The biggest threat for payment networks is dis-intermediation!

Practically, they are not in a very indispensable position. I mean, they are still very critical part of the system. The core strengths of these networks are brand and connectivity. Their brand helps the issuers sell their cards and convince the users to make the purchases. Their ubiquitous connectivity ensures that any acquirer can talk to any issuer to any processor. They also provide value added services such as Fraud detection and management services.

However, because of the huge ecosystems that other players have created, they can potentially talk to bank systems directly without using these payment networks. For example, Facebook can create their payment instrument and directly talk to the bank systems! If ISIS becomes successful, the MNOs can potentially directly talk to the bank systems.

While there is only a small chance that could happen, the payment networks are not taking any chances. They are spreading their services  across the payment ecosystems and coming closer to the consumer-merchant ecosystem.

Let us see how each of the major networks are responding!

In the case of Visa and Mastercard, they have had very limited direct relationship (and hence, influence) with the consumer so far. The issuer had a relationship with the consumer and could provide incentives and sops for them to use their cards. They had very little direct relationship over the merchants as well. The acquiring bank and the processors handled this part. Not anymore!

Here is what is cooking since the last 2-3 years..

Visa

Merchant – In order to get closer to the merchant, Visa started offering payment gateway services through the $2b acquisition of CyberSource. This is the first step in getting closer to the merchant .

Wallet – Visa realized that “being a wallet” is more important than “being in a wallet”. They have started working on a digital wallet service called V.me that provides consumer to perform eCommerce, mCommerce and NFC enabled retail Commerce payments.  This service is yet to start trials as of March 2012.

Payment instrument for virtual goods – With the acquisition of PlaySpan, they have got the capability to provide micropayment systems to the merchants.

Mobile Banking – With the acquisition of Fundamo, they are at the core of enabling mobile banking for customers. Visa realized that it is better to be an aggregator doing this function rather than let banks provide dedicated apps with payment functionality to the consumers.

Under banked consumers – With Fundamo acquisition, Visa is in a good position to serve the underbanked consumers, which is a high-growing segment.

Visa spreading its wings

Refer to the complete current payment ecosystem diagram here.

Mastercard

Mastercard is acquiring the capability to provide new services to merchants/consumers or working in house in Mastercard labs to build such systems…

Merchant – Mastercard entered into the payment gateway space by acquiring DataCash and Europay.   With their Mastercard Marketplace, they are building partnerships with other providers to provide easy eCommerce options to the merchant.

Consumers – With Mastercard paypass product, they have come closer to the the consumer by providing toll payment and transit payment options.

Underbanked consumers – with Mastercard Mobile Money program, Mastercard is garnering marketshare in the underbanked segment.

Mastercard spreading its wings

Amex

Amex is much more than a payment network.  I have included them also in this discussion since they also have a strong network brand .  Because of the closedloop nature of Amex model (3-party model), they already have very good influence over the consumers. They also have had a closer relationship with the merchants compared to Visa and Mastercard.

Payment Gateway – By partnering with Transaction Network Systems (TNS) , they have entered into the payment gateway space.

Merchant-Consumer ecosystem – Amex is in a unique position to run several programs in the Merchant-Consumer ecosystem that other issuers in the 4-party model may not execute without Visa/Mastecard. The Go Social program is a huge hit with the merchants and has made lot of news off late (the twitter offers, foursquare offers, etc..)

Amex spreading its wings