Mobile-Payments War: Profits May Suffer Collateral Damage
Battle resembles a multifront conflict complete with overlapping agendas and shifting alliances
The mobile-payments war is getting messy.
Far from the quick victory for Apple many expected when it entered the fray, the battle increasingly resembles a multifront conflict complete with overlapping agendas and shifting alliances.
When asked on his company’s earnings call last week about Wal-Mart Stores’s move to introduce its own mobile-payment services to customers, MasterCard CEO Ajay Banga summed up the situation: Retailers like Wal-Mart, he said, are “trying to find a way to offer a product and a wallet that their consumer can be connected to loyally.”
“The banks, by the way, are doing the same thing,” Mr. Banga added. “They’re trying to make sure they offer products that get the consumer loyal to them and not just let the digital player own that space or the merchant own that space, and, of course, the digital players doing the same thing.”
The result is a crowded, confused space. Wal-Mart’s service will compete with the likes of Apple Pay, Samsung Pay, PayPal and J.P. Morgan Chase’s Chase Pay. Wal-Mart itself never enabled the NFC technology needed to use Apply Pay.
So protracted conflict in the payments sector is likely.
This analysis could be taken one step further: Intense competition could drive down profitability for whoever remains standing. That is because it will, over time, push down pricing across the entire payments infrastructure.
Payment providers are competing with one another to offer a convenient experience to consumers. But they also need to lure in merchants, and to do that they will probably need to compete on price.
Some pricing pressure is visible already. At PayPal Holdings, which also reported results last week, the take rate, or the amount of revenue it collects on every purchase, has declined 0.16 percentage point a year since 2012, according to Sanford Bernstein. It is currently about 2.8%.
So far, that is mostly because PayPal is expanding to bigger merchants that demand lower fees. But the pressure on the sector could soon intensify.
If Apple, for instance, moves to establish Apple Pay as a payments-acceptance service used by merchants, it could undercut the fees charged to merchants. This is because it relies mainly on device sales for revenue. Chase Pay already is offering merchants lower fees than they pay on traditional card payments.
When the smoke clears, the ultimate victors of the payments war may find the spoils disappointing.