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What's Up in Washington: Be Wary of Card Networks Killing Payments Innovation (MAG Quarterly- Volume Five, Issue Four)


By Doug Kantor, Partner, Steptoe & Johnson, LLP 

December 7, 2017

This is a key moment in the evolution of payments.  New technology is on the verge of changing the landscape – unless dominant networks can kill it first.

The rate of change that technology is making in our society is sobering.  It wasn’t long ago that a corporate giant (Kodak) was a stalwart among U.S. companies because it dominated the market for film we used in cameras.  Now, most young people have never used film in a camera – not to mention that many have never used a camera but take pictures with cell phones instead.  In the retail industry, it was just in the last decade that Blockbuster video looked like a juggernaut with more than 9,000 stores renting movies to consumers.  Now, most consumers get movies by streaming them over the Internet directly into their homes (and more and more are dropping cable television service altogether in favor of Internet-based home entertainment services).

Technology has brought these and many more changes in a rush.  A similar wave of change hasn’t broken just yet on the way we pay for things, but the swell is unmistakably growing on the horizon.  Paypal, Square and Apple Pay are the first signs of change.  They’ve allowed easy electronic payments between individuals, helped small and mobile businesses more easily accept electronic payments, and brought mass attention to the ability to use mobile phones to transmit payment information.  

Each of those services relies heavily on the funding mechanisms of the decades-old payment system – one that has been characterized by the use of plastic cards issued under the Visa or MasterCard networks.  The technology is here now, however, to move electronic payment information quickly and securely without relying on the numbers embossed on plastic cards to fund the payments.  Virtual currencies and related innovations have shown that all this is possible.  And, a small but growing percentage of payments are happening with these upstart technologies in place.  With these technologies, the dominant card networks aren’t needed to make payments.  In fact, Visa and MasterCard make the new technologies less efficient by taking an unnecessary cut out of the value of transactions.

Of course, Visa and MasterCard recognize this and are engaged in a fevered battle to keep their monopoly-type positions in the face of sweeping technological change.  Visa and MasterCard have, for example, put forward proprietary technology to tokenize payment card numbers – and ensured that they must be involved in every tokenized transaction to decode the token.  That is unnecessary to consumers and businesses making and accepting payments, but it is essential to the networks’ goal of translating their dominance of plastic cards into a dominance of future electronic transactions.  By ensuring they serve as bottlenecks in the electronic payments change, Visa and MasterCard keep themselves in the game.

And, the networks are using their controlled proxies – EMV Co. and PCI – to implement new and creative ways to protect their market positions.  That is why, for example, chip card technologies have to use the proprietary EMV standard rather than functioning on open technology standards that competitors could use on a level playing field.  That is also why Visa and MasterCard insist on “owning” their own batches of payment card numbers (every card number starting with ‘4’ is a Visa and those with ‘5’ are MasterCards).  That “ownership”, which is wholly unnecessary, helps those two networks box out the upstart competitors that might otherwise come onto the scene and win the loyalty of consumers through better services.

That, of course, is just the problem.  Because Visa and MasterCard are able to use their dominant market positions to block new technologies from getting a foothold, they change the nature of competition.  The winners of future payments ought to be those companies that can deliver the best value – price, security and speed of payments – to consumers and businesses.  Instead, Visa and MasterCard want to win without having to bother outperforming their nascent competitors.  
Unless legislators, regulators and businesses have the presence of mind and courage to stop Visa and MasterCard from abusing their market positions in that way, the best of the current technological revolution will skip over the payments world.  If that happens, Visa and MasterCard will continue to dominate payments for the next generation – and we will all pay the price for that.