Payments: Antsy challenge
Payment infrastructure providers deserve some shaking up
Cash may be king, but its throne gets smaller every year. Electronic transfers and payments drive commerce more and more. Online payments systems are big business, worth about $84bn in fees worldwide, thinks Goldman Sachs. That figure should more than double by 2026.
Technology should reduce costs. US card transactions cost half as much online than offline. The roughly 3 per cent fee that merchants and consumers pay goes to five different parties, including banks and card networks such as Visa and MasterCard.
Online technology also encourages new entrants. In China, third party providers Ant Financial, an affiliate of e-commerce group Alibaba Group, and Tencent have both grown rapidly. They have successfully cut out middlemen and adroitly adapted to mobile networks, generating nearly $9tn of transactions via that route.
Indeed, these two have done a bit too well, thinks their government. New regulation requiring central clearing will in effect create another middleman, braking the accelerating growth of the pair. On the other hand, Visa and MasterCard, which dominate payments in most other parts of the world, cannot yet clear renminbi payments. That protects Ant Financial and its local rivals to an extent.
Whether the Chinese could challenge the hegemony of Visa and MasterCard elsewhere is doubtful. The US companies do better in terms of profitability. Fees of two basis points are thought to be enough for Visa to break even. Tencent’s “Others” segment, which includes payments, generates just 16 per cent of gross margin. Compare that with Visa’s 96 per cent. And aside from growth in China, the card networks can pursue the $23tn volume of business-to-business transactions.
China’s payments companies have done well within the walls of their fiefdom, but are threatened by more regulation. Visa and MasterCard remain most likely to profit from the worldwide cashless revolution.