Credit and debit cards: the vinyl of payments
Remember Vinyl? If you’re in your thirties or younger, odds are that you’ve never touched one of those marvels. They revolutionized the music industry landscape in the early 20th century, unlocking access to audio content for many as the dominant music format for half a century. Then advances in technology saw them fade away in the 80s, replaced with mainstream users by higher-density and higher-quality storage technology, starting with the compact disk.
Predicting the future is a thankless task, however, there are strong signals that bank cards are set to undergo a similar journey. This is separate from the virtualisation trend, which is well underway and fits in a stream of continuous innovation led by card schemes and processors. This trend brought us tokenization, cards on file, and virtual cards. Looking ahead, we believe that the traditional dominance of card payer-to-payee rails, the infrastructure that allows all digital money transfers, will be critically eroded by account-to-account payment schemes (“A2A”).
Credit cards were invented as a crutch to facilitate consumer-to-business payments in a world where the immediate transfer of money from one bank account to another was impossible. Cards were tokens enabling trust and removing friction when paying.
The State of Affairs
Today card payments worth trillions of dollars are controlled by a handful of payment corporations, including VISA and Mastercard. They extract a levy on any card payment made. But despite their ubiquity, cards are far from perfect: they suffer from expensive chargebacks, losses due to fraud, the requirement for reserve accounts for certain types of merchants, and failed transactions due to insufficient card limits.
The traditional card scheme’s dominance is now challenged by a number of regional A2A schemes, including PIX in Brazil, NPPA in Australia, and PSD2 in Europe. These schemes are not owned by corporations, and are much less expensive than credit cards, they offer payment guarantees, and they eliminate chargebacks and the need for reserve accounts and card limits. Admittedly A2A payments are evolving but still lack certain functionalities (such as recurring payments, POS integration), but the gap to cards is narrowing quickly and legislators, such as the EU Commission and the UK’s CMA, are drawing up proposals to bring instant and recurring payments into the mainstream.
We have been closely tracking the developments in A2A for years, before even the open banking hype of 2020-21. In that time initial adoption has progressed from higher risk merchants – as is typical with new payment methods – to recently also include lower risk verticals, including travel. The momentum among consumers adopting A2A payment methods is also becoming apparent. More than 70% of Brazilian adults have already made a PIX payment. About 70% of online transactions in the Netherlands are processed with iDeal, while Swish reports that about 80% of the Swedish population are already active users. We believe that during the next 2 to 5 years A2A payments are about to “cross the chasm”, and will see their adoption by an early majority of online merchants.
A critical insight we have learned as we’ve closely monitored the rise of A2A payments is that a key condition to merchant adoption is reaching feature and performance parity with card payments. Plain payment initiation will only bring you so far. Cash management, reconciliation, analytics (e.g. the settlement status), control of routing, and risk management will be an integral part of the stack of successful A2A payment companies. We can already see this next wave of companies coming through, such as Volt, Banked, Kevin and Fintecture, who show signs of closing the feature gap to bank cards and providing a single point of international access.
In the Long Run
In the long run, we don’t see cards as becoming totally wiped out. Instead, we see a divergence coming, like today’s stubborn music aficionados who continue to invest and maintain their vinyl collection, while the rest of the world forges ahead digitally with Spotify and Apple Music. We see bank cards’ deployment reducing and becoming entrenched in areas where they provide a distinctive value (e.g. consumer protection, actual credit, warranties). And as a consequence, much lower fees will be levied on the back of merchants and consumers.
In fact, we see a future in which you will have to explain to your (grand-)children what those archaic credit cards and Vinyl disks are used for.