The Future of Zapp and Other Musings on MasterCard and VocaLink

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):


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.


Zapp makes progress

Zapp makes progress
Clients following our payments research will know of our interest in Zapp. Zapp is a new UK payment method that utilises the Faster Payments scheme. Zapp is a way for the merchant to create a Faster Payment in the consumers device (mobile/tablet/laptop) using a wide variety of methods (bar code, SMS, QR code, etc). This provides all the relevant data – value, account details, etc. The consumer then just authorises the payment. We’re interested for a number of reasons. Firstly, as mentioned in my first real-time payments research report, there seems to be a myth that real-time payments are P2P payments primarily. Zapp is very much a way for consumers to buy things both online and offline. Secondly, there has been a move to thinking about real-time payments enabling other products, rather than just being a standalone payment method. These are known as overlay services, and a number of initiatives (Australia, Finland) have explicitly stated their desire for overlay services to be created. A few overlay services have been created for Faster Payments – PingIt and PayM for example – Zapp is by far the biggest, most ambitious, and potentially, disruptive. Thirdly, Zapp state that is cheaper than the alternatives. Implicit in this, is cheaper than cards. Zapp are very careful to ensure the language they use doesn’t imply its card like (and therefore potentially subject any regulation around fees that could be considered interchange). Yet the route to market includes using large merchant acquirers. With any new payment method, adoption is slow. Payments are a 2-sided market. You need sufficient numbers of consumers to have adopted to interest merchants – yet consumers won’t adopt something that they can’t use. Zapp has potentially half the equation solved, with large banks signed up and Faster Payments reaching 100% of UK current accounts. It was interesting to see then the announcement this week that Zapp have signed some major retailers to take part. Furthermore, these are big, household names – Sainsburys and Asda are two of the largest supermarkets in the UK. With official launch in 2015, there is still a long way to go, but the chances of success seem to improve daily.