The Future of Zapp and Other Musings on MasterCard and VocaLink

Yesterday, my colleague Gareth shared on these pages his first thoughts after the announcement that MasterCard is buying VocaLink. I agree with his points, but also wanted to add some of my own observations.

As someone who closely follows the developments in digital payments, one of the questions following the acquisition to me is what happens with Zapp, a solution that VocaLink has been working on for the last few years to bring "mobile payments straight from your bank app." To me, it boils down to two considerations:

  1. Would MasterCard want to kill off Zapp?
  2. If not, can MasterCard help accelerate Zapp's launch?

My view on the first question is a resounding "no". Yet, the question is not as silly as it might seem. At Celent, we have been talking about the "battle of rails" in payments, i.e. between pull-based payments running on the cards infrastructure, and push-based payments, such as Zapp, built on top of new faster/ real-time payment networks. Given the cards' dominance in merchant payments today (at least in the UK, US and quite a few other markets), solutions such as Zapp may be seen as a threat to card-based transactions. Buying off a competitor only to shut it down may be an expensive strategy, but would not be unheard of.

And yet, I believe that such logic would be completely flawed. By buying VocaLink, MasterCard becomes a rail-agnostic payments company, and stands to benefit from cards and non-cards transactions. Furthermore, specifically in the UK, Zapp could be MasterCard's ticket to regaining ground in everyday consumer payments. As I discussed in another recent blog, Visa controls 97% of the debit card market in the UK. I would imagine that a Zapp-like solution would have more of an immediate impact on debit card transactions rather than credit card spend.

So, if that's the case, can MasterCard help accelerate Zapp's launch? Perhaps. We first heard of Zapp in 2013, and even included a case study in a Celent report published in September 2013. Yet, three years later, despite announcing a number of high-profile partners – from Barclays and HSBC, to Sainsbury's and Thomas Cook, to Elavon and Worldpay – Zapp is yet to go live. I don't claim to have any insight knowledge into the reasons for a delay, but I would imagine that changes in the competitive environment had something to do with it, particularly with Apple Pay showing how easy mobile payments can be when paying in-stores or in-apps. While I have no doubt that VocaLink and Zapp have great technologists and User Experience design specialists, I would expect that MasterCard's Digital Enablement Service (MDES) should bring helpful experience of integrating mobile payments into the banks' apps. And MasterCard's relationships with both acquirers and issuers should help convince the remaining skeptics and bring more partners on-board.

Zapp aside, I think the deal is good for both organisations for a number of other reasons, such as for example:

  • Not every payment is particularly suitable for cards (e.g. B2B, government) – now these payment flows become accessible for MasterCard.
  • Visibility to a much broader pool of transactions should be very helpful when developing risk management, loyalty and other value added services.
  • MasterCard's global reach should help bring VocaLink's experience in faster payments to markets which would have been harder for VocaLink to access by themselves.

In closing, I woudl like to go back to another announcement MasterCard made last week – the one about rebranding, the first in 20 years. MasterCard has changed its logo – it still has the interlocking circles in the colours which are widely recognised, but the company's name is spelled "mastercard" (although the company's legal name remains MasterCard):

MC_728x150

According to MasterCard, in addition to a more modern look, there was a conscious desire to reduce the emphasis on "card." That particular announcement was combined with the re-launch of Masterpass, and of course, digital payments will over time reduce the reliance on cards as a physical form factor. However, yesterday's announcement diversifies MasterCard away from card rails, and not just the plastic form factor, and is an important step in the company's journey from a cards network to a payments network.

 

What MasterCards’ Acquisition of VocaLink might mean

Today, MasterCard announced the acquisition of VocaLink  in the UK.

Before I start I should say I have worked for both organisations, and any comments that I make are mine, and nor am I mentioning anything that isn’t in the public domain.

In some ways the acquisition is surprising, given all that is happening – PSD2, the PSR threatening to fundamentally change VocaLinks ownership and the PSF (it’s payments – never too far from an acronym!) talking about replacing the infrastructure altogether.

It’s easy to think this is perhaps MasterCard re-inserting themselves back into the UK market as since their acquisition of the Switch brand, virtually all the cards have flipped to Visa. I think it’s actually more for three reasons.

