Episode 83 – Settlement Systems in Detail – Carol Coye Benson, Glenbrooki
Brands Blur as Digital Payments Flourish
Remember the good old days? You carried a Visa card and you could use it anywhere Visa was accepted. Visa logo on the front of the card; Visa acceptance mark on the merchant’s window. To the cardholder, it was a Visa transaction; to the merchant it was a Visa transaction. No confusion.
PayPal broke that simplistic model through the use of a decoupled processing model. Where can you use your Mastercard? Anywhere Mastercard is accepted OR anywhere PayPal is accepted. Large merchants directly accepted Mastercard, so that was a non-issue, but many small online merchants only accept PayPal. To the cardholder making a purchase at one of those small PayPal merchants, it is clearly a Mastercard transaction because the card funds the transaction. To the merchant it is a PayPal transaction, done under PayPal rules and PayPal business terms.
Many cite PayPal’s position in the value chain, standing between the card network and the merchant, as a classic example of disintermediation. But I argue there is something bigger here than “just” disintermediation. There is a blurring of systems that is starting to undercut the traditional definition of an acceptance mark.
Network peering is a great example of this blurring phenomenon. One of the major trends in the payments industry over the last ten years has been the rise of network peering agreements that bind two networks together in order to broaden the network’s reach in the market. UnionPay and Discover famously entered into such an arrangement so that their respective branded products would work with reciprocity on each other’s network.
So where can you use your UnionPay card in the U.S.? Anywhere that Discover is accepted! To the UnionPay cardholder it’s a UnionPay transaction. But to the merchant in the U.S. it’s a Discover transaction based on Discover economics, rules, and acceptance terms. The peering also let’s a Discover cardholder from the U.S. use their Discover card anywhere Union Pay is accepted. It broadens the reach of both networks, for sure, but also creates consumer confusion.
No Longer Simple
The new relationship between Venmo and PayPal is another example of payment systems blurring together. Venmo is a closed loop network in the U.S. that has been extremely successful with millennials in the P2P domain. Kids love to send money to other kids using Venmo. But PayPal, which owns Venmo, has been hard at work trying to find synergies between these two unrelated networks. The result is that Venmo can now be used at any mobile merchant that accepts PayPal. There is no account linking, the Venmo user doesn’t even need a PayPal Wallet account. But Venmo can now be used anywhere PayPal is accepted. The buyer thinks they are paying with Venmo (using their Venmo balance, linked card, or linked bank account). But the merchant thinks it is a PayPal transaction. No disintermediation, just a blurring of where Venmo stops and PayPal begins.
And what about Apple Pay? There is a lot of confusion about where Apple Pay fits in the value chain and who it is disintermediating. If this is one of your concerns, I’ve got some bad news. Apple Pay isn’t really in the value chain and is not really disintermediating anybody. What Apple has done is insert itself into the user experience and into the branding of the transaction. The cardholder thinks they are paying with Apple Pay. The merchant even has signage promoting that they accept Apple Pay as a form of payment! But it is just a card transaction with the same economics and business terms as any other card transaction. Apple Pay is so outside the value chain that the merchant “accepting” Apple Pay doesn’t even need a business relationship with Apple!
What about Android Pay? Android Pay is basically Apple Pay for Android. So you have the same transaction model and the same branding perceptions. The consumer thinks they are paying with Android Pay, but the merchant thinks they are accepting a card transaction. But what makes Android Pay extra interesting is that it has a usability twist for consumers that Apple Pay doesn’t. Through strategic partnerships struck with Visa and Mastercard, Android Pay can be used online anywhere that Visa Checkout or Masterpass is accepted.
To make this work, a consumer must link their Android Pay account to their Visa Checkout or Masterpass account, but once done the two systems are integrated together. Mechanically it’s still a card transaction on both the consumer side and merchant side, but this perfectly illustrates how these systems are starting to blend into one another.
It Can Get Even More Complicated
Buckle your seatbelt because we’re going to do a payments industry barrel roll now. Let’s tie these things together and see what happens. PayPal has also struck its own strategic deal with Google so that PayPal can be used as a funding source inside the Android Pay wallet. Let’s say, for the sake of example, that the consumer has provisioned their Citibank Mastercard into the PayPal Wallet and set it as the default funding source. But the consumer has also provisioned PayPal into their Android Pay wallet. Now the consumer sees the Visa Checkout acceptance mark and taps on it to buy something from a merchant. Up pops the Android Pay biometric authentication and the transaction quickly completes. The million dollar question is whose customer is this? The merchant’s customer? Google’s customer? PayPal’s customer? Mastercard’s customer? Citibank’s customer?
Does the consumer really care? I doubt it. They just want what they have to work everywhere they want to use it. I’m not going to elaborate on the role that the new Payment Request API from the W3C plays in this, but it is massively important for integrating even more client side and server side payment methods.
If this changing landscape intrigues you, I invite you to host one of our one-day Digital Payments workshops on your campus. Not only are Digital Payments new, they are starting to blur together and becoming more ubiquitous in the process. That’s something a brand manager could never imagine happening. Until now.