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A Matter of Time

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Dec 07, 2022

Will fintech democratize the payment space, reducing the dominance of branded credit and debit cards, so consumers become channel agnostic?

A Matter of Time

Over the last several years, a repetitive drumbeat has permeated our airwaves and screens, declaring fintech will democratize the payment space, reducing the dominance of branded credit and debit cards, so consumers become channel agnostic. Zelle, Venmo, Block, and others have made this their mission and, in the meantime, created companies with multi-billion-dollar market caps.

The target of these companies are usually banks and payment networks, mainly Mastercard and Visa. Fintechs have invested heavily over the years, making tremendous in-roads into digital payments and forcing financial institutions to keep pace. But, for all the development and investments, Visa and Mastercard are still dominant players. 

The Federal Reserve Bank of Atlanta recently highlighted U.S. payment trends as digital becomes more prevalent. While payment apps such as Zelle and Venmo make up roughly 5%, and online electronic payments represent 25%, credit and debit cards still account for nearly 60%; with credit cards remaining the most common electronic payment form for consumers. With technology companies and financial institutions flooding the payments space with the hope of becoming significant disruptors, Mastercard and Visa continue to thrive. Both experienced double-digit revenue growth last quarter, their stocks trading close to all-time highs as the broader market has declined. This is because fintechs and payment companies are not necessarily disrupting the market but seem to be slotting themselves into spaces within the current payment ecosystem.

Another compelling reason for the payment networks’ continuing relevance is consumer trust of their banks, credit unions, and card providers. Federal and state regulations contribute to that trust. Payment apps follow some of the same regulations as financial institutions, but customer service and familiarity are the distinguishing characteristics. If there's a problem with a charge to a credit card, the customer can quickly access via a digital channel, or call/visit a branch to resolve the issue and is simply reimbursed. Some payment apps, like Venmo, have a 'help' portal which requires you to email and wait for a reply. In a recent statement following an investigation by the CFPB, Zelle said payments must be treated as if they were cash, and "Zelle does not offer purchase protection." A far cry from the ‘standard’ protection both credit and debit cards offer.

Anytime the internet and money meet, there will be fraud. Cards and payment apps are not immune, but credit and debit cards are subjected to the Electronic Funds Transfer Act, and Regulation E, payment apps are not. To initiate a transfer, you only need an email or phone number to complete the request. When fraud occurs on Zelle, roughly 1 in 10 claims are paid, with 90% of the claims being denied according to data supplied to the U.S. Senate’s Banking Committee this year. With 1,800 financial institutions offering Zelle, and an average fraudulent transaction amount of $500, per, the numbers can be overwhelming.

Cost is another component when using payment apps versus credit or debit cards. When using debit or credit cards, for the most part, the transaction cost is passed on to the merchant, while some apps charge the end-user a percentage of the transaction total. While the fee is nominal, it can still be a differentiator and drive transaction volume back to network-issued cards.

For merchants, consumers using credit or debit cards can be a love-hate relationship. Merchants pay a transaction or settlement fee for their processing services, making the overall transaction smooth and easy. The difference between a cash transaction and a card is substantial. According to Shift Processing the average cash payment transaction in 2020 was $22 versus $112 for credit cards. Although the fees are higher, so are the margins.

This is not to say fintech providers don't have a role in the payment space. But data shows us debit and credit cards are still the most common payment method and will continue to be going forward. Consumer trust in their banks, credit unions, and card issuers provides stability fintechs have yet to match. Technology has pushed financial institutions to improve their digital payments and mobile banking capabilities, and fintechs have been a catalyst for many of these changes. Still, they have yet to truly disrupt the payment space or overtake Mastercard or Visa.

Payment networks are still significant contributors to and participants in the economy, seamlessly moving billions of dollars daily while facilitating purchases and payments globally. From a technology standpoint, fintechs have pushed financial institutions into developing and adopting more intuitive and customer-friendly systems. But this has more to do with direction than disruption.

Until payment apps become more widely available to mobile users for purchases, Visa and Mastercard will continue to dominate the payment space.

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