It sometimes seems that two issues dominate payments: the ongoing battle over the price of payments between major retailers and issuing banks, and the organizations in developed markets that are tumbling over each over to announce their latest wallet, wearable token or smartphone app is going to revolutionise the payments world as we know it.
However, many developing markets are quietly and steadily making significant steps forward in payments.
In many areas of the developing world there is a lack of banking and payments infrastructure. Interoperability has been slow to develop in many areas. Nevertheless, there is an imperative of financial inclusion to help economies develop and a number of markets are turning to domestic payment schemes as a key enabler.
With my co-authors Andrew Veitch and Professor Jurgen Bott, I researched payment schemes in both developing and developed markets to find lessons in financial inclusion, and whether countries should set up domestic payments schemes or just rely on the international players, particularly MasterCard and Visa. We were fortunate to also have input from ten central banks to get the national economic policy perspective.
There were three key findings that came from the research.
Domestic schemes are the best way to achieve low transaction costs. To enable financial inclusion, transaction costs need to be kept to a minimum. The research showed transaction costs from domestic schemes are on average only 45% of the cost of using MasterCard or Visa for in-country payments. Even in developed markets, around 95% of transactions are in-country but in many developing countries it is over 99%. Being 55% cheaper on 99% of transactions really does allow for low cost services to be developed.
Domestic schemes also innovate better for local markets. The international scheme giants throw lots of money at new ideas, but the research showed few of them hit the spot in terms of meeting local market needs. Local schemes on the other hand, with their deep roots in local markets, are often better placed to deliver exactly what is required.
The innovation benefits can be seen in a number of markets. In India, the recently created RuPay domestic payment scheme has gone beyond a straight debit card to support Kisan cards, or cards which provide affordable credit for farmers. In Nigeria, Quickteller provides an extensive range of value added services to 20 million Verve local scheme cardholders through ATM, online and smartphone channels.
Additionally, domestic schemes have participation and governance benefits. One of the underlying reasons for the success of the MasterCard and Visa organizations was that traditionally banks were involved in their governance and product plans. Since the companies went public, this is no longer the case, but domestic payment schemes still allow for the essential participation by banks and other payment providers that can fuel the sense of a multi-stakeholder enterprise rather than a strict P&L-driven approach.
Whatever the rights or wrongs of the Ukraine crisis, the Russian payment market has been left exposed by its lack of domestic cards, infrastructure, and a scheme. It now seems inevitable that a Russian scheme and infrastructure will be set up (probably similar to China and India) and a number of the central banks contributing to the research are also concerned about the same exposure.
Interestingly six recently retired senior executives from MasterCard and Visa who contributed their views also argued for developing markets to build their own payments infrastructure.
Given that there can be substantial economic, innovation and governance benefits of a country having its own payment scheme and infrastructure, is it feasible for markets other than the giants of China and India to follow this route? There are several factors which are combining to make it dramatically easier than before.
The building blocks of a domestic scheme and infrastructure (switching systems, specifications and scheme rulebooks) are more readily available from competent providers at a reasonable cost. Switching systems from the likes of ACI are widely available and chip specifications from EMVCo and Discover offer viable alternatives to MasterCard and Visa specifications.
There are also now several consulting organisations staffed by experts with international expertise that can help with scheme set-up including rule books, interbank guarantee agreements and pricing structures. And there is a now a developing trend for domestic payments schemes to share technology costs rather than have to build internally.
These factors are helping domestic payments schemes and infrastructure providers to become established and to provide low cost, innovative services. MasterCard and Visa will continue to play an important role in developing markets, especially for international business. But the research shows there is a strong case for developing markets to begin developing their own national capabilities as part of the drive towards promoting financial inclusion.
John Chaplin is author of National Payment Schemes: Drivers of Economic and Social Benefits?