Can the digital payment wave weaken Mastercard's empire?

• Mastercard outlines its response to an increasingly fragmenting payments landscape
• It offers to support old and new customers alike by helping them de-risk major technology investments with the provision of a gateway service
• China has leapfrogged most markets in its adoption of digital technology, with this technology driving almost the entire payments ecosystem.

The emergence of new technologies has set the entire payments ecosystem in change. Digitisation in payments is not only bringing down barriers to migration for customers, enabling them to execute their transactions through providers who offer easier, more convenient and cost effective payment options, but is also forcing change on existing business relationships. PayPal, Alibaba and Tencent, previously considered mere payments processors, have not only been carving out huge payment markets, but have also begun articulating much more ambitious growth opportunities beyond their current payment services. Incumbent banks and network providers have a lot to fear, but they too have been responding to the challenges.

One major incumbent, Mastercard, wants to maintain its importance to the industry including new players. The company is creating a comprehensive gateway service, essentially permitting all participants engaged in payment processes to initiate, process and/or execute payments without building proprietary platforms, enabling them to do business without the need to build all the infrastructure themselves. As a payments infrastructure provider, Mastercard is keen to create hosted solutions addressing not only their clients’ B2C challenges, such as integrating various payment technologies into more effortless payment experiences, but also offering a global services and technology platform to enable these clients to stay at the cutting edge of what their market requires.

“It is the single biggest challenge that our customers face: How do you pit one technology against the other and how do you make your investment decision and change your business accordingly?” said Rama Sridhar, senior vice president, enterprise security solutions, network & processing solutions, Asia Pacific, Mastercard.

The role of the consumer in payments

Digitisation has significantly enhanced consumers’ power as it has spawned a far greater number of payment providers. Banks are no longer setting the benchmarks for payment services. Fintech players have risen to the challenge and are setting new benchmarks for user experience causing banks’ offerings to appear wanting. However no-one technology trend is prevailing so all players need to remain agile and innovative in this evolving market.

“There is no one-technology trend, there is no multi-linear approach to the various payment technologies. It is all happening simultaneously and sometimes it becomes really hard to figure out what bet to take. There is no single winning bet but a series of innovations and new services that keep evolving. Technology keeps changing and there is need to be agile and innovate,” Sridhar added.

With demand power now in the hands of the consumer, the outcome for providers’ investments are by no means certain. The recent admission by the Indian telecoms regulator that the plan to increase financial inclusion through USSD based mobile banking services has failed to work, is an example. This case highlighted how challenging it is to replicate the success of Kenya's M-Pesa when a single unified national ID infrastructure is not in place, KYC procedures at agent sites are absent, and consumer behaviour is not fully understood.

A recent Mastercard survey demonstrated the pace of change in the payments arena. The company’s 2016 mobile shopping survey underscores the rapid transition to digital and the message is clear: consumers in Asia Pacific are trying to embrace new mobile payment technologies at a progressive pace. Digital wallet use has seen the fastest rate of growth over the past two years compared to mobile and NFC payment uptake with the survey revealing that one in five consumers are using digital wallets today, a two-fold increase from two years ago. The region’s biggest adopters of digital wallets are coming from markets in China (45.0%), India (36.7%), and Singapore (23.3%). Even though digital payment technologies continue to gain popularity, non-payment mobile banking apps remain the most widely used technology by consumers.

China, India and Singapore show the highest growth in mobile wallet usage

Source: MastercardMobile Shopping Survey

Adapting to the cost and pace of change

Fintech does not bring better technology per se into payments but is filling the gap between consumer expectation and experience through better engagement. Banks meanwhile are struggling to adapt to the changes that digitisation is bringing and are no longer able to rely on customer loyalty when it comes to paying a premium for payment services.

Sridhar noted that banks are extremely good at what they were set out to do, which is banking, whether for their institutional or retail clients. However, she also pointed out that banks need to reinvent their legacy infrastructure and constantly re-innovate because any change that is coming is not static and does not even have the tenure of a customer lifecycle.

“The digital payment wave is like a tsunami. There’s a plethora of digital initiatives, some of it from the franchise world of Mastercard and Visa but a lot of it also comes from fintech players. They are now realizing the impact of creating better user experiences. So there is a huge migration of customer transactions from the historical financial institution domain into fintech. The need to adapt to the cost and pace of change, compounded by an infrastructural handicap, is the motivator for financial institutions to have a hard look at what they do themselves and what they are perhaps better served by reaching out to other players in the ecosystem,” said Sridhar.

