Why Visa and Mastercard are becoming less reliant on transactional fees

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So far, 2019 has been characterized by a series of eye-catching strategic deals within the global payments ecosystem, with new players positioning themselves to rival Visa and Mastercard. The card networks giants have responded by pursuing a strategy to become less reliant on transactional fees.

While Visa and Mastercard have an almost complete duopoly of the European card payments market, the threat of increasing price pressure on transactional fees from regulators — along with the emergence of new competitors — is forcing them to consider alternative commercial options.

“The deals earlier this year between Fiserv and First Data, and FIS and Worldpay, could represent competitive threats in the future by bypassing Mastercard and Visa,” said Mark Falcon, founder of U.K. regulatory strategy advisory firm Zephyre. “So they’re trying to become much less reliant on interchange fees and payment cards generally. Their central strategy is to grow their share of the overall payments market and grow their pricing with it. And various acquisitions and strategic partnership are part of this.”

One of the main aspects of this strategy is putting new deals in place for the movement of money, which add flexibility and enhance what they already offer. Experts suspect this is why Visa and Mastercard have signed strategic agreements with PayPal, Apple, Google and Klarna in recent years.

“The card schemes have been much more successful than banks at building robust, scalable, low-risk systems, so I think they’re very well positioned to say, ‘How do we get different channels?,” said Mike Massaro, CEO of global payment provider Flywire. “Whether that’s through mobile wallets [or] bank accounts, I think they want to have all the ways in which you can send or receive money hooked up into their overall solution. So you don’t just have to move money over the card rail, but you can choose a particular network, for example based on economics, or country of origin, or destination.”

A driving factor behind Visa and Mastercard’s desire to widen their network of payment rails is to expand from mostly C2B card payments to B2B, B2C, and C2C payments — markets which are currently mainly served by inter-bank or ACH payment schemes, and remittance providers. This was illustrated by Mastercard’s acquisition of Transfast last month, along with Visa’s deal for Earthport.

Visa declined to comment for this story, and Mastercard did not respond to inquiries.

Increasing numbers of businesses are serving global consumers, and are thus facing greater complexities in terms of regulation and the sheer number of relationships they have to maintain to enable different payment methods.

This means there is an opportunity for Visa and Mastercard to develop software solutions that leverage their global reach to deliver increased value to major corporations by integrating a variety of payment options into their existing infrastructure.

“Payments in many ways haven’t gotten easier, they’re now more complex,” Massaro said. “There’s more regulation, there’s more countries around the world that have unique payments systems that make it challenging for anybody that has to collect money or send money. The world keeps changing, and more methods keep appearing as people want different options, but that means businesses need interoperability between all these networks. They need a global infrastructure which supports all. And so companies like Mastercard, Visa and American Express are trying to figure out how to make this easier.”

Massaro predicts that in this sense, the card networks may be able to succeed where the banks have largely failed over the past decade.

“Being able to integrate payments into existing business infrastructure is not a skillset that the banks have had,” he said. “And so I think we’re only going to see more interesting partnerships like the ones so far this year, as the card schemes try to figure how they connect that last mile, as well as attempting to build out software components that are more value oriented than the banking approach of just exposing APIs, and allowing them to connect through third parties. As well as expanding their network through these cross-border partnerships like Transfast and Earthport, I think we may see more acquisitions in the software space because that’s really where the value is going to be delivered to the end customer.”

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