Interchange fees will shake up the European card market
One of the most immediate changes is the European Union regulation on interchange fees. Interchange is paid by merchants to card issuers for the acceptance of card-based transactions, and under new regulation, this fee will drop from near 2% to 0.3% for credit and 0.2% for debit cards.
Most notably for card issuers, the reduction will directly impact their bottom line. With less money to be made, issuers will begin to cut card offerings and benefits for consumers, and instead, look at new ways to generate revenue.
One likely route will be to look outside of the transaction, to generate more revenue. Card issuers may try to form direct relationships with merchants, and through intelligent use of data, e.g transaction history, deliver highly targeted promotions to relevant customers. However, the card schemes, with greater richness of data, may get there first.
Regulators will get serious about ‘open’ payments
New players have been encouraged into the payments ecosystem and this has been the catalyst for a ground-shifting change – with banks, regulated (but nimbler) non-banks and the unregulated cryptocurrency players battling it out for supremacy.
However, this competition is neither level nor efficient. Banks still retain (and want to protect) the broad distribution networks, regulated payment service providers are looking for scale whilst staying on the right side of compliance, and the cryptocurrency players are seeking legitimacy.
Better outcomes can be achieved through regulators encouraging more collaboration. This ‘open’ approach to payments would be more effective in addressing the residual inefficiencies in payments, and lead to an explosion in creative payments solutions better suited to needs.
Near real-time payments will start to go global
The success of the UK’s Faster Payments solution will be replicated and in some case exported to other countries. For example FedPayments and Ripple in the US, along with Blockchain-based e-Peso in the Philippines. Also the UK’s Faster Payments is being exported to Thailand.
The benefits of faster payment systems will force many more countries to make plans for adoption and will initially lead to faster payments being the global norm and eventually to faster cross-border payments becoming practical.
Convergence of cards and bank payments
Traditionally most non-cash retail payments happen on cards but bank-based models are emerging. Regulators are now mandating that banks accept these developments which will inevitably cannibalise card-based payments.
Bank-based payments have the potential to save costs for retailers by avoiding interchange, though with the reduction in interchange fees, cost saving is becoming less of a driver. The arrival of Apple Pay however and a general acceptance amongst consumers for mobile payments is likely to maintain the pressure and build momentum for bank-based payments.
As such, expect the convergence of cards and bank payments to accelerate in 2016.
Banks and fintech companies will finally start collaborating
Banks no longer dictate the terms of the industry. With an evolving global economy, traditional banks are under increasing pressure, with increasing regulation and new competition. 2016 will see banks realise they need to collaborate to survive. Banks and fintech companies will have to work together, to forge tangible and meaningful partnerships.
Importantly, banks will realise that they can play a profitable role in deciding (and funding) the winners in fintech. Partnerships, rather than acquisition, will become the norm, with banks establishing funds and accelerators to support innovation.