The arrival of digital-payment platforms promises to create new kings of the highly lucrative global payments system. But the old bank/card model has adapted better to digitisation than many expected
Italy’s new right-wing prime minister, Giorgia Meloni, chose card fees as one of her early targets. Her quarrel was with charges levied on card payments that go to processors, networks and banks. Angered by the policy of her predecessor, Mario Draghi, to fine firms that rejected digital payments, she called card fees a “hidden tax” on small businesses. Ms Meloni also suggested raising the limit on how much cash was allowed for large transactions, though she later backed away from this.
One reason for optimism over new digital finance and the fintech boom is that banks and cards look ripe for disruption. By our calculations, in 2019 crypto firms and fintechs accounted for around 9% of the global market capitalisation of large listed and private payment firms, including banks and card networks. By the third quarter of 2021 that share had almost doubled to 15%. Yet it has since fallen back to nearer 10%. Banks and card networks have proved resilient, especially in America.
One criticism of this system is that it particularly hits the margins of small retailers that do not have the power to negotiate lower fees. “Your Amazon account has been fixed for years,” says Ahmed Siddiqui, author of “The Anatomy of the Swipe”, a book on payments. A study by the Reserve Bank of Australia found that average card fees in Australia were 1.15% for the smallest tenth of retailers but only 0.47% for the largest tenth. And there are offsetting benefits.
Yet differential pricing is unlikely to go far. Mr Wang finds that fewer than 5% of transactions in America have payment-specific pricing. Cards are often more convenient for retailers because the card networks handle consumer disputes. The smallest traders that stand to benefit the most are precisely those in which non-card consumers would benefit the least because of low payment values. Many retailers fear that card users will be turned off by surcharges and go elsewhere.
Hence a third strategy, to build an alternative payment method for existing repeat customers, rather like the RedCard of Target, a big retailer. RedCard offers customers 5% discounts on Target purchases, encouraging them to spend at Target over its competitors. Some 20% of the firm’s $100bn annual revenues come through RedCard.
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