Firstly, real-time payments. I’ve written about the charge towards real-time, and VocaLink are well positioned. They operate the UK Faster Payment Service in the UK, and the underlying technology is at the heart of the systems in Singapore, Thailand and The Clearing House in the US. In addition, the market is likely to explode. The ECB said at a recent conference that they expect 60-80% of all SEPA CT transactions to migrate to SEPA Inst. Even at today’s volumes, that’s 12 billion transactions in addition to the UK’s 1 billion. That's volume any processor would be eyeing. Coupled with PSD2, where card volumes may well fall, then is rationale alone for the acquisition.

Secondly, look at electronic payments more broadly. The VocaLink core payments engine is award winning. It was built to win business across Europe in the post-SEPA world, and is capable of handling multiple schemes on the same platform. Indeed, part of Sweden’s transactions run on it to today alongside a very different UK scheme. Imagine now the offering that MasterCard has in say emerging markets – the ability to deliver 100% of electronic payments.

The third is when you bang together some of the technologies of the two businesses. These are ideas, and of course they are far harder than they sound but just think about the possibilities:

– Real-time payments + MasterCard global network = true real-time global ACH;

– ACH/real-time + low value debit transactions = decoupled debit on your own transactions;

– ISO20222 remitance data + VocaLink B2B skills+ MasterCard global network + MasterCard analytics + MasterCard finances = Synegra meets Tungsten Network, but on steroids.

There is much still to find out, and yet more to mull over, but the signs suggest some exciting times ahead.

Unintended Consequences of Regulation, Part “n”

I must admit, I lost count how many times we at Celent have written and talked about unintended consequences of regulation. This is the latest installment.

As most people know, PSD2 has introduced new card multilateral interchange fee (MIF) limits in Europe. Debit card transactions across Europe have been capped at 0.2% of transaction value, while for credit cards, the limit is 0.3%. This is often used as an example of regulators bearing down on the issuers, and in many cases, especially for credit cards, it is indeed a significant reduction of fees charged previously.

However, let's take a closer look at the UK. According to the UK Cards Association statistics, debit card transactions outnumber credit card transactions by 3.3 times (10.3 vs 3.1 billion in 2015), while the purchase value of debit card transactions was greater than that on credit cards by 2.4 times (£439 vs £181 billion in 2015). Furthermore, of nearly 100 milion debit cards issued in the UK, 97% carry Visa brand. In other words, Visa debit cards are the most popular payment cards in the UK.

Visa interchange rates have varied over the years, but immediately prior to March 2015, Visa interchange for consumer debit card chip & PIN transactions in the UK was flat 8p per transaction. In March 2015, those fees changed to 0.2% + 1p, but were capped at 50p. The extra penny could be charged, because the UK Payment System Regulator allowed an interim period where the cap of 0.2% could be applied at an aggregate rather than an individual transaction level. As the individual interchange fees were capped at 50p, that meant that in aggregate they didn't exceed the required 0.2% limit. However, we understand that as of September 1, 2016, Visa UK is removing both the extra 1p and the cap of 50p and setting debit interchange fees at 0.2% per transaction, as required by PSD2.

As the chart below demonstrates, transactions less than £35 become cheaper than 8p set prior to March 2015. At £41.34, which is the latest average debit card transaction value, the current charges are at 9p and new ones post September will be 8p, the same as before. However, transactions above that amount and up to £250 are already more expensive than 8p today and will remain so post September.

MIF1

The real difference is for transactions above £250. The removal of 50p cap and charging at a straight 0.2% means that a £10,000 transaction (for example, when buying a used car) will now cost a merchant £20 in interchange versus the 8p the merchant paid before the regulation came into effect.

MIF2

What about Brexit? Will these European regulations still apply in the future? The answer for domestic transactions is, yes. The interchange caps are now enshrined in the UK regulation and are independent of the UK's status in Europe. More broadly, the Payment Systems Regulator announced immediately following the referendum results that "current payments regulation deriving from the EU will remain applicable until any changes are made, which will be a matter for Government and Parliament." Perhaps a more interesting question is what would happen with transactions between the UK and Europe in the future. If the UK is no longer part of the EU, would the payment networks decide that such transactions should be treated as inter-regional rather than intra-regional? Only time will tell.

