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Fintechs have done a great job bridging moats in the payments sector. For some investors, they have been too successful. The likes of well-funded Block and Stripe are driving down costs for merchants but also profit margins for payment service providers. The ditch surrounding the card networks is proving too broad for these techies to jump, though.
Simply put, a payment is a transfer between two bank accounts. In the middle, a tangle of financial plumbing makes that happen. The fintech assault has so far succeeded at the start of that chain, helping merchants take payments more cheaply and easily.
The middle part — the network over which banks talk to each other — is more resilient. It is largely controlled by two companies: Visa and Mastercard. UK open banking initiatives may allow fintechs to chip away at their duopoly. But progress will be slow.
A rich prize awaits any victor. Network fees account for about 50 basis points out of total payment transaction costs of 200bp to 300bp. Visa and Mastercard’s marginal costs are practically zero. Operating margins averaged 62 per cent in 2022.
The networks’ strength could be their Achilles heel. They rely on physical payment cards. Direct bank-to-bank payments are the only threat to their use. For these to really take off, payments must shift further into the digital realm. Technologies such as QR codes plus facial and fingerprint recognition aim to make mobile-enabled payments faster, safer and cheaper.
Leading the charge in Europe is TrueLayer. The London-based group processes a third of open banking payments in the UK, Ireland, France and Spain, worth about $35bn.
In contrast, Visa and Mastercard process $25tn of volumes annually. Card payments should still account for almost half of the UK total by 2026.
The two networks are also well aware of the threat. They are making their own efforts to move into direct payments. The fight may be on, but it is shaping up to be a long one.
The Lex team is interested in hearing more from readers. Please tell us what you think about fintechs’ chances of chipping away at Visa and Mastercard’s duopoly in the comments section below.
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