Visa and Mastercard have dominated the payments industry for decades. In a 2015 Nilson Report, Visa and Mastercard represented more than 82% of the global market share for transactions worldwide. Visa and Mastercard charge a transaction fee on each transaction taking place through their cards. They also partner financial institutions and charge sizeable foreign exchange fees on global transactions.
The first credit card was issued by New York’s Franklin National Bank for loan customers way back in 1951. It was issued as a symbol of trust for credit worthy customers. Today the card industry has become more cut throat. Trust became a secondary issue compared with profit. After all, credit card loans are revolving industries with high profit margins for consumer banking. Financial institutions and payment systems have worked together and charged the consumers interests rates and a host of other fees.
For decades, payment system firms enjoyed an undisturbed market free from disruptive forces. Unlike the short messaging system (sms) industry which was disrupted by data messaging applciations, payment system firms have endured the onslught of payment applications such as Square and Paypal. The rise of mobile payments startups may well challenge the traditional card payment system. Indeed some startups offer card-less convenience as well as attractive data analytics for merchants.
And yet, Visa and Mastercard continue to grow their topline revenue. Given both new and traditional forms of payment are growing, perhaps there may be a complementary relationship between the two. Unlike the Uber versus black cabs in London, mobile payment applications are not necessarily disruptive to the payment ecosystem.
Online applications such as Paypal allow users to add credit cards as well as top up an e-wallet directly from banks. Many users continue to use credit cards as a complementary service to the new wave of payment applications online. After all, a standalone system is another form of security for suers. Users can always cancel the card once they feel that Paypal or another payment application has initiated an unauthorised transaction. For many of these users, convenience is the winning factor. With mobile applications, payment becomes a quicker and more enjoyable process. The 30 second wait for the POS terminal to dail up to the network is long compared to the Visa paywave transaction which can take mere seconds. When users add these cards into a new application such as Apple Pay or Liquid Pay, the transaction can be done in a matter of seconds.
For many mobile applications, payment is the first step. Alipay started with payments then moved into investment products, microfinance and trade. Payments bring in the critical mass. Today, users do far more including trading stocks. If they could top up their stock brokerage account, pay interst and commissions, select robo-advisors all within the same application, might more defect to such applications? Mobile payment applications might just be the start of a smarter financial ecosystem.
The victims of the disruption may emerge only in later phases of this growing market in mobile payments.