How Can National Card Schemes Remain Competitive? Five Tips

Commentary by John Chaplin, director at Anthemis Group

In my 18 years at Visa and 5 years at First Data, I acquired an in-depth knowledge of card payments, card schemes and payment networks across the world. It is my fundamental belief that increased competition between payment schemes is good for the industry. Competition ultimately leads to innovation which benefits end users of payment services. Competition can also lead to greater efficiencies in payments which is good for the overall economy.

Why then should we care about national payments schemes in an increasingly global world?

Without strong domestic schemes complementing the international card schemes (Visa, MasterCard and the smaller JCB, UnionPay and Diners/Discover), banks and payment providers have less choice. And whenever this happens the result is always the same, users enjoy less innovation and reduced cost efficiencies.

For the report The Outlook for National Payment Schemes in a Global Economy, Anthemis surveyed representatives from 17 of the most significant national schemes from around the world. The scope of participation in this project demonstrates the commitment to the continued development of schemes centred around national economies.

For a number of years, the outlook for many national schemes seemed bleak. Many feared that the duopoly of MasterCard and Visa with seemingly limitless capital would eventually squeeze the life out of many of the domestic schemes. The international card schemes are also often able to offer lucrative incentive payments that heavily influence the decision of many banks when choosing which scheme to use ($4bn annually in 2011). The lack of regulatory action so far to curb these ongoing incentives is a surprise to many industry insiders.

However, we have noticed from our work with a number of schemes that there is a renewed belief that national schemes have a positive future and that “global is good” is not always true. If schemes are to thrive in an increasingly globalised world, they must continue to play to their traditional strengths while also be willing to take risks. We advocate that national schemes must take the following factors into account if they are to be successful in the future:

First, it is vital that national schemes maintain their low fees resulting from efficient business models if they are to retain or win business from banks. One major caveat is that the owners of schemes (normally banks) must not insist on the lowest fees possible if this means stymieing investment in innovation. Rock bottom fees at the expense of creating new products and services is a self defeating strategy. Several alternative routes for capital exist which do not involve compromise on a low fee model. In the Nigerian market, for example, the incumbent national scheme employs a mixed ownership approach where additional capital is injected largely for product innovation and in the UK, VocaLink is advocating the use of external capital to fund innovative developments.

Second, it is no paradox to say that national schemes need an international strategy in a globalised world. National schemes need to build an international acceptance plan that mixes co-branding with Visa/MasterCard along with an increased role for the smaller international schemes. Our survey highlights that many domestic schemes believe in some form of reciprocal acceptance strategy amongst themselves, although it not clear how this would operate in practise.

Third, schemes should maintain governance models which allow for strong local input. A big advantage of domestic schemes over the international schemes is their deep local knowledge. Nevertheless, they need to remember that banks are not the only stakeholders that matter. Many schemes, especially the long-established ones, take a long time to make decisions due to their governance models. This needs to change.

Fourth, domestic schemes need to embrace alternative payments methods that are not solely dependent on cards. Although the international schemes may have more money to innovate, it doesn’t mean that they are always better at it. Most of the domestic schemes in our survey recognised that there is a big role for them in areas like mobile and e-commerce, where MasterCard and Visa are less dominant.

Fifth, cooperation between some national schemes could be very beneficial indeed. At present, there is very little information exchange between schemes. There is no need for each scheme to build 100% of its capabilities internally. Knowledge sharing should raise the overall efficiency bar and could lead to some schemes buying services from other schemes.

Although the creation of a level playing field by addressing international card scheme incentives lies with the competition authorities, the other issues, such as cross-border acceptance, slow decision making or insufficient focus on innovation, are within the domestic schemes’ own power to address. If they do adapt to meet the demands of the global economy, domestic schemes should flourish and this in turn should encourage innovation and cost-saving to the benefit of the whole industry.

To download a copy of The Outlook for National Payment Schemes in a Global Economy, authored by John Chaplin and Andrew Veitch of Anthemis Group, please click here.

And for our interview with John Chaplin, click here.

John Chaplin, Director, Anthemis

John Chaplin has been highly influential in the development of payment solutions for more than 20 years. He is currently a Director at Anthemis, having joined in early 2011.

John is also President of Ixaris, an innovative provider of prepaid payment applications and services. In this role, John leads the company’s strategic alliances and expansion strategy as Ixaris brings innovative payment solutions to market that enable organisations to derive greater revenue online. John is also a Board Director at InterSwitch Limited.”¨”¨Prior to his work with Anthemis, John spent 17 years with Visa and later with First Data where he was one of the driving forces of the phenomenal growth of card payments across Europe. He has a unique understanding of the market, and he is active in assisting a number of financial technology firms to expand and globalize their organizations. Since 2008, he has been a member of the Payments Market Expert Group advising the European Commission on the development of the Single European Payments Area (SEPA).