The Nilson Report


Meet The New Payment Champions Same As The Old Ones

The Wall Street Journal 

By Aaron Back

Jan. 11, 2019 5:30 a.m. ET

A couple of years ago, the payments landscape in the U.S. looked like it was up for grabs. Hardware companies like Apple and Samsung, online ones like Google and Amazon, banks like JPMorgan Chase and retailers like Walmart were all unveiling their own new ways for Americans to make purchases, especially with their phones.

Now that the dust is beginning to settle, it is increasingly clear that the ultimate winners are likely to be the same old credit-card companies that already dominated: Visa and Mastercard . MA -0.53% Among less traditional players, PayPal looks best positioned, thanks largely to a flexible strategy that accommodates these giants.

That would be a disappointment to many—especially merchants—who had hoped that the rise of digital payments would disrupt these incumbents. Along with banks that issue the cards, Visa and Mastercard take a slice of every debit and credit-card transaction that runs over their networks. That costs merchants money, but it often works out to the benefit of consumers as these transaction fees pay for cash back or other card rewards.

In recent years there has been a somewhat bewildering proliferation of ways to pay for things. Some retailers like Starbucks and Dunkin’ Donuts let you pay at the register by scanning a code on your phone. Other systems like Apple Pay use a chip embedded in a smartphone; you just pass your phone; you just pass your phone over a checkout terminal to pay in a "contactless" transaction.

The vast majority of the time, though, all these methods are really just different means of delivering your credit- or debit-card information to the merchant.

As a result, the centrality of Visa and Mastercard has only been reinforced. The Nilson Report, a payments-industry-focused publication, estimates that debit and credit cards accounted for 62% of total consumer payments in 2017, up from 53% in 2012. They see this rising to 70% in 2022, while truly online payments that bypass the card networks will remain fairly stable at around 14% total. Cash and checks are steadily disappearing as ways to pay.

This differentiates the U.S. from how mobile payments have developed in certain emerging markets, especially China, where WeChat Pay and Alipay are far more ubiquitous and allow merchants to save substantial amounts on transaction fees by leaving out credit-card networks.

PayPal’s decision to open up more to Visa and Mastercard in 2016 was a crucial turning point. It began to allow consumers to more easily link their accounts to credit and debit cards, as opposed to funding purchases with their PayPal balances or bank accounts. In return, the card networks began allowing PayPal to use their contactless payment technology so customers could use their PayPal mobile wallets to pay for purchases in stores.

This means that when consumers buy something with PayPal, or Venmo, its more youth-oriented brand, the company gives up a more substantial cut of every transaction since it has to pay fees to the card networks and card- issuing banks. Indeed, for contactless in-store payments PayPal earns exactly zero.

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