Payments 2012 – The Year in Review (and a look ahead)
Payments has traditionally ranked among the most dynamic industries in the world, and 2012 was no exception. The year was marked by new technologies, new entrants, new regulations, and in some segments, the beginning of a return to normalcy. This retrospective will attempt to highlight those events that were not only newsworthy, but important – still worthy of our attention in 1, 3, or even 5 years.
Interchange litigation settlement: Still not final, the settlement of the long-standing merchant litigation against Visa and MasterCard is unlikely the end of the story. Discussions with retailers, acquirers, networks, and issuers reveal a startlingly high degree of emotion remaining around payment network economics, and the failure of the participants to thus far engage in thoughtful dialogue. This ongoing debate will affect future industry developments, notably mobile, given the retailer-backed MCX initiative.
Durbin routing rules: Merchant-controlled routing and issuer non-exclusivity created a brave new world of debit network dynamics. Merchants and acquirers are still working to understand how to most effectively employ their new privileges, while networks and issuers are adapting to volume and revenue uncertainty. Cardholder experience remains a big unknown.
Prepaid grows up: Spurred by the long-predicted consolidation of prepaid specialists and increased attention from large financial institutions, the long-term structure of the prepaid industry is starting to take shape. Strategic players used acquisitions to build out their capabilities (USB/FSV, GDOT/eCommLink and Bonneville, Google/TxVia, AccountNow/nFinanSe). Industry heavyweights JPM Chase, American Express, and Walmart launched compelling new products, Liquid and Bluebird, and are putting their marketing muscle behind those products. Franchise issuers like US Bank, PNC, BB&T, and Regions successfully rolled out GPR products, as both down-sell options for unqualified DDA applicants and companion cards for existing customers.
PayPal “Discovers” physical POS: PayPal’s agreement to participate in the Discover acceptance network, the details of which are still being refined, will bring the eCommerce market leader into the physical world. This increased utility, coupled with PayPal’s consumer base and brand recognition, could propel PayPal to “fifth network” status.
Debit stalls EMV: The global chip-card standard is (finally) poised for broad rollout in the U.S. However, Visa, MasterCard, and 18 (18?!) PIN-based networks have not resolved the operating and technical issues for an EMV-enabled product in a post-Durbin environment. As such, major issuers see no incentive to being an early adopter of EMV on debit. The path on credit, however, is more straightforward and leading issuers are already executing targeted re-issue strategies. EMV issuance to the mass market will likely take years, however.
So, with 2012’s important events as a backdrop, we suggest these developments to watch closely in 2013:
Mobile: The mobile wallet buzz on the Fall 2012 trade show rota was eerily reminiscent of the eCommerce buzz circa 1999. If the analogy holds, only a handful or so of the literally hundreds of aspiring wallet providers will prove commercially viable. That said, market forces driving the development of mobile payments are powerful when you consider the efforts of Google, ISIS, MCX, and PayPal as well as the investments being made by the major payment networks. While adoption is on a longer cycle, 2013 may be the year the industry begins to coalesce. The challenge is that mobile isn’t about solving a glaring consumer problem, it’s about creating a better consumer payment experience and communicating those unique benefits only possible in a mobile environment.
Regulation: While the industry is learning to cope with Durbin, CARD, and Reg E, the potential for additional regulatory burden looms large. In particular, pay attention to the CFPB’s continued interest in prepaid cards and NSF fees as potential disruptions. Also, 2013 will mark the first tests of restrictions on Net Compensation under Durbin.
Network turmoil: Turmoil among leading payment networks will continue and likely accelerate. Merchant/acquirer routing incentives will increase pressure on issuer participation economics. As a result, we expect a new round of issuer deals with their network providers. The long-predicted “race to the bottom” is more likely to occur in the margins of smaller networks, and those without associated processing capabilities, potentially resulting in another wave of consolidation among smaller networks.
Banks in Prepaid: 2013 will likely mark the roll out and fulfillment of banks’ GPR strategies. Their success in integrating prepaid into their retail product offerings coupled with adoption by traditional mainstream customer segments will play a large role in determining the long term size and structure of the prepaid issuing market. Payroll cards will continue their march towards becoming table stakes within the product suite of treasury groups.
Small issuer strategies: Small issuers continue to be the focus of processors and networks in search of profitable revenue growth. This interest will put downward pressure on small issuer processing fees. However, network routing competition will, almost certainly, put at least as much downward pressure on exempt issuer debit revenue. The net of these two forces may not bode well for the bottom lines of small issuers.
Union Pay: They’re not just “China” anymore. China’s state-sponsored payment network has size and scale rivaling that of more established network providers. 2013 may be the year Union Pay emerges as a global force in payments.
The new year is certain to bring challenges and opportunities for players across the payments value chain. The confluence of new technology, a changing competitive landscape, and a continued activist regulatory environment will ensure that, in 2013, payments will again be an exciting place to be.
For more information, please contact Lee Manfred, Partner specializing in Deposit Access and Payment Strategy, email@example.com
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