Regulations are paving the way for a payments renaissance

The future of payments looks less about consolidation than it does about innovation and collaboration to help merchants that are reeling from COVID remain operational.

According to Yelp data, more than 98,000 small businesses and retailers in the U.S. have been shuttered, with countless more on the brink. Businesses need all the help they can get, and payment innovation cannot arrive fast enough.

One force that is poised to shape the future of payments innovation is regulatory and antitrust intervention. Regulators in the U.S. are signaling their intent to prevent anti-competitive consolidation in the payments industry, to give new market entrants in the space the opportunity to reach scaled adoption. Headlining this trend is the recent dissolution of Visa’s planned acquisition of San Francisco-based, fintech startup Plaid.

The Plaid deal collapsed (at least in part) because of an antitrust suit filed by the DOJ in November 2020. Were the transaction to proceed, the DOJ alleged, Visa would be able to unlawfully impose a monopoly over the online debit card market.

According to The Wall Street Journal, Plaid represents a “nascent but important competitive threat to Visa, and eliminating that threat would lead to higher prices, less innovation and higher entry barriers for online debit services.”

While Visa initially planned to challenge the DOJ’s lawsuit in a trial scheduled for June in California federal court, both Visa and Plaid mutually agreed to call off the deal. The DOJ action is not the only headwind that the acquisition faced, however. Both Plaid and Yodlee (a subsidiary of Envestnet) are under pressure from class-action lawsuits brought by consumers who take issue with both companies' data practices.

Between regulatory friction, concerns over fair market conduct, and consumer push-back over the use of their financial information, the payment industry stands at a crossroads in 2021.

As pandemic-era businesses continue to struggle to meet growing consumer demands for convenience, security, and contactless payments, their dependence on consumer debit and credit-card payments puts added pressure on thinning margins.

With payment card processing fees ranging between 2.87% and 4.35% and cannibalizing more than $240 billion from U.S. businesses that took in over $8 trillion in card-based transactions last year, it’s clear that the barriers to both entry and scale facing fintech startups in the payment space must come down.

For years, the fintech ecosystem has been driven by a cycle of disruption/acquisition/consolidation, with card networks and payment processors increasing market share (and buying innovation) via acquisitions. This cycle has blunted the transformative impact of new payment technologies with the benefits accruing to the consolidated few, while payment processing costs remain high for businesses. Instead of lowering costs and enhancing the customer experience for consumers, this acquisition/consolidation cycle has mainly served to consolidate the power of incumbent payment networks, processors, and card issuers. There have been few if any trickle-down cost benefits to merchants.

Adding insult to injury, proliferating fraud risks also compound friction between merchants and the payment networks, with consumers caught in the middle. While the migration to EMV chip technology has mitigated fraud risks at the point of sale (POS), card not present (CNP) risks have skyrocketed, according to fraud-intelligence firm Gemini Advisory.

In a 2020 report Gemini said that by 2023, CNP fraud--where scammers use stolen debit and credit card data to purchase goods and services online--will have siphoned some $130 billion from merchants’ top line over the trailing five-year analysis period.

Fintech platforms hold the key to improving the trust, security, and sustainability of payments. Regulatory guidance from the DOJ and the Federal Trade Commission is helping startups and incumbents alike build the future of payment systems. Powered by the promise of the open-banking revolution, ingenuity and collaboration are going to be the new trend that will usher in a new era of payment innovation.

For example, alternative payment rails can provide significant cost savings to businesses in a retail economy that has transitioned in a blink to cashless operations. Payment processing costs for both retail POS card-present transactions and card-not-present payments through mobile apps and e-commerce have exploded, driving demand for payment innovations that promise to radically reduce card-processing fees.

According to The New York Times, Visa estimated it could “lose a quarter of its online debit business [to next-generation payment rails] by 2024.” Our own analysis shows what the payment processors have feared--that reducing payment processing costs by 50% (in the case of guaranteed ACH platforms), or by 75%+ (in the case of our own technology) could enhance businesses' bottom line by 30% or more.

The availability of direct account-to-account (A2A) payments, guaranteed ACH, crypto, and tokenized/contactless mobile payments will drive more efficient, secure, and affordable solutions for businesses and their customers.

This isn’t to say that traditional payment networks are going to fade into obscurity any time soon, but the time is right for change. Symbiotic innovation and cooperation between fintech challengers and incumbent processors and networks are set to accelerate the adoption of alternative payment platforms, alongside advancements in tokenized contactless payments running over legacy payment rails. Scaled adoption of next-generation payment ecosystems will require collaboration between fintech startups and existing payment processors to meet business demand.

The market is demanding choice in payments, and is poised to choose the lower cost, higher security, lower risk alternatives.