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Can an alternative payments system exist? 06 September 2021

Online? Absolutely. In the real world, it is a bit more complicated. 
For decades now, Mastercard and Visa have been the world’s dominant payment processing networks. American Express and Discover are also in the mix but to a much lesser extent. Visa and Mastercard don’t issue cards directly to consumers, but instead partner with banks, credit companies, and credit unions to deliver the valuable pieces of plastic to customers that keep our economies moving. The prevalence of their networks means merchants all over the globe are forced to accept their terms, such as the planned fee increases coming in the spring of next year. This doesn’t sit well with many – from the small businessowner to the halls of government. 

In Europe, there are halting steps towards the creation of a new payments system. For years now, European member states have bemoaned being tied down to the American payment rails. They finally decided to act. The Old Continent’s attempt at payment sovereignty was titled “Pepsi” and it stood for Pan European Payment System Initiative. Supported by 20 banks – a fraction of all European banks – it apparently launched in July of 2020, under the name European Payments Initiative (EPI). The new initiative is expected to be operational starting in 2022.  
 
It is an ambitious effort to create a new payments system, but it is part of a worldwide trend of payment disruptors who seek to upend the traditional way people pay and get paid. Across the globe, many fintechs have jumped into various parts of the payment process. Entrepreneurs have noticed inefficiencies everywhere, from peer-to-peer to international transfers to payroll. Around these inefficiencies, companies are innovating and delivering digital solutions that lower prices, send money faster, and are easier to use. And that is all before mentioning the burgeoning cryptocurrency movement. 

The question of “Can an alternative payments system exist?” is different than the normative “Should an alternative payments system exist?” Based on a principle of open and fair competition, the answer is yes. However, payments are unique in their reliance on the network effect. Visa and Mastercard have a vast global footprint of merchants, and users want cards that work at those merchants so banks and credit card companies issue them a card from one of the two companies. More merchants and customers using their systems beget more merchants and customers using Visa and Mastercard. It is a virtuous cycle that redounds to the benefit of two companies.
 
 The same phenomenon occurs with social media companies. Facebook has grown into a modern-day behemoth because it is the online space where everybody is. A social media company trying to link and connect people is going to struggle if only five people use it. Similarly, the bar that only accepts Dogecoin as payment is limiting its potential customer base. 

Therein lies the problem: the advantage of these two payments companies is so entrenched, that even an initiative backed by the European Commission is going to struggle to get off the ground. There are just too many merchants – both in real life and online – that already count on Visa and Mastercard to process their payments. The new EPI may help speed up payments between countries and businesses, but customers just want to be able to buy goods and services as effortlessly as possible. And while Europe is trying to stand up a brand-new payments ecosystem, the two payments giants – not to mention other players like PayPal and the tech giants – won’t just be sitting on their hands. They will continue to aggressively increase their market share. 

So, yes, theoretically, an alternative payments system could exist. Indeed, there is a category called “alternative payments” which encompasses companies like PayPal, Stripe, Apple Pay, and BNPL startups that are providing people with alternative ways of paying. There is a dynamic online environment in which payment options are flourishing. They are, however, largely confined to e-commerce. Becoming big in the e-commerce world is no small thing, especially given the boom in online sales since Covid-19 entered our lexicon back in early 2020. That is why many of these alternative payments companies have been immensely successful.

Back in the real world, however, the question remains “Cash or card?” And card means Visa or Mastercard. The question at in-person checkouts, at least in western countries (China is another story), is never “Cash, card, Paypal, or Bitcoin?” This could very well change, but it requires significant uptake of both merchants and individuals to topple the firmly rooted duopoly. It is difficult to envision that becoming the reality any time soon. 
 
Extensive networks take a long time to develop and mature. Once a company’s network effect becomes so strong, they shift from being one company among others to being systemically important. Facebook is how large swathes of the world communicate with one another. Microsoft office is how businesses get work done. Visa and Mastercard are how people pay and get paid. They aren’t so much businesses but public utilities. Without them, modern-day societies – and the businesses and individuals within them – would be a lot clunkier. 
 
Managing the interplay between public utilities, systemically important companies, and peoples’ needs is a difficult balancing act for governing bodies. In that spirit, I admire the intent and effort of the European Payments Initiative. It just might be too little too late. 

Keywords:

Payments Digital payments/Wallet

Geography:

Global

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