Some people in the industry talk about payment network dis-intermediation. Now that most people have connectivity through their smartphone, it is like having a direct access into their bank account (credit account or DDA) at your fingertips – wherever and whenever. So why do we need Visa and MasterCard?

Before we go any further to check if the networks can be undermined by new players, let us take a look at what a network is and what assets do they have:

Network-centric view of the Payment Industry

With their huge brand, they have created the consumer product ubiquity, merchant acceptance ubiquity, relationships with issuer and  acquirers and the actual network connecting the FIs and the merchants..   If someone were to create such a “new” network, they would need to get enough FIs to issue those branded cards, get enough acquirers to accept such cards and very importantly make  consumers use that brand cards and convince enough merchants to accept such cards – all at the same time .. not to mention building and operating and monitoring a secure network connecting FIs worldwide.  These networks, along with the other 2 bank-networks – Amex and Discover had enjoyed no outside competition – until now!

As you see in the diagram above, the brand plays a very important part in succeeding as a network. Particularly for Visa and Mastercard, who is neither an issuer nor an acquirer. Branding requires explicit visual representations/logos of these networks to the consumers, merchants and the FIs. A Mastercard logo on the credit/debit/cash card that a consumer owns or a “Visa accepted” logo are absolutely required in keeping up the brand.

However, recent developments in the wallet technologies are appearing to disturb this status quo. Mobile wallets and more importantly, physical wallet cards have emerged off late that don’t carry the Visa, Amex, Mastercard, Discover logos on the cards, but can facilitate transactions using cards issued with Visa/Mastercard/Amex/Discover brands..

Look at these “Wallet cards” that can contain all the branded cards, that don’t display the logos of those brands..  Companies like Google, PayPal, Apple (very soon if not already) are in the process of building up their wallet brands with the consumers and the merchants while using the networks as mere background pipes. Just imagine what would happen if Google Wallet and Paypal Wallet get enough brand recognition with the customers and merchants. They could simply approach the issuers/acquirers bypassing the networks and by developing new instruments. If they achieve consumer and merchant ubiquity, it is not impossible to build other elements of the network!  Is it easy? No way! Can they undermine these networks in the next 3-5 years? No, but they would have a good start if they achieve consumer and merchant ubiquity.

Look at how these wallets would work in the network ecosystem:

PayPal, Google and Serve wallets abstracting the network brands..

Notice how the wallets have begun to create their “own” brands with the consumers while riding on the existing networks. They have made agreements with one of the networks (PayPal with Discover and Google with Mastercard) as a bootstrap to build merchant acceptance.

Strange combination of transactions can now happen. For example, one could map a Visa card onto a Google wallet card and use that to fund a transaction at a merchant site that accepts only Master Card cards. (Google uses a virtual Mastercard prepaid card at least in their mobile wallet implementation. Not sure how if they use the same method to initiate the transactions in their Google wallet card implementation). The point here is that the network brands are being diluted by these solutions. Visa/Mastercard/Amex had strict rules till now in terms of how their logos need to be displayed on the cards, on the merchant acceptance points, etc. but these are being breached!!  The problem is that these networks themselves are parties/partners/investors of solutions that are breaching each others brand rules.

Finally, let us look at why these wallet solutions might thrive in this environment. That is because they are solving one important pain point not addressed in the current network arrangement. Because the wallets have a great deal of information about the consumer that the networks didn’t have ever before (thanks to mobile and cloud technologies), they can use that information to connect them better with the merchants. Consumers can be led to better offers at the right time and the right place while merchants can be provided with more and loyal customers. Creating such a Merchant-Consumer platform will help facilitate this and that is what these wallet solutions are addressing.

The fun part is that each of these networks and companies like PayPal, Google , other wallets have conflicting initiatives and priorities while they are co-operating and competing! There seems to be lot of chaos here, but that I guess that’s how systems evolve.

I will talk about how each of the  networks are strategizing to  offer this “Merchant-consumer platform” as part of  their network in a later post but bye for now!