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Thursday, October 1, 2020

Understanding the World of Payment Networks

As consumer behavior around payments evolves at an accelerated pace -- catapulted by the Coronavirus pandemic and other factors -- it is important for new entrants in the fintech world to respond to these changing demands. And it starts by picking the right payment network.

So what are all of the different solutions available to fintech product companies and how should they navigate the process of picking a network?

We’ve broken it down.

Visa
You can thank Visa for establishing the habitual norm of using plastic cards as payment. The company introduced the world’s first consumer credit card program for the masses in 1958, in partnership with Bank of America, which assumed the responsibility of issuing the first of many credit cards. Today, Visa sits at the apex of an association of banks as the most widely accepted card network in the world.

But it’s important to focus on that - it is a network. Visa routes payments, but it plays no direct role in either issuing the actual cards, or accepting them at the point of sale. Rather, it licenses global banks the ability to issue Visa cards, and enables acquirers to accept payment. What this means for fintech is that to access Visa’s network, you must work through its member banks.

Visa is the top card network in the world. Its advantage lies within its influential brand power, the result of more than half a century of establishing and cultivating its role as a payments powerhouse. For fintech companies, it can bring that substantial ability to bear in the form of marketing and incentive agreements.

However, being a powerhouse also means that it’s difficult to navigate through. While not a problem if you’re simply issuing a vanilla card product, more complex and different offerings will take time to work through the system. And while the breadth of the Visa network is unparalleled, strangely, it lags behind in international capabilities.

Mastercard
Just trailing Visa, Mastercard is the second-largest payment network in the global industry. Like its powerful competitor, it functions similar to a membership organization, anointing partnering banks as issuers and working exclusively as a payment processing network.

However, Mastercard does offer some solutions and higher flexibility that give it a leg up on its competitor Visa in certain areas.

One great feature Mastercard offers is its multi-currency functionality, which has allowed the company to better cater to the demands of companies sprouting in the international side of the new economy. By enabling transaction settlements in any Mastercard currency, the network provides a solution in a financial world that is no longer confined to the boundaries of borders.

For instance, Mastercard enables multi-currency travel and corporate expense cards that make international purchases easier and less expensive by:

- Letting users transact in multiple currencies on one card
- Lower the cost of foreign exchange transactions

These are but a couple features this solution offers that can prove beneficial to companies that do business abroad.

Discover
What greatly differentiates the Discover network from Visa and Mastercard is its mutually integratable and individual system. While the industry leaders are never involved in the card issuing process, Discover takes an active role through its own bank, Discover Bank, to issue their own cards. However, like Visa and Mastercard, Discover also partners with other banks to issue their card. Discover also offers a direct merchant connection, having separate agreements with a variety of merchants.

Discover’s flexibility materializes in their ownership of their network. By having their own bank and operating their own network, Discover is more easily integratable for merchants and customers, making it a more seamless process.

Discover’s main downside is the perception that it is not accepted as readily as Visa and Mastercard. While this notion is technically true (its acceptance in the US is about 97% of what Visa and Mastercard’s acceptance is), it is only the smaller merchants like Bodegas and such, where it tends to fall a little short. Internationally, it has a solid overseas footprint in 185 countries (vs. 200 for Visa), but the merchants accepting Discover/Diners Club cards tend to be travel-related, such as hotels and restaurants. Its reciprocal agreement with China Union Pay is a key differentiator.

Discover focuses a lot on the customer experience and given that it is involved in every aspect of the payment processing system within its network, it can cater services to the needs of its consumers and partners, and is more readily able to create solutions around non-standard payments.

Being a smaller player in the payment industry, Discover is easier to navigate, far more flexible and easier to integrate with than its larger competitors like Visa, Mastercard and American Express.

American Express
If you value exclusivity above all else, American Express (Amex) might be most suitable for you. Both a processor and an issuer, Amex has a separate network.

However, in the new economy, Amex’s top strength - its exclusivity - is rapidly becoming a weakness. To avoid diluting its premium stature, Amex has closed itself off to non-established players in the market - players that include the up-and-coming generation of digital economy companies with the potential to reshape conventional markets. These new-age companies also seek flexible services from their payment provider, which Amex might not be willing (or equipped) to offer yet.

Amex is also the king of the corporate expense card industry, but this is an area where new Fintech companies are creating strong offerings that could gain ground against what once was an insurmountable lead. Businesses are demanding more than just an expense card, and new entrants offering holistic AR/AP solutions will take advantage of Amex’s inflexibility--unless they see fit to change.

The Conclusion? Competition Breeds Innovation
Visa may be the industry leader, but Mastercard’s efforts in recent years to close the gap has earned it the role of a close second, leaving the two payments service companies neck-and-neck from a fintech perspective. We see Mastercard’s piéce de résistance to be its multi-currency product, which enables transaction settlements in any Mastercard currency, a path that Visa has been pursuing to no avail – not just yet.

But the payments service industry has been getting increasingly competitive, with service providers vying to secure the loyalties of an expanding global market that becomes more interconnected by the day.

The new economy is all about disruption, but it’s difficult to disrupt the core payments themselves. Disruption comes at the product layer or by making the space itself more accessible, agile, and cost-effective.

And that’s definitely a good thing for us all. As they continue to strive towards becoming the best, payment providers will be redirecting their efforts into understanding more what consumers want and need, and what isn’t being addressed.