Should banks consider domestic payments schemes?
A feature of the payment card market is that there are international schemes (MasterCard and Visa, and to a lesser extent American Express, Discover and UnionPay) but also domestic schemes (e.g. those of France, Germany and Spain) that only work within the country border writes John Chaplin.
Traditionally domestic schemes have partnered with MasterCard and/or Visa in an arrangement that leaves the domestic player handling the local transactions and their international partner facilitating and controlling the international business. Some markets in Europe have sold off their domestic schemes to the international players (e.g. the UK decided to sell their local Switch scheme to MasterCard in 2002) whereas outside Europe new domestic schemes have been set up far and wide in places like Brazil, India and Nigeria.
With my co-authors Andrew Veitch and Professor Jürgen Bott, I carried out global research interviewing banks, payment schemes and regulators to investigate the role of domestic schemes. Its purpose was to help banks make smart decisions on whether to work with both a domestic player and MasterCard or Visa, or to just partner solely with one of the international schemes and use their products for all needs including local. There are many claims and counter-claims in this area about which approach is best and so we felt that some objective research was sorely needed.
There are three compelling reasons highlighted from the research that show it is in the interest of banks to participate in a domestic scheme as well as working with MasterCard and/or Visa.
As retail banking margins come under increasing pressure from the twin onslaught of regulation and increased competition, cost control becomes ever more important. The research showed that transaction costs from domestic schemes average only 45% of the cost of using MasterCard or Visa for in-country payments, and there are well-documented examples of domestic schemes running at 25% of the level of the international players. As around 95% of all transactions are carried out in-country, this makes a material difference to overall bank costs.
Better local innovation
The international giants throw lots of money at new ideas but the research showed that few of them hit the spot in terms of meeting local market needs. There are many subtle and not so subtle variations in payments practices between countries … as consumers we seem to want different ways of doing it. Domestic schemes because they are based in-market seem to have a greater feel for these variations in customer behaviour and then to be able to develop services that work. The international schemes do not want to get too deeply into most markets and therefore they expect the issuing banks to do most of the work for them.
The trend towards combining multiple payment types (especially card and ACH) to create a compelling multi-channel customer proposition is more easily accommodated by the domestic schemes that tend to have close working relationships with the domestic ACH. Doubters about the ability of domestic schemes to innovate need only try the Multibanco ATM network in Portugal or use the Quickteller service in Nigeria to see what can be done by a local player. In comparison, after more than 30 years, the MasterCard or Visa ATM networks cannot even consistently support a simple balance enquiry function.
Participation and governance benefits
The MasterCard and Visa schemes have now been converted from a bank-owned mutual structure to stock market companies with the sole exception of Visa Europe which is hotly tipped to follow suit soon. There are some attractions to the introduction of a more commercial approach but the downside is that the banks as users of services are less involved in their development. Many banks in the research complained that new services are increasingly designed to benefit the international payment schemes rather than their users. There were also many adverse comments about rising fee schedules.
Some banks in Europe that abandoned their domestic schemes felt at the time that this would leave the burden of dealing with regulators to the international schemes and that the outcomes would be better for them. They are now sadder and wiser. Clearly many feel that MasterCard and Visa have made a hash of dealing with regulators, especially in Europe.
For many countries there is a rising concern that using MasterCard and Visa for domestic payments business exposes banks to external political interference. The Russian banks learned recently that their approach of using the international providers for domestic business was not viable when following US sanctions on Russia, they suddenly had key elements of their domestic payments capability frozen. Traditionally payments have managed almost to float above inter-country politics but in the new order there are many countries and banks considering the robustness of their domestic payments business.
These are three very compelling reasons why even in this era of increasing globalisation retail banks should support and use domestic payment schemes as well as participating actively in the international schemes.