So, what are the merchants with larger than average debit card transaction portfolios going to do? In the short term, some might start surcharging to pass the costs on to the customer; longer term, others might start exploring other opportunities presented by PSD2, and consider becoming Payment Initiating Service Providers (PISP) to move customer funds directly from consumer bank account to theirs, shunning cards altogether. Almost inevitably, the most proactive ones will shop around to see which acquirers offer the best deals; remember, these are interchange fees, not the actual merchant charges, and it is up to the acquirers to decide how much they charge their merchants. However, once again, the consequences of a regulation are not quite as originally intended.

The diversity of payments in the US

As a payments geek, I am always curious about payment experiences in various parts of the world. In the last month I had a couple of trips to the US – to New York and to New Orleans – and they just reminded me how diverse the US payments environment is. And I am only talking about the physical POS; I haven't really ordered anything online or in-app while I was there.

First, a few observations around EMV. As I live in the UK, all my cards are Chip and PIN, and the US market has been migrating to EMV for a while now. Of course, the migration can't happen overnight – some merchants have already upgraded their terminals, but many haven't yet. Also, there is no mandate in the US to use offline PIN, so "chip and signature" EMV cards are common amongst the US issuers. As an end-user, I experienced a full gamut of payment scenarios:

  • Majority of merchants would simply take my card, swipe it and give it back to me straight away. Not one of them checked if my card is even signed, let alone if the signatures matched…
  • On a few occassions, I was asked to insert the card into an EMV terminal and enter my PIN. And then we waited. And waited more. And a bit more. I knew EMV transactions take longer in the US, but I didn't realise just how much longer… Not surprisingly, the networks had to do something about it and have announced software updates (e.g. Visa's Quick Chip for EMV and MasterCard's M/Chip Fast) to speed up transaction processing.
  • Not a single eating establishment I visited had a handheld EMV terminal. All of them just took my card and disappeared for a while in the "back of the room" – a practice that sends shivers down the spine for most Europeans 🙂
  • On at least one occassion, I entered the PIN, yet the salesperson was still looking for a signature box on the receipt and wanted me to sign it. I had to explain that PIN replaces the need for signature; of course, these things will disappear once merchants learn more about the EMV cards.

A number of merchants in New Orleans had a Clover POS station. It looked really sleek on retailer desks and transactions seemed fast and easy. I asked a couple of them what they thought of it, and they all said they were very happy with the device, its looks and ease of use.

As a side note, American Express cards seem to be far more widely accepted in the US. In Europe, I got into a habit to double check at new places if they take Amex; in the US, that seems unnecessary.

Of course, it's no longer just cards. US was the first market in the world to see the launch of Apple Pay, Android Pay and a number of other digital wallets. The challenge for many of these wallets is the lack of places where they can be used, as contactless terminals remain relatively rare, albeit growing. However, when they can be used, they work very well. The biggest advantage that I can see as the UK user of Apple Pay is that in the US I can use Apple Pay for any transaction, whatever the amount (as long as my issuer is happy to authorise it). I had no problem paying for a taxi ride from New York's JFK airport to downtown by Apple Pay ($70+ fare with the tip). In the UK, Apple Pay and Android Pay (which has just launched this week) are subject to the same contactless card transaction limits and can only be used for transactions of £30 or less. Again, we expect this to change, as contactless terminals get upgraded.

I was also intrigued to see a PayPal acceptance badge at one of the POS terminals. I asked the cashier if it was a popular payment method amongst their customers. The cashier said that it seemed new to him, and that he personally had yet to see anyone trying to use it. I must admit, I am a fan of the PayPal wallet and use it whenever I can, but nearly all of my transactions are online/ via a mobile app. This time, I only noticed the PayPal sign after I already started paying by card, so can't quite report on the actual experience…

And yet, cash remains hard to beat, with many places only accepting cash. I refrained from visiting any of the dodgier establishments on New Orleans' Bourbon Street, but I didn't even had to in order to experience the power of cash. Most sellers in the French Market clearly prefer cash; getting into (jazz) Preservation Hall is "cash only" at the door, and while not every place has the sign as artistic as the one in the picture below, "cash only, one drink minimum" was a common mantra of many bars with live music.

cash only

Clearly, there is a lot of payments innovation in the US. Various wallets and innovations in POS contribute to the diversity of end user experiences. Such diversity is a good thing and if anything, it will only increase, as customers will have increasingly more ways to pay. And as the migration to EMV continues, the undesireable kind of diversity should reduce as well.

