The payments world has recently seen two big, bold deals which, in their own way, will have a major impact on the payments world. They are very different in nature and are a great reflection on how payment players are looking to adjust to the rapidly changing payment market: supping with the devil on the one hand, expanding into unknown territory on the other.
It was not a complete surprise when MasterCard announced its acquisition of Vocalink; it had been mentioned in the press a few months before. The regulator had mentioned often enough that it wanted the big UK banks to sell Vocalink. Visa was barred from the sale by having a dominant position in UK debit. So Mastercard, not encumbered by numerous national and political ties that restrained the other European clearing houses interested in a tie-up, had a fairly clear run at it.
With this deal MasterCard has acquired what is probably the primary player in the Faster Payments, or real time ACH, space today. Vocalink processes the majority of UK non-card retail payments and owns the software that powers Faster Payments in the UK, FAST in Singapore and the real time offering of the Clearing House in the US, which is going live in January 2017. Using Faster Payments, money can be exchanged between two parties’ bank accounts in quasi real time. There is no need for a card network to sit in between the accounts. So why would a card network buy into the ACH space?
The Visa/PayPal deal was completely unexpected. Both the US networks have had their difficulties with PayPal, who was originally established to address the dismal experience of online card payments. PayPal provided a cool customer experience, but still utilized the established card rails to facilitate the payment. The business model disintermediated the card brand at the consumer level, disintermediated the transaction data from the issuers and card networks and, to cap it all, PayPal started encouraging consumers to load their digital wallets via ACH, much cheaper for PayPal than card acceptance. None of this can have endeared PayPal to the card networks. And yet, with PayPal’s success it is safe to say that PayPal was, and continues to be, a major source of transactions for the networks. A classical dilemma for them.
Visa has taken the bull by the horns and inked a deal with PayPal which brings together one of the largest card companies with one of the largest digital payment players in the world (remember, this includes Braintree, Venmo, Paydiant and Xoom!). The deal addresses some of the problems that have traditionally plagued the relationship between PayPal and the card networks from brand visibility to disintermediation by ACH. The really big thing of this deal, though, is how joining the two players’ capabilities will likely transform the way digital payments will develop in the future. From a consumers perspective this deal should be a clear win as it promises, in a fairly short time, more choice, more control over how the consumer wants to transact and a more seamless experience. In fact, it is such a good deal that MasterCard now also wants to get in on the act and it sounds as if PayPal is not immune to their overtures.
Both deals reflect the changes that are happening in the payments space
To set the scene, a quick recap of a previous article called “A helicopter view of payments” which I published in April of this year. The article divided the payments eco-system essentially into two layers: the application and the infrastructure layer.
The article argued that all payments players who had traditionally operated a tightly integrated, vertical business model across all the layers now had to think on how to separately manage their businesses in the different layers. As the layers became increasingly separated by technology and regulation managing within them would require different business models and thinking. These two deals demonstrate how the thinking is already changing.
The Visa/PayPal deal plays predominantly in the Application layer. The deal is all about the digitalization of the payment experience, making it seamless, quick and elegant. It is a crowded space where consumers have increasing choice on how they want to transact. In order to satisfy their customers, the players in this space will have to ensure that they give them that freedom of choice, even with competing products.
It is noteworthy, that a traditionally integrated operator like Visa has partnered with one of the major digital challengers that have positioned themselves between the banks (and the card network) and the consumer. Going it alone in an increasingly complex and fragmenting payments world seems no longer to be a winning proposition. Partnering appears to be the fastest way to achieve serious reach in the digital application layer. Of course, Visa is also looking to achieve more transactions on their processing rails through this deal. The point is that they no longer have complete control over how those transactions come into the network, as they would under an integrated model. We are likely to see further deals of this nature in the near future, as none of the players will want to be left behind. Being first should certainly give Visa a head start in this space against Mastercard and will help it accelerate growth.
The MasterCard deal falls into a different category. Vocalink plays in the infrastructure layer of the payments market. When we look at payments globally, card networks process only a small portion of total payments. Today the majority of payments are handled by ACH and will be handled by Faster Payments tomorrow, a huge processing market to which MasterCard had little access. The deal has the power to be transformative for MasterCard as a payments processor and shift the economics of their smaller scale in the infrastructure layer compared to Visa.
Faster Payments is growing rapidly in Europe, the USA and other parts of the world and looks likely to be the next big payment rail of the future. Going forward, players in the application layer will be able to ride these rails via APIs, just as they ride the card network rails today. The transaction will likely be faster, cheaper and provide more value-adds. And why should card transactions not also ride on these rails? Whatever the exact scenario that develops and at whatever speed, Mastercard has ensured that they will play a major role in the infrastructure layer. Now they “only” have to execute on this vision, a herculean task next to their current digitalization efforts in the application layer. Chances are that we will see two separate businesses in order to manage this: one for the application layer, one for the infrastructure layer.
When I asked a long time payments expert his opinion on the two deals this is what he said: “I think the interesting question is whether Visa/PayPal are bringing together customers in a new way on the old rails short term, while MC is acquiring the new rails that will be the basis of payments switching long term?” I will leave the reader to form their view on that question.
So now we wait for a potential Mastercard/PayPal deal and then a Visa announcement on Faster Payments. I suspect the first one will come much sooner. Exciting times in payments.