Mastercard, which sees itself as a provider of infrastructure engages with the entire spectrum of players in the payments ecosystem including governments, banks and fintechs, and is willing to support everything that moves the ecosystem as a whole into digital. The company asserts that although the financial services landscape is altering, it is not fundamentally changing beyond recognition.

“We do not bet on one versus the other, but I believe banks will continue to be the trusted guardians of financial transactions. I would expect the bank to almost go back to their core competence of managing funds of the customer and provide simple and complex financial services to them. I would look at technology players, generating new technology plays which will need to be integrated by the banks. There will be new collaborators, not necessarily competitors,” she added.

China is different

Sridhar discussed China which represents the largest payments market today. “China is a market that has leapfrogged most markets in the world in the adoption of digital technology, with technology almost driving the entire payments ecosystem. I think the single biggest difference between China and the others is there is a parallel ecosystem that is being created in China. There is a pseudo-banking element that has been incorporated into the digital ecosystem, in particular by the big players. They have created deep wallet money management accounts which are the funding accounts for payments transaction, a space where banks were typically the primary intermediaries. They have been able to build a payment value chain from social messaging to funding accounts to payments. In this process, they built an ecosystem for themselves, they built the loyalty with the customer; they also have sophisticated tools and techniques, thus keeping the consumer within this ecosystem. To create an infrastructure system like that and replicate it successfully in markets outside China is not easy to do because it requires extraordinary amounts of investment, financial clout and regulatory support. The Central Bank is now encouraging open competition to enable banks to compete effectively in the digital ecosystem, which is a technology-induced place,” she said.

Facing the Future

Mastercard has sought to consistently innovate to keep pace with the rapid change occurring in the payments space. As a large, somewhat bureaucratic incumbent, at least compared to the multiple start-ups in the new ecosystem, Mastercard will need to continually add more value to the emerging new class of payment players and strengthen its services to incumbent banks with legacy based payment platforms. To do this it will need to be agile and innovate at a pace faster than ever before.

The company maintains that it is crucial to remain focused on what happens to cash to determine how the landscape might change in the future. Although digital payments originated from mobile and internet banking have seen strong growth, overtaking traditional payment instruments such as cheque and interbank giro in some markets, globally around 85 percent of consumer transactions are still made using cash or paper checks. Mastercard sees these traditional instruments as a potential revenue pool and with the increased adoption of electronic payments, the opportunity could be huge for the company.

There are threats too. In the changing payments landscape it is easier for bigger payment solution players to become the network itself. For example, in the US, friction built up between network processors and PayPal; PayPal was steering customers to link their digital wallets directly with a bank account, routing payments through cheaper ACH networks cutting both Visa and Mastercard out of transaction business. Visa and PayPal settled this dispute and while Mastercard took longer, they too have now reached agreement with PayPal. It seems PayPal considers working with the network processors a safer bet as it seeks to fend off competition to its wallet proposition from Samsung Pay and Apple Pay. PayPal now allows customers to select both Mastercard and Visa credit and debit cards as default payment methods in exchange for increased visibility for its POS terminals.

Countries upgrading their national payment infrastructures together with the growth of local networks pose another type of threat for Mastercard. For example, India’s local network, RuPay, similar to China UnionPay, is potentially undermining the position of network players given the scale of cards with linkages to bank accounts issued by RuPay.

In 2014, Mastercard introduced Host Card Emulation (HCE) and cloud-based software to make mobile payments easier on a large scale. A year later, it launched the Digital Enablement Express program to help financial institutions, digital wallet providers, merchants and device manufacturers deliver new mobile payments services more quickly to consumers. In the same year, Mastercard also rolled out globally its Safety Net system, which is a transaction monitoring system that employs data visualisation tools to analyse transactions. Early in 2016, it unveiled the Mastercard IQ series, a suite of solutions that use real-time intelligence to empower issuers to make more informed fraud management decisions. A new payment processing platform across Asia Pacific is further expanding the role of Mastercard during the payments process, extending beyond its traditional network-branded switching services.

Despite being primarily an infrastructure provider, Mastercard has a history of successfully embedding its brand at the customer facing front-end but with a plethora of new players coming into the payment market, branding and mindshare may become more challenging in an already crowded market. It is inevitable that its business partners, the issuing banks and fintech players each with their own brand, are going to face an increasingly fragmented pool of customers. Although Mastercard wants to accelerate the e-payments train, it is no longer able to play the “ring-master” that can bring consolidation to a payments industry where it sits at the apex of the industry.

It will be interesting to watch how Mastercard continues to respond in this environment, especially its determination to focus on supporting an increasingly fragmenting market that it curated over such a long period of time.