.5X MDR can kill Card Networks overnight. Wonder why there isn't one like that. If startups can attract VC funding despite making whopping losses in so many other industries (e.g. ride share like Uber), why not in payments?

A2A payment has been a success in India thanks to UPI and now it seems to be the standard and many US firm are adopting this in India. The reason is two fold - this method of payment from your Bank account is well tuned into customer's behavior in these markets. Secondly the transaction cost is 40 basis points as opposed to 1.8 per cent or higher for a card scheme.

Now this behavior is catching up in UK and other markets since the transaction cost is much lower. So although customers are used to swiping their credit card, merchant acquirers will push such an alternative payment method becasue it lowers the cost for the merchant.

Saw this tweet on how Visa has announced an increase in CNP interchange rates. It's US-centric but I was surprised to find some tweeples saying that even PayPal and SQUARE have failed to make a dent on Visa / MasterCard when it comes to online / CNP payments.