How the major card networks are planning to survive the pandemic

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The major card networks have heavily invested in broader services as transaction processing loses its luster, a strategy that’s provided a ray of hope as retail and travel industries remain sidelined.

Visa and Mastercard both are in the process of acquiring data aggregators, Plaid and Finicity respectively, to improve their ability to use open banking connections to court fintechs that offer alternatives to traditional credit card debt and a range of other merchant-facing technology, such as online storefronts and spending analytics.

Both card brands have also made a series of deals designed to improve retailers’ ability to serve consumers, placing Visa and Mastercard at the front end of the relationship as much as the transaction-processing back end.

Mastercard has partnered with Microsoft, for example, in several areas, covering cloud delivery and artificial intelligence. The combination of Mastercard Labs and Azure will support augmented reality and internet-of-things use cases to manufacture new experiences for consumers.

Microsoft and Mastercard have also worked together on digital ID, promoting interoperable authentication that covers not only payments, but workplace security and access to private and government buildings.

During Thursday’s earnings report, Mastercard CEO Ajay Banga outlined its broad range of services, including “insights, analytics and cybersecurity tools” that allow it to adapt to its partners' changing needs. Banga also highlighted Mastercard’s planned acquisition of Finicity.

“The shift to digital has a downstream impact into our services — more digital vs. cash is more data, more data is more desire and more need for data or our cyber solutions,” said Michael Miebach, Mastercard’s president, during Thursday’s earnings call. Miebach will become CEO after Ajay Banga exits the role at the end of the year.

Finicity will provide a new source of innovation for Mastercard's merchants and consumers, Miebach said. “There’s credit decisioning, account verification and we’re also attracted to Finicity’s approach to opening banking,” Miebach said.

Both card networks have also worked on “smart city” projects that cover transit technology and broader municipal services, such as parking.

These were ongoing strategies before the pandemic, but have become a vital way for the card networks to offset losses on traditional payment volume with service-oriented revenue while waiting for payment flows to recover.

“Debit and credit card payments are still the bread and butter of the card network, but they are becoming fintech companies,” said David B. Shipper, a senior analyst for debit credit and prepaid cards at Aite Group, noting both Mastercard and Visa have made tools for third-party developers a major part of their ability to extend beyond payments. “They offer solutions for bill payments, real time payments, reporting, merchant discounts, rewards, payroll. Visa even offers an API that can predict merchant wait times.”

During its earnings call this week, Visa spotlighted partnerships and ancillary services as an area of growth that the pandemic has accelerated.

“While COVID-19 has proved to be challenging, Visa has opportunities,” said Logan Purk, a researcher at Edward Jones. “The biggest benefit is the massive shift to online and digital payments. This is key as Visa pointed out consumers that buy online tend to spend more than traditional brick-and-mortar shoppers. Also, as more spending moves online, this could spur more demand for Visa's add-on services, such as security.”

As more commerce moves online, consumers and merchants need a different range of services than in the past. That’s given Visa’s earlier decision to open its technology tools and unexpected use case.

“Value-added services have grown quickly,” said Visa CEO Al Kelly during this week’s call, discussing technology partnerships that broaden merchant services, particularly in areas such as risk and security — giving Visa areas to provide services that aren’t directly tied to payment transactions. “As e-commerce has expanded and new sellers come into online marketplaces, there’s added capabilities that they need. And these use cases do bring a higher potential for fraud.”

And during its earnings call, Amex — which reported an 85% drop in its second-quarter net income — referenced its partnership with PayPal as a coronavirus recovery play that can partially offset the loss in travel payments. Amex has also recently upgraded its risk scoring for digital ID and expanded business management tools for U.K. companies.

PayPal, however, doesn't have the baggage of being heavily invested in point of sale payments or travel rewards. Its second-quarter performance broke multiple records — including new users, revenue and payment volume — as consumers and merchants flooded into the digital economy.

The card brands have of course not abandoned their payment processing mission; they’re spending heavily to establish domestic processing in China despite the political headwinds, for example.

But offering services such as digital ID, spend analytics and data management provide a way to position themselves as technology providers.

For years, this was seen as a way for the card networks to avoid being seen as a “dumb pipe” that set interchange fees from billions of transactions to maintain their balance sheets. These strategies now give the networks a way to lean into the recovery.

For the loss of interchange revenue due to travel restrictions, unemployment levels, and general consumer angst, the financial services industry needs to increase profitability through both new revenue streams and cost reduction, said Krista Tedder, head of payments for Javelin Strategy & Research. “To truly manage the challenges of the coronavirus economy, digital transformation needs to move beyond the user experience and transform the technology and products that are included in financial services.”

This includes point of sale loans, micro-transactions, micro-investment options, cryptocurrency trades, real-time and instant payments, Tedder said.

“Everything is on the table for evaluation of what the customers will want long-term to balance out the loss of transactional revenue,” Tedder said. “This is not a short-term problem that the financial services industry needs to solve for, but a long-term sustainable change.”

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