Global payment network Mastercard made headlines recently with the announcement that it plans to remove its company name from its logo. While a relatively minor shift in and of itself, removing the explicit connection between the brand and payment cards neatly highlights the changes occurring in the payments industry. We are now moving into the third wave of major disruption in the payment industry that we've seen this century, which will be characterized by payment rail convergence.
The first such cycle was driven by the explosion of e-commerce. The need for secure and convenient payment services in this space catalyzed the development of digital wallet services (and workarounds such as card on file), alongside a series of innovations to secure these rapidly growing transaction flows. At the same time, rapid advances in smartphone technology have since seen mobile become the dominant form-factor for digital payments. Nevertheless, the majority of digital commerce payment flows move across the existing card scheme rails.
We are arguably now in the second cycle, which is driven by the need facing all payment processors to extend their reach. While payment processing has always been a scale business, regulation and competition have depressed margins, driving consolidation across the industry. The recent acquisition of European merchant acquirer SIX Payment Services by Worldline is one of many recent examples that highlight the need for greater scale in terms of transaction volumes.
For many of the same reasons, there has also been an acceleration in acquisitive activity to bring new reach in terms of the breadth of service offerings across the value chain (beyond the need to increase overall volume). Reaching new customer bases, offering new value-adding services around the core payment offering (critical in terms of restoring margin), and moving into new transaction types have also been a major driver of M&A across the sector. This is not unique to the traditional card schemes, but Mastercard's acquisition of VocaLink (which runs the UK's payment-processing infrastructure), and Visa Inc's proposed acquisition of cross-border payment specialist Earthport, are good examples of players across the industry moving into new parts of the payments landscape to expand their service offerings into new areas.
We are now moving into the third wave, which will be about payment rail consolidation; specifically the movement of digital transaction volumes onto real-time payment systems. While simple economics are of course a driver, the real push is about service innovation. Once it became accepted that, at least from the customer's perspective, payment initiation and the payment flow itself can be de-coupled (as with a digital wallet), it then became inevitable that transactions will increasingly migrate to the rails that provide the best overall customer experience. In almost all cases, this will be real-time payment infrastructures, and banks in all regions are actively exploring new service offerings that leverage this opportunity. Open banking initiatives will be a further catalyst for change.
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