Cardless ATMs and disappointing mobile wallet adoption

While I’m an outspoken advocate of financial services technology, I have been a bit of a curmudgeon when it comes to mobile wallets. My skeptical attitude reached an apex when I dropped my smartphone in a glass of merlot several years ago and hasn’t recovered. Had my smartphone been my mobile wallet, embarrassment would have been the least of my problems. Said simply, I just don’t see a compelling use-case for most consumers. Until they arise, I expect industry press to continue to publish stories of lackluster adoption. There have been many. One in particular caught my eye. A recent article in Digital Transactions makes my point in its opening statement, “The introduction of cardless ATMs, which rely on a financial institution’s mobile wallet instead of a debit card to make an ATM withdrawal, could help further the adoption of mobile wallets and mobile payments.” Said another way, if the industry offers consumers enough reasons to configure and use a mobile wallet, adoption may eventually result. This doesn’t sound remotely compelling to me. I can hear the rebuttals now. In defense of Bank of America, BMO Harris, Chase, Peoples Bank and other institutions that have invested in cardless ATM access, physical debit card usage at the ATM could pose an annoyance to mobile wallet adopters, few that they are. With ATM usage roughly twice the customer penetration of mobile banking (below), the last thing banks need is a reason for customers to be dissatisfied with their ATM experience. In my opinion, that’s a more compelling rational for investment than some vein attempt to bolster mobile wallet adoption.

US P12M Channel Usage 2014Source: Consumers and Mobile Financial Services 2015, U.S. Federal Reserve, March 2015

In the article, one banker summed up the challenge associated with mobile cash access this way: “We found the biggest struggle is explaining what it is and the benefit it offers.” If the biggest struggle is communicating a compelling value proposition, then maybe the value proposition isn’t compelling. I don’t think it is – at least not yet. Please don’t misunderstand, I think cardless cash ATM access is a reasonable initiative, but not for the reason stated in the article. I applaud efforts to better integrate retail delivery channels, and ATM cash access is a baby step in that direction. Combine cardless ATM access with other capabilities such as broader P2P payment mechanisms, geo-location and a merchant-funded rewards program, and mobile wallets begin to look compelling. Until then, banks have a bevy of higher priority initiatives to deliver in my opinion. But, even if my bank enabled cardless cash access, I still wouldn’t abandon my physical wallet. In the event of another tragic merlot mishap, traditional ATM cash access might be a real life-saver.

First thoughts on marriage between Visa Inc. and Visa Europe

Today Visa Inc. announced it would be acquiring Visa Europe, subject to regulatory approvals. The press release is here; the executive team also held an investor call earlier today – the recording and the presentation are here. The deal was widely expected, and so should not be a surprise to anyone who follows payments. Still, it poses a number of questions, such as, for example, how effective the combined entity will be in dealing with intricacies of the European market, and whether this would lead to the Europeans calling (again) for a new separate pan-European card scheme. It’s true the European payments market has unique dynamics in terms of regulation and competition, both in cards and in payments more broadly. PSD2 will have profound effects on the existing market players, including Visa. Depending on the final interpretations, some provisions such as scheme and processing separation requirement might introduce undesirable complexities to the integrated Visa. However, I am sure none of this news to Visa’s management and they must have a plan for how to deal with the regional challenges. Visa has committed to maintaining a strong European presence, including an “empowered European leadership team and in-country resources”, “local data center”, and “differentiated country and regional strategies.” Furthermore, the potential synergies are real – a more consistent product set and fewer duplicated efforts should help Visa drive innovation and move to digital on a global basis.​​​ Visa also said it was planning to incur up to $500 million of integration-related costs over the next 4-5 years, most of which would go towards integrating Visa Inc. and Visa Europe systems. In the past, I have seen on occasions Visa Europe appealing to European banks by playing up its ownership structure in Europe and contrasting it to the global approach of MasterCard. This argument is now gone – both networks will be global commercial entities. Would this re-open calls for a pan-European card scheme? I had a look at this issue a few years ago in the Celent report, “In Search of a Third European Card Scheme” and concluded that it was “time to move on.” I still stand by that conclusion today; in my view, it has always been a politically motivated initiative, with no particularly clear business rationale. When “plastic” was the main/ only form of electronic payment, it at least made more sense to consider various options. Now, the world is changing rapidly, as digital payments and real-time networks between bank accounts emerge. Let’s hope that the European banks will find better use for their financial windfall from this transaction than trying to create a new pan-European card network. Given the original “put” option, it was always more a question of “when” rather than “if”. Congratulations to Visa team for deciding to move forward with the deal. P.S. Stay tuned for my reflections on last week’s Money 20/20; I was planning to post those today as well, but Visa’s deal prompted a number of inquiries, so wanted to offer a few thoughts on that first.

