An article on Bloomberg today raises the specter that Chinese companies Alipay and Tencent may have found a model that U.S. technology firms like Facebook, Twitter, Google, and Amazon could use to challenge U.S. banks for control of the consumer payments market. According to the article:
The future of consumer payments may not be designed in New York or London but in China. There, money flows mainly through a pair of digital ecosystems that blend social media, commerce and banking—all run by two of the world’s most valuable companies.
The article refers to the highly lucrative credit card networks operated by Visa and Mastercard in the U.S. If technology firms were able to achieve what the Chinese firms have done, Bloomberg estimates (citing the Nilson Report) that $43 billion in merchant fees could be lost by banks from 2018-2020. Obviously, this figure cannot be taken literally, since 2018 is nearly half over, and there is no evidence that any of the big technology firms have had anywhere near the success of the Chinese firms. But clearly there are large sums at stake. In fact, this was one of the reasons why U.S. banks initially resisted same day ACH, fearing the loss of debit card revenues to an ACH network that typically charges a fixed fee of a few cents.
Another source of revenue that could be threatened is overdraft and ATM fees, if technology firms started taking deposits and mobile wallets reduced the need for cash. Bloomberg estimates the size of each revenue pool as $1.8B in overdraft fees and $783.3 million in maintenance fees, based on numbers from S&P Global Market Intelligence.
Okay, so those are some scary numbers. But how realistic is the threat? Bloomberg acknowledges that:
To be sure, U.S. banks have formidable advantages on their home turf. They have longstanding relationships with their customers, many of whom still like ‘visiting their money’ at a local branch. Consumers love credit card rewards programs and other perks, which have gotten sweeter in recent years, as well as the ability to charge back purchases that don’t go well. And U.S. bank deposits are backed by the Federal Deposit Insurance Corp.
Another point to note is that, even in China, money does not originate with Alibaba or Tencent; it must be loaded from a bank account. There is no reason why banks should give away this access, and we should not expect them to, barring regulation requiring it (see PSD2 in Europe). If they do, they have only themselves to blame for being relegated to the sidelines.
Where the threat is most clearly present is in the large amount of time that people spend on social networks and portals. Venmo achieved success through tight integration of messaging and payments, and provided the kick in the pants that banks needed to launch Zelle. A similar dynamic is driving the growth of the Chinese payment services: both are constructed on top of massive e-commerce, messaging and social media platforms. However, Facebook has not so far been able to achieve similar results, despite having had a payment mechanism for its Messenger app for three years now.
In short, while the threat is real, U.S. banks have plenty of time and options to meet it. What we should take away from the Chinese example is that context is everything; banks need to find ways to integrate their payment systems into social media platforms and e-commerce platforms, rather than letting technology firms do all the work and reap all the rewards.
For more details on these Chinese mobile payments schemes, as well as India’s Paytm, Mercator Debit clients have access to the report Asian Mobile Payment Apps as a Way of Life: A Look at Alipay, Paytm, and WeChat Pay, available from the Mercator Advisory Group website.
Overview by Aaron McPherson, VP Research Opperations at Mercator Advisory Group