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Letter from the CEO: The US is Fast Becoming a Third-World Country in Payments (MAG Quarterly- Volume Six, Issue Four)

Mark Horwedel headshot
By Mark Horwedel, CEO, Merchant Advisory Group

December 6, 2018

The United States payments system is falling behind many other countries. Innovation provides the opportunity to inject competition into the U.S. payments system, but will stakeholders and regulators make the necessary changes to allow that to happen?

Payments innovation abounds throughout much of the world, while in the U.S. innovation is almost non-existent. Colleagues point to India and China as markets where payments innovations are changing the fabric of society. The innovations provide unapparelled convenience through mobile apps capable of addressing a wide range of consumer needs, while delivering payments to merchants at a small fraction of the cost of over-priced and fraud-prone card payments in the U.S.

It’s been several years since M-Pesa revolutionized payments in Kenya, a country none of us would have considered a likely candidate for payments leadership. A May 2014 publication proclaimed, “To serve the local population, online businesses need to be able to accept mobile payments. Safaricom’s M-Pesa is the dominant mobile payment platform, used for 98.5% of transactions by value. M-Pesa has become the de facto choice for both customers and businesses.” Meanwhile, the U.S. has only recently began to modernize the peer to peer payments upon which M-Pesa first was introduced in Kenya. Not surprisingly, a non-bank, Venmo moved first, and U.S. banks followed suit only after realizing the threat of loss of business.

In Europe and many other countries, payments innovation has been sparked by government regulation. Rampant payment fraud has often served as the catalyst for change by policy-makers forcing private companies to develop technological solutions to address the growing fraud problem. EMV and 3DS are examples. More recently, privacy and competition concerns have led to another round of payments legislation and regulation (see Herzig article below) that will further protect consumers from payments fraud and safeguard their privacy, while opening the doors to FinTech competition with traditional banks. Regulators expect new competition will lead to more innovation and price competition in these markets.

Almost overnight, Alipay and WeChat Pay have achieved dominance in China, the world’s biggest payments market, by capitalizing on the convenience and ubiquity of barcode technology which doesn’t require expensive upgrades to merchant point-of-sale systems and doesn’t invoke the competitive concerns associated with Near Field Communication (NFC).  It is rumored that China Union Pay lost 25% of its card payment volume last year as the mobile platforms came to dominate the payments landscape.

Payments innovation continues to accelerate in much of the world, often encouraged or mandated by governments seeking to modernize their payment systems, to address the incidence of growing payments fraud or simply trying to stir competition in markets where competition is lacking or non-existent. 

Meanwhile, U.S. payments remain overpriced, plagued by rampant and growing fraud and by almost a total lack of innovation by traditional financial institutions. Today, what passes for payments innovation in the U.S. is primarily associated with a continuation of cards reward battles fueled with the excessive interchange fees collected from merchants. Banks’ protected status keeps innovators at a distance while enabling the banking industry to enjoy a monopoly on payments. They have no real incentive to innovate.

While it is doubtful that the U.S. payments paradigm is sustainable in the face of a growing international economy, growing payments fraud, and growing awareness by the public and policy-makers that we are lagging behind, there appears to be no near-term effort to change things. The near-term prognosis is not positive, and real change may not occur until the inevitable next banking crises motivates policy-makers to take actions to address the sad reality of payments in this country.