What are the payment alternatives in 2024?

Card schemes were planning to increase fees, according to reports last autumn. Then the UK Payment Systems Regulator (PSR) announced in December 2023 provisional proposals to introduce a price cap for cross-border interchange fees. What’s the alternative?

A perennial hot potato

Many merchants and industry players feel that there’s a duopoly between Visa and Mastercard, who can pretty much write the rules and set the fees.

Either you accept it, or you don’t. And if you don’t, what are the alternatives? That question crops up at regular intervals, including right now.

A recent independent review into the future of payments, commissioned by the UK government, recommended that the UK develop ways to challenge the dominance of the big card networks.

Report author, Joe Garner, highlighted that the UK was “almost unique in that merchants have no established digital alternative to cards with which to take payments from consumers.”

“In most other countries, there is a convenient alternative process, which enables consumers to pay merchants at a lower cost than cards,” wrote Garner. This absence of choice was one of the key drivers of dissatisfaction among merchants, he said.

Like herding cats?

Developing an alternative system to rival Visa and Mastercard is often mooted, certainly in Europe. However, it’s easier said than done.

The latest incarnation of this is the European Payments Initiative (EPI), which kicked off in July 2020. But what looks like a great idea to legislators and regulators, looks different to bankers.

The commercials are often difficult to justify. Why design a so-called ‘third scheme’ that looks and feels like the other two?

Corralling participants in the same direction at the same pace is also tough. When each has different or competing objectives, plans often get mired in internal and external politics.

Tough talk

The language of the PSR announcement is bullish. But really, regulatory interest in interchange levels is as old as the concept of interchange itself.

It’s sometimes hard to have a fact-based debate on this emotive topic. Mostly because each party brings its own facts – all of which are generally correct. Yet each party invariably has its own agenda, making what’s left unsaid as significant, if not more so.

Visa and Mastercard have invested in their systems, brand and rules since the 1970s. Their global coverage and recognition is a formidable moat against competition. But it also means that merchants can accept a card payment from anyone and know they’ll get paid, providing they’ve followed the correct procedures.

Given the number of scheme participants, it’s impractical – certainly for us as an acquirer – to negotiate bi-lateral rates with each card issuer worldwide. Default multi-lateral interchange fees set by the schemes short-cut the process.

I could quibble with what’s included in the fee calculations. Acquirers and merchants bear a disproportionate share of the costs of new technology (e.g. chip and contactless hardware), PCI DSS and first-party misuse, also known as ‘friendly fraud’. The commercials must work for everyone in the model.

But on balance, when compared to cash and other less efficient payment methods, the benefits of cards as to coverage, convenience, customer choice and speed still outweigh the costs for now.

Schemes obsolete?

Card schemes benefit from a type of muscle memory. Those who pay with credit or debit cards will always want to use them. The schemes have built that global acceptance, brand recognition and payment habit.

Nowadays they offer tokenisation. As more sales happen on mobile and in-app, the storage and use of payment credentials across different websites will become more significant, plus help protect the schemes against disintermediation.

Then there’s M&A. Visa and Mastercard have made high-profile investments in payment, fintech, banking and software-as-a-service companies. All with the strategic aim of extending their reach and rails beyond cards into commerce and commerce enablement.

Visa recently announced the acquisition of Pismo, a core banking platform in Brazil. Before that, there were European deals with Tink and Currency Cloud. And Mastercard has made a real-time payments play with stakes in VocaLink and the account-to-account payment business of Nets, among others.

The card schemes aren’t going to be rendered obsolete any time soon. At the same time, there’s no room for complacency.

The rise of the alternatives

Local or so-called alternative payment methods (APMs) are already mainstream in some markets. Take the Netherlands, where 70% of all e-commerce transactions today are made with iDEAL, a bank transfer method.

In Germany, credit cards are in distant fourth place for e-commerce payments (12%), behind PayPal (30%), payment on invoice (24%) and direct debit (21%). Meanwhile Poles prefer to use bank transfers (67%) and pay for only 15% of online purchases using credit cards.

APMs include everything from bank transfers to buy now pay later (BNPL) and digital wallets like Apple Pay and Google Pay. So, only accepting Visa and Mastercard online means turning away as much as three-quarters of business in some countries.

The APM trend is only set to continue as consumers use digital payment types more. The convergence of online and physical-world payment in mobile devices also means greater cross-over of APMs between channels.

It’s my belief that as commerce becomes more digital and global, payment habits will remain resolutely local and connected to the bank account. As such, the card schemes must reckon with a range of credible, local alternatives nibbling away at their market share.

Open future

At Ecommpay, we like to think of Open Banking as bank payments but better. For customers, it looks and feels the same as the bank transfers they know and trust. But for merchants, Open Banking technology delivers access to multiple banks – up to 2,000, in fact – via a single connection.

While Open Banking hasn’t made a significant dent in day-to-day transactions yet, do I think that it’s going to continue to scale? Absolutely.

Paying this way is not in our DNA today – and that links back to the muscle memory point above. This is the journey that Open Banking is on right now.

However, if you get the products, services and technology aligned, it can be a very seamless, quick and safe way to pay. This is what consumers and merchants expect.

They want their money now. They want that process to be quick, easy and cost-effective. And they don’t want the fraud. Open Banking can deliver on all of these.

Account-to-account payment is part of our present and will be part of our future. But like most things in payments, it takes a while to build momentum. Change happens gradually then suddenly. We just need to be ready to take advantage of the alternatives.