Credit cards losing ground to digital wallets
Summertime and the livin' is easy, but not for card companies.
A major change in how we pay is coming that will hit credit card fees hard, card companies should brace for the impact, because the glory days of the card duopoly are over.
“Mobile wallets’ share of global POS transactions jumped over 21% YoY in 2021 rising to 28.6% of global POS transaction value, or over US$13.3 trillion. APAC continues to lead the way in mobile wallet adoption with 44.1% of 2021 POS transaction value; mobile wallets are expected to outpace all other POS payment methods combined in APAC by 2023.”
Globally mobile wallets are expected to rise to 38.6% share (over US$22.7 trillion) by 2025.
FIS Global Payment report: here
A tectonic shift is coming
2021 was a big year for card companies, credit card use dropped! While debit card usage increased it’s clear that card usage is increasingly shifting to pass-through mobile wallets. This is a clear signal to card companies that “the livin’ is easy” is over for card companies.
The FIS Global Payments report makes it clear in no uncertain terms:
“Credit card use dropped in 2021 and debit share increased; however, card usage is increasingly shifting to pass-through mobile wallets. Credit cards accounted for 23.9% of global POS transaction value in 2021 – over US$11.1 trillion – led by a 40.2% share in North America. Credit’s share is projected to decrease to 22.4% by 2025 when it will represent over US$13.2 trillion.”
There will be no tears for card companies who have maintained a lock on payments and fintech’s in the West despite a fee structure that comes from another era. Never forget that cards once used paper and card fees were at least in part based on human processing. Now in a digital era, paper charge slips and humans are long gone but the fees remain. An anachronism if there ever was one.
Credit card fees in their myriad forms are an anachronism. Paper and human processing are long gone, but the fee structure remains.
Are credit card fees invisible?
The sad part is that the system has been in place so long most don’t even understand how expensive it really is. Card fees have become invisible, an unquestioned “fact of life” for many. Many in the West do not understand that all of the goods and services they consume have been inflated to cover the merchant’s fees. There is no “free lunch.” Estimates from the Fed are that cards add 1.4% to retail prices across the US.
It’s no wonder that no one hates interchange, and card companies, more than retailers. According to the National Retail Federation US Merchants hand over $138bn in fees each year, their second-biggest cost after wages.
The ECB estimates that European pay about 1.4% of GDP for payment services, with the US paying an astounding 2.1% of GDP.
Gov’t has, of course, stepped in but regulates debit cards only. The EU caps fees for debit cards at 0.3% of the transaction value while China’s WeChat and Alipay collect charges of just 0.1%. In the US, debit cards are regulated by the “Durbin amendment”, at 21 cents per transaction plus 0.05 percent of the transaction amount.
Still, credit-card fees are unregulated and much larger in both the US and EU, usually sitting at about 2% of the transaction and rising to 5% for some premium-reward cards. Who do you think pays for your mileage points on your high-end platinum, diamond or titanium card? Meanwhile, somehow as though in an alternate universe, Visa and Mastercard still survive in China with a maximum interchange fee of 0.45%. Curious, isn’t it?
Credit cards are clearly a good business, and while no one disputes their utility, it comes at a cost. How much it’s worth in a new era where digital connectivity is ubiquitous and CBDCs are in use is the question. Source The Economist: here or without paywall here
The Fed still can’t find a use for CBDCs
The worst part of card fees is that they are shockingly regressive and disproportionally impact the poor. Still, governors of the US Fed, the nation with the highest interchange fees, can find no possible use case for CBDCs? As though a nation should gladly pay 2.1% of GDP to the card duopoly forever. That the Fed is clueless to the cost of cards on society, despite their own research confirming this, never ceases to amaze me.
“Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or “cash”) users because merchants generally do not set differential prices for card users to recoup the costs of fees and rewards.”
“On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $21 and the highest-income household ($150,000 or more annually) receives $750 every year.”
“Who Gains and Who Loses from Credit Card Payments?” Federal Reserve Bank of Boston, August 2010.
