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The music sector has been re-shuffled by technology, Airbnb checked into the hospitality service sector and the most striking technological disruption is perhaps the drive-by shooting of Uber on the taxi-branch. These industries have been ‘robin-hooded’ by technology companies. Is the payment sector next?
The idea is simple; whenever margins are high, customers are unhappy and incumbents are not changing to what their clients want, a tech company comes in and takes over. We believe certain financial industries are indeed next on the list of technological disruption. However, it is not the entire ecosystem that will be disrupted. The value chain is becoming more fragmented.
When looking at the impact of technology in sectors like entertainment, hospitality services and the taxi branch we can conclude that they all had one common outcome which can be summarized as the Robin Hood effect. By that we mean that a large part of the economics of the goods or services offered is returned to customers, who also become more empowered. This is accomplished by introducing a very high level of transparency through the usage of data and technology. Consumers’ preferences and demands change. We believe the introduction of financial technology (‘fintech’) will also change consumers’ requirements and ultimately create a Robin Hood effect.
The future of payments is being shaped by three factors, namely technology, regulation and socio-demographics. Within these three broad drivers there are trends that are either transformative or disruptive in nature. Although we do not think the payments ecosystem as a whole will undergo revolutionary change, we see a clear direction into which the three forces are pushing the ecosystem. The new name of the game is cheaper, faster and more secure transactions.
It is hard to pinpoint clear winners in every part of the ecosystem at this point in time. The technology and/or business model that can disrupt has not yet gained the mass adoption to actually be disruptive. There is one segment, however, which we think will be a clear winner, i.e. the networks. We think global network players like Visa Federation (Visa and Visa Europe) as well as MasterCard will benefit. Also networks that have found their unique niche, like American Express and Alipay, will be winners in our view.
Despite the fact that there have been many attempts in the past to replace networks, none of those attempts succeeded. Trust and scale are very important for networks and the barriers to entry are continuously increasing. Technological innovations within networks only help sustain them. Disruptive technology in other parts of the ecosystem cooperates with the current network players instead of disrupting them. From a regulatory perspective the barriers to entry also increase due to decreasing interchange fees and increasing safety requirements.
We think card issuers, payment card producers (chips) and point-of-sale hardware providers are challenged by new technology. The introduction of mobile payment solutions will have consequences for point-of-sale hardware providers. From a regulatory perspective issuers and card manufacturers are challenged as well. Issuers’ business models will be greatly impacted by the implementation of the EU payment service directive 2 (PSD2) that cuts interchange fee incomes of issuers. Card producers are compelled to comply with the latest standards which cost a lot of money and cannot be priced on to customers, while at the same time cheaper digital alternatives become available.
For more in-depth research, please read the white paper.