UK payments outlook 2024

Our friends at PaymentsUK have released their latest forecasts, the ever excellent UK Payments Market 2015. Whilst we don’t have a copy of the full report (hint, hint…), the press release does give us some interesting insights. For example, payments will hit 44 billion transactions a year by 2024. This is a net growth of 3.4 billion, which hides significant and continued declines in both cash and cheque usage (53% to 33%, and 1.1% to 0.4% respectively). The table provided (and replicated below – the link above has a better quality version) shows that, for consumers at least, cards continue to drive the growth. There are obvious reasons for this: consumers switching from Oyster-like cards to contactless, and indeed, contactless generally, is just one good example.   Number of annual consumer payments made per adult uk pay 3 One thing that really stood out for me is the final line before the total – the “other” category. Celent’s forecasts typically count prepaid and store cards into our debit forecasts. But what is notable is that PayPal is explicitly mentioned… and mobile payments aren’t. At all. We’ve not seen the full report, so it may be explained there, but given what we read in the press, this is hugely surprising. Recent examples include: Actually, it’s not surprising. Firstly, what is a mobile payment? That in itself will cause heated debates! Secondly, for the latter to be true, I ought to know at least someone who is making those mobile payments – or rather, every other person I know! I’m being slightly tongue in cheek – read Zil’s post from a few weeks back about him at least trying. However, I’d still argue that even this wasn’t a true mobile payment – the mobile device is just holding the card credentials. I refer you to my first point! So what are the takeaways? Firstly, the growth may continue – but in reality is perhaps less strong than you may initially think. A 3.4 billion growth in 10 years is actually only a CAGR of c 0.5% a year. Compared to some developed countries (France for example) that’s good, but compared to some developing countries that’s low. Secondly, there may be 101 new ways to pay, but they’re unlikely to make significant inroads, instantly. Current methods are deeply embedded in our every day life. Indeed, many of the “new” methods run on top of the existing rails, and the volume often gets counted as the old method. This doesn’t mean that there are no improvements to be made but that they are just that – tweaks to the existing. Finally, perhaps the phrase of there are lies, damn lies and statistics, ought to be caveated that many of the issues seem to be with PR people and journalists. Many inadvertently misread the numbers, but some of the latest releases underline that we all ought to find the original source rather than necessarily solely relying on what’s being reported.

Practice what you preach?

This is the next – I have a terrible feeling its not the last though – of seeing the cards world through the eyes of a consumer. The story so far is contained in three previous posts, with the last reporting that my card details were skimmed (we assume) in the US. This post however looks at the experience at home. As a consumer, we often get warnings from our banks about phishing attacks – we will never do this, our emails will look like this, etc. Then consider what a daily average inbox looks like – full of identical emails from fraudsters, often better written, and better laid out. Furthermore, banks only focus on emails and outbound calls. I’m possibly wrong, but I’m fairly sure never had the same warnings about text messages, tweets etc. Consider then these channels and how many spam messages you get on a daily basis. (It’s probably ok though, as all the PPI claims I’m told I have should more than compensate me for all the recent accidents I’m alleged to have been in!) Saturday afternoon I received this text: fraud Note that it comes from a mobile number, and texts from my card provider have their details in the text. I deleted it, assuming it was spam, and that if I replied I’d be signed up to some premium rate text service…again. Something made me pause, so I rang my card company, using the number that I already had. And I was right to do so, as it was from them. Thats why I’ve blurred the full number – this is an active line that they are using, but don’t advertise They seemed surprised that I was querying the method, yet when I asked how many people responded to texts, they seemed less certain (to be fair, it was a call center operator!). As a consumer, I appreciate the attempt to make it as seamless and easy as possible. Yet it contradicts the advice we’re given. It would be very simple to text people randomly and ask them personal detail to confirm who they are or to log into a man-in-the-middle website. It feels a little chicken and egg. Consumers need educating. Explaining that the layers of security are providing them protection. At the same time, banks need to think about how consumers will – or should – view their messaging. Given the nature of the message, and the reputational issues, I wonder whether it’s time for the banks collectively to find a solution. Detecting fraud and managing it could be a competitive differentiator – or it could prove far more powerful to do collectively. Across providers, across channels, across products. Best practice across the industry surely has got to benefit everyone long term?  

