Financials sector trends: what are the key threats to major card networks?

US lawmakers have kept a watchful eye on the oligopolistic positioning of major card networks for decades. In July of this year, long-time card-network rival and Illinois Senator Dick Durbin revisited the issue by proposing the Credit Card Competition Act of 2022 to boost routing choices among merchants and alleviate comparatively high domestic interchange fees.

Meanwhile, developing market nationalism has presented a secondary threat to card network penetration, where government-backed peer-to-peer and consumer-to-merchant platforms circumvent card network rails and effectively diminish interchange fees.

How is the regulatory landscape changing for Visa and Mastercard?

Card networks are facing increasing regulatory scrutiny, with significant pressure on interchange fees and the merchant discount rate (MDR). Visa and Mastercard account for about 83% of US credit cards and such dominance and network structure have enabled them to impose fees on US merchants that are “among the world’s highest”, a press release said. Building on debit card competition reforms enacted by Congress in 2010, the bipartisan Credit Card Competition Act, if passed, would direct the Federal Reserve to ensure that credit card-issuing banks offer a choice of at least two networks over which an electronic credit transaction may be processed. The aim is to give businesses a meaningful choice when it comes to card networks, and encourage innovation in the credit card space.¹https://www.durbin.senate.gov/newsroom/press-releases/durbin-marshall-introduce-bipartisan-credit-card-competition-act

“Nobody really knows, as far as I know, what’s going to come out of the Durbin update, but least cost routing is a major, major deal in places like Australia,” a former VP at Mastercard told Forum. “It directly diverts transaction volume away from these incumbent card networks and towards local card networks.” They noted that many merchants and merchant acquirers are not built to redirect transactions to another card network, but to the extent that there are regulatory threats for such a move, “it does threaten the incumbents”.  

How could merchant localisation affect revenues?

The former VP at Mastercard told Third Bridge Forum that Mastercard and Visa profits primarily come from cross-border fees, particularly in fragmented regions such as Asia-Pacific. Cross-border transactions are particularly common across the corridors of Australia-New Zealand, mainland China-Hong Kong and Hong Kong-Singapore. However, many transactions across these regions are becoming domestic flows as merchants opt to partner with local acquirers instead. “That presents a challenge for both card networks”, the specialist told us. 

Nationalism is also a threat to global card networks. One such example is India’s Unified Payments Interface (UPI), which “completely bypasses the whole card rails” by facilitating a government-backed real-time peer-to-peer and consumer-to-merchant platform. The MDR is zero and there is no interchange fee, signalling “an entire market being completely disrupted”, a former director at Visa Inc said. Other countries, such as Australia, have been trying to develop a similar system, we were told, though the question is how much it would scale globally. “Especially for these smaller European countries, I don’t see how a solution like that can scale, but there’s definitely a huge push in a lot of these Asian countries to develop their own network,” the expert said.

Can Visa and Mastercard diversify their revenues?

To sustain their growth in a changing operating environment, Visa and Mastercard are expanding their roster of value-add services, enhancing their digital capabilities and looking more closely at B2B payments. The former VP at Mastercard told us that the fundamental Achilles heel of both networks is that they can only price at the card type and merchant level, and are therefore “trying to figure out how to do that effectively”. 

This weakness effectively opened the door to buy now, pay later (BNPL) companies that have sprung up in recent years. However, the experts we have spoken to do not see BNPL players as a fundamental threat to traditional card networks, and ultimately see installment options at the point of sale eventually becoming industry standard. “The card network who figures out how to offer an installment on a debit product is the one who wins,” our specialist said. We heard Mastercard is shifting its strategic focus towards other value-added services such as data analytics – an area described by our expert as “low-hanging fruit”. According to our expert, network fees could fall to about half of the company’s revenue in the future, down from approximately 80% today. 

Across Forum Interviews, B2B payments were highlighted as a significant opportunity for card networks, although this is not something they have typically focused on. “The payments are huge, they’re constant, it just depends on if they can crack it,” a former director at Mastercard said. A former VP at American Express estimated that the biggest slice of a USD 120tn revenue opportunity in B2B payments is AP/AR transactions of USD 90tn. However, they are of the view that only when the market itself grows will card networks be able to capture more of this TAM. “What I do see the card network being able to pick up is that USD 20tn that’s already on card,” the specialist said.

Although card networks face a changing regulatory environment, their outlook is strong, we were told, particularly given the resurgence of international travel after pandemic restrictions. Their biggest threat, Forum Interviews suggest, is government intervention overseas. As well as cracking down on cross-border fees, some countries are also establishing their own card networks or partnering with domestic players in a bid to keep their citizens’ data safe.

As regulators increasingly take note of calls for lower fees and greater network choice, the balance of power is starting to shift. Whether or not the Credit Card Competition Act is passed could be a turning point in the future regulation of card networks.