The regressive nature of credit cards is quite shocking, your miles are in essence paid for by low-income households who pay more for card services and their purchases while enjoying none of the benefits. Ironically, even wealthy household’s perks are a “bad deal” in that they are a tiny fraction of what they pay in interchange:
“Households with an annual income of less than $25,000 (roughly a quarter of the total number) on average get no net rewards, since any they do receive are entirely offset by fees. Households that bring in more than $135,000 a year recoup in points or perks around 0.6 percentage points of the interchange fees they pay.”
Brian Kelly “the points guy”
Digital wallets are “Made in China”
Unsurprisingly, APAC, driven by China’s phenomenal success with WeChat and Alipay is leading the transition to digital wallets. The trend is continuing with real-time payment networks throughout the region adopting digital wallets, most of which are QR code enabled.
Excluding China, where mobile wallets account for 54% of all transactions, cash and cards are the leading POS payment method in APAC. “Cash represents 16% of regional POS transaction value, yet remains the top payment method in half of the APAC markets in our report, including Indonesia (51%), Thailand (63.4%) and Vietnam (53.8%). Despite this, cash is projected to fall to less than 8% of POS transaction value in APAC by 2025.”
The problem of preference for digital wallets is so serious that even Visa in a recent study recognized that in South East Asia most nations prefer digital wallets to cards. This makes sense as more than six in ten people in the region are unbanked. Most of these unbanked will never be part of the credit card system and see digital wallets as their entry point to financial inclusion.
Southeast Asian consumers prefer digital wallets! Why wouldn’t they? Digital payment is the first step to financial inclusion for many. Source: Visa Consumer Payment Attitudes Study 2022. Download: here
APACs preference for digital wallets is such a clear trend that Alipay is formed “Alipay+” to form a network of linked digital wallets that will someday likely compete with Visa. So not only are cards competing with digital wallets in the region but card’s international network will also soon be under attack. There will simply be no need to carry a credit card if a global digital wallet solution exists.
Partial list of Alipay+ partners. Note that “WorldLine” gives these digital wallets access throughout the EU.
Apple to the rescue?
It is very clear that in the US there is little interest in cracking down on the card duopoly. The EU, however, with its digital euro CBDC does appear ready for change. In a recent policy paper, the European Central Bank went as far as to say that a stated goal of the digital euro was to “reduce reliance on foreign entities” a clear shot at the card companies.
Still, the most likely company to rescue us from fees is Apple, which is already battling banks over the 0.15% it takes on every payment. Ironically in Apple’s case, it is the banks that don’t want to pay Apple’s fees, not the other way around! An amusing turn of the tables for incumbent banks.
Apple started project “breakout” which is designed to bring a wide range of financial tasks in-house. Its new in-house BNPL offering is perhaps an example of things to come. Some may say that Venmo and bank direct payment fintechs are likely credit card disruptors. It’s not clear to me how Venmo’s 1.9% + 10 cents transfer fee for any money sent to business accounts makes them any better than cards.
In the end, Apple is one of the few entities that is uniquely positioned, by virtue of size, market presence, and technical capability to challenge the card duopoly. In this case, it will take the resources of anti-trust worthy big tech and their dominant position to elbow out the equally anti-trust worthy card duopoly.
For a great read on Apple’s “Breakout” check out this article by Efi Pylarinou: here
Takeaways:
The credit card duopoly will eventually crack, its fee structure is unsupportable.
That card usage is declining is an early indicator for card execs.
Cards are under attack from BNPL, digital wallets, fintechs, and in the near future CBDCs. All will reduce card’s fat margins.
Cards are obviously not going away, but the fees they charge will have to change to meet the competition from digital wallets.
In Asia where newly banked citizens never had a credit card, they will have to win back consumers from digital wallets. This is possible, many Chinese have Visa and MC despite their use of digital wallets.
Apple is uniquely positioned because of size and technical ability to challenge the card companies. Let’s see if they do!
Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is an Onalytica Top 100 Fintech Influencer and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.
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An article after my heart. Been wondering what the direction of credit cards is, and how that is trending given all the upheavals in fintech especially since Covid.