What do we want? EMV! Where do we want it? Over there!

In my last post, I talked about the experience of using my credit card in the US, and how just inconsistent it feels. Some of it was undoubtedly tied to security – using photo ID or entering zip codes – though I’m far from convinced that they provided any security at all. In some conversations we’ve had, there has been a feeling that US fraud is actually manageable at an industry level – a belief that they are in line or better than in many other countries. Yet the recent figures from Nilson seem to paint a very different picture. Whilst accounting for 21.4% or $6.187 trillion of total volume last year, the US accounted for 48.2% or $7.86 billion of gross losses worldwide on plastic cards. Zil has – and will! – discuss the implementation of EMV at length with anyone, so I won’t discuss that here. What struck me was how ineffective the checks were currently. As a consumer (rather than a payments geek) it struck me:
  • Asking for zip code as authorisation seems pointless – if I’ve stolen a purse or wallet with cards in, I’m likely to have either the zip code already or have enough info to find it within seconds on the internet
  • Asking for a signature, yet not even checking it seems odd. Perhaps I have an honest face or perhaps the risk didn’t warrant the effort
  • Photo ID, at least for non-US, seems pointless. How many people can spot fake ID, or know what a, say, Latvian national ID card looks like?
Another thought that strikes me is that the figures probably hide some other issues too. Traditionally, a third of UK card fraud takes place overseas (in 2014, £150m of £479m). And given that most other countries have EMV, of that, the majority takes place in the US – it has been ranked the country with the highest losses every year for as long as I can find records for. I suspect the figure above does not include this. The volume of fraud then that could be cut by EMV in the US would seem to be even higher. Whilst I know it’s not that simple, the US “accounts” for over 5% of UK card fraud. Full EMV in the US wouldn’t reduced this to zero – but equally, even if it halved it in the top 10 countries which lose most to the US, the reduction in fraud would easily be in excess of £100m a year. Visitors to the US aren’t just wanting the experience to improve, they’re wanting to stop paying for fraud that takes place in the US as well.  

Celent cards research is now published

About a year ago, I decided to embark on a journey of researching vendors and service providers in card management and transaction processing (CMTP). While I have been writing extensively about emerging payments (and will continue to do so), the reality is that many of these payments still rely on cards and the supporting infrastructures. Yet, as the transaction types proliferate, some of those older infrastructures are struggling to cope. If I were at a bank looking to either establish or upgrade our CMTP capabilities, I would want to know: What options do I have? How should I approach the challenge? Who can I turn to for help? The good news is that banks and other institutions seeking help with card management and transaction processing technologies don’t have to face the challenge alone. Depending on their requirements, they can enlist help from packaged software vendors, issuer processors and professional services firms. It has been a massive undertaking, but I am pleased to announce that today Celent published four new reports with details on CMTP vendors. We engaged with over 30 vendors and there is a lot of detail – the reports collectively go to nearly 300 pages. Part I is an overview of the vendor landscape, and Parts II-IV have detailed vendor profiles for 27 companies below: I hope and expect that these reports will be a great resource for everyone in the payments industry, and would like to thank all the firms that participated in this research – their effort was non-trivial. If you are a Celent client, you should be able to access the reports directly. Otherwise, please get in touch with us at info@celent.com.