Creating a Competitive Payments Landscape

Creating a Competitive Payments Landscape
John Drechny CEO Merchant Advisory Group
Nov 4, 2022

A primary goal of the MAG has always been to foster competition in the payments industry. Many people have asked me what this means and what MAG has done to achieve this goal.

Payments is an evolving and complex environment requiring many different stakeholders to work efficiently and collaboratively. In some roles, like merchant acquiring, there are multiple providers a merchant can choose from to find which party best suits their needs. On occasion, merchants may even choose multiple acquirers, resulting in additional paths to complete transactions. Using a multi-acquirer solution allows merchants the ability to evaluate an acquirer’s performance in real-time and the opportunity for merchants to proactively manage transaction processing through acquirers based on performance.

Several new acquirers have entered the payments space in recent years. Some of these new acquirers have grown into multi-billion-dollar businesses. This growth is a clear sign of a thriving and competitive market. As a result, merchants and their consumers are better served.

Other roles within the payments industry have been more stagnant due to high entry costs and rules which inhibit competition. One example is the limitation on a merchant's ability to connect with the thousands of financial institutions that provide access to consumer deposit and credit accounts. In this case, merchants have very few choices because only a couple of networks control much of the access and each network has exclusivity in many cases. In addition, merchants are required by network rules to accept all the card products within the network, known as Honor All Cards, further limiting the competition that drives efficiencies in the market.

Unlike the acquirer market, no new payments networks have entered the market for several decades. Discover Network, the last market entrant, currently has single-digit market share. Any other attempts to enter the market have failed to gain any traction.

So, how do we encourage more competition? One option is introducing new payment methods. While there are some developments around new methods, they remain a very small share of the market. For example, stablecoins or a Central Bank Digital Currency (CBDC) could result in greater competition but would require these products to operate without control by incumbents who are financially incentivized to keep the old products viable. If financial institutions are the only solution to distribute stablecoins or CBDC in the market, what incentive exists to replace the current lucrative products from which issuing financial institutions earn significant revenue?

Another possible solution for increasing competition is real-time payments. In 2023, the Federal Reserve will enable its latest payments rail, known as FedNow. This innovative rail will allow for both the payment authorization and the settlement to flow within the same transaction. As a result, we could see added competition for access to demand deposit accounts. If the FedNow payments rail is to be a competitive product it will require participation from financial institutions which hold the DDAs for all types of transactions. To date, we do not see paths leading to this type of competition but instead see access being given to transaction types that are not dominated by the current debit card products, including, for example, bill pay and business-to-business transactions.

In both examples of real-time payments, we also see the global networks entering the market. For instance, Visa offers its Visa Direct product as well as several crypto products it supports. If the dominant networks become the primary solution for these new real-time transactions to occur, it is unlikely we will see more competition to their core products and instead, greater influence in the overall payments market.

The other alternative to payments competition is through regulatory or legislative action. This comes in different forms of intervention around the globe. In the United States, this has been through a push to require more than a single network be available for every payment transaction. The premise is if the merchant has multiple networks to choose from, then a competitive environment will be created, allowing both sides of the transaction to be considered.

Today, market competition is primarily on the issuing side. Networks compete to provide issuers with a certain level of income in order to be the exclusive network on their products. If the issuer does not receive their expected return, the issuer can move to an alternate network. Meanwhile, the dominant networks have little, if any, threat that merchants will stop accepting their networks. The result is an unchecked escalation in fees absorbed by merchants to fund issuers’ income.

When merchants are given a choice on which network to use, it creates a balance where both issuer and merchant needs must be considered in the financial equation. If a network increases the revenue for the issuer to win their business but the merchant has an alternative network to send the transaction, the network will not achieve its desired outcome. The network must now balance both sides to win the transaction volume.

So how does the MAG work to help encourage competition in the payments landscape?

  • First, MAG engages in conversations with all stakeholders within the payments ecosystem to advocate on behalf of the merchants. In our Collaboration Committee, merchants meet regularly with the networks and acquirers to help ensure rules implemented in payments allow for competition in the marketplace and are operationally viable in merchant environments.
  • Second, MAG participates in groups that develop payments specifications. The MAG is on the EMVCo Board of Advisors and the Board of the U.S. Faster Payments Council, is a member of W3C, and is engaged with FIDO and U.S. Payments Forum payments efforts. This gives MAG the ability to represent merchants in multiple conversations specific to payments competition.
  • Third, MAG engages in educating regulators on merchants’ struggles with the lack of competitiveness within the payments ecosystem with the support of our Advocacy and Communications Committee. When regulators reach out to the market with requests to comment on changes to the payments landscape, the MAG writes responses on behalf of its membership.  The MAG also helps facilitate discussions between the merchant community and those in government seeking a greater understanding of the payments space.
  • Finally, through the Innovation Committee, MAG engages with new startups trying to enter the market to help them better understand merchants’ needs.

Through these efforts, we have made progress toward a more competitive landscape, but much work is still needed. I encourage the merchant community to get more involved in these efforts by doing any of the following:

  • Join the Collaboration, Innovation, or Advocacy and Communications committees. Click here for the form to sign up.
  • Be an advocate for educating everyone within your organization on the various efforts underway to make the payments industry more competitive.
  • Share your voice within the payments ecosystem by participating in the conversation with regulators regarding sought after payments landscape changes.
The Merchant Advisory Group

Driving positive change and innovation in the payments industry that serves the merchants interest through collaboration, education, and advocacy.