21 Aug 2013
Of course I can’t answer this question.. but it is THE question most frequently asked by investors. I certainly don’t see anything that would significantly dent Visa, MA or Amex’s growth internationally. The concentration of electronic payments is tremendous, fully 92% of all electronic transactions occurred in the top 10 OECD 20 markets. Internationally, as markets mature, banked consumers increase, market facilities like credit bureaus improve coverage, credit starts to flow… I went to work for Ajay Banga at Citi after listening to his fantastic interview w/ Mike Mayo (then of prudential), Ajay talked about 600-800M new people gaining access to financial services globally. V and MA will be prime benefactors of this global growth.
Domestically? Well that is another story. OECD 20 countries have begun to price debit transactions at cost of ACH. EU (SEPA CF), Canada (Interac), Australia (EFTPOS)… now the US is following with a Durbin rate likely to be $0.07-$0.12/transaction (12c is the fee in Australia). This rate change impacts $5-7B of bank fee revenue (see Reuters). Of course banks are not in the business of loosing money, and must find a way to make that up..
This brings me to the obvious loser in next 5 yrs: Retail banking in the US. Prior to this latest Durbin change, fully 40% of mass market retail bank customers were unprofitable. This latest change to debit fees will accelerate bank moves to reduce cost to serve (Branch Infrastructure to Online channels).. Retail banks must either find something new to sell consumers (ex Amex/WFC), or charge them more. (see Blog Future of Retail Banking: Prepaid?), many are seriously considering what BAC did 2 yrs ago .. adding a fee.. (see CNN/Money Article).. remember the reaction back then?
This retail bank pricing pressure comes at a time when retailers are offering banking lite products (WMT/Bluebird) AND new bank aggregators are forming which would allow ANY company to deliver banking services. Best example here is Wirecard in Germany.. as a payments specialist and bank which enables MNOs to offer banking services.In the US we see early stage examples of this same model, OTC: IEBS Independence Bancshares (nD Bancshares) has been recapitalized w/ Bob Willumstad (former AIG CEO) as Chairman.
What is Credit? Debit? Charge? Pre-paid? How are they different? With debit costs moving toward $0.. consumers (and start-ups) have access to “real time” settlement at ACH “like” pricing.. This is the heart of Bank’s concern.. and their subsequent efforts to establish rule changes on “wrapping”. Banks don’t want Paypal, Google, or anyone else using debit this way.
As I stated in Controlling Wallets: efforts to “control” have unintended consequences.. like holding onto your Jello by squeezing it.. PIN Debit may be the first “break” where you can have your cake (Visa Bug) and eat it too (enhanced data w/ merchant).
PIN DEBIT.. the Dumb Pipe Switch
If you are a BANK… you can do anything you want to on a PIN DEBIT network (you control).. For example, First Data owns STAR.. they are leveraging the Star network with Cardspring to transfer non payment information (offers/incentives). This is a great example of how to construct a solution within the constraints of existing networks and rules…. And KEEP your Visa logo.
Unfortunately there are few PIN debit cards that are not also signature debit cards.. When the Visa logo is on the card.. it is the customer that decides. Merchants LOVE PIN.. as pricing was different. Now (in the US) PIN and Signature debit pricing is is the same (for banks over $50B in assets).. Offsetting this confusing PIN/Signature furball is the requirement that both signature and PIN debit must have at least 2 options (each) for routing AND several PIN networks are not owned by issuers (Pulse, NYCE, Star, …). This gives FIRST DATA, FIS, Discover opportunity to deliver services that SWITCH debit for the benefit of the MERCHANT (ex Cardspring).
Is “PIN debit” the baseline product for retail network consortium? It is how I would construct it. Target’s Redcard is the model, but it is closed loop. Expanding a Target Redcard through a PIN debit network would provide for Open loop (multiple merchants participating). Operating in a PIN debit network also gives the PIN network control over rules on acceptance. Although there would be no real interchange cost savings here.. there would be a real advantage to retaining customer data.
The other advantage of processors which also own a PIN network.. is that they “see” all transactions for their merchants. If McDonald’s processes a debit card transaction.. their processor (ex FirstData, FIS, CMS, …) has flexibility in choosing whether to process as PIN or signature. PIN is not routed through Visa, Signature is.. First data could see if card is registered for any loyalty/incentive programs. This is what what JPMC has done (partially) w/ the Visa deal.. without acquiring a PIN network. Allowing them to use signature debit and credit as rails for non-financial data and routing which will not go through Visa.
Beyond Retail banking, the traditional Credit Card Product seems ripe for change. Why would consumers with good credit accept 18% rate on a credit card when the bank is paying them 0.1% interest? The top issuers know they must improve the merchant and consumer value propositions.. but are largely failing. Its hard to turn around large portfolios and create new value propositions that don’t cannibalize your core business.
This brings me to Winners.
- Companies that can help retailers become better publishers and marketers (see blog)
- Company that can construct a better customer experience (Square, Apple, Payfone)
- Companies that and orchestrate COMMERCE, not manage payments (Google, Amazon, Facebook)
- Companies that can enable anyone to ADD ON banking services (Wirecard, GDOT, IEBS, )
- Companies that can CONTROL the mobile phone (Google, Apple, Samsung, ??MNOs)
Sorry for typos.. I publish these things before I proof them.. any corrections appreciated
See my disclaimer above. I have equity in GDOT, Wirecard, Goog, AAPL, AMZN