Payment News

Banknotes for Steam Age, CBDCs for Digital Age

Dr Joachim Nagel, President of the Bundesbank, opened the central bank’s recent Payments Symposium with a speech about the future of payments.

His speech compared the impact on payments of the arrival of railways in the 19th century with today’s internet and digital developments. The railways were part of an industrial revolution that led to banknotes becoming an everyday payment tool out of necessity. Today nearly every second payment in Germany is made online. Although private enterprise has moved fast to enable this, he identified three problem areas where the market is not working well – (1) a lock-in effect; (2) data protection; and (3) strategic dependencies.

His conclusion was that a central bank digital currency could address these problems, providing the population with continued access to government money. There are also potential cross- border benefits. He sees this as a centralised system.

Opposition to the US Credit Card Competition Act

Senator Richard Durbin has put forward a Credit Card Competition Act which proposes that merchants must route card transactions through the least expensive network, thereby reducing consumer costs. Card issuers will have to enable at least two payment-card networks for debit- card processing, including for online and other ‘card-not-present’ transactions

Those who oppose this are campaigning hard, presenting it as a reduction in choice, the ability of card companies to fight fraud, reward schemes and retailer incomes as shoppers return to cash and spend less.

Reward card average transactions are 25%-60% higher than a non-reward card transaction. Opponents also claim cards will have to be processed via second networks, requiring the issue of new credit cards and forcing credit card companies to have to share their technology with competitors, which will lead to more fraud.

In 2010, the Dodd-Frank Act included an amendment from Senator Durbin that capped debit swipe fees. Shortly afterwards JP Morgan, Wells Fargo and Sun Trust ended their debit reward programmes and their free checking accounts. Analysts see co-branded credit cards that offer rewards when the cards are used for airlines, hotel chains etc. as withdrawing because these rely on single network processors. 87% of cardholders own a rewards credit card.

The Federal Reserve issued an update on the Act saying the rules are ‘substantially similar’ to a proposal from last year and that the final deadline for implementation will be 1 July, 2023. The Merchants Payments Coalition sees the new Act as important because of the move to e-commerce and the increase in use of mobile apps and digital wallets for in-store purchases. The original Durbin Act left a loophole for such transactions which reduced competition in the payments market.

In order to get the Act passed, Senator Durbin and Senator Marshall are looking to attach their proposals to an amendment to the defence budget. There is scepticism about whether the legislation will be passed.

Although the US is not Australia, it is worth noting that Australia has had this legislation in place for some time.

British Retailers Campaign Against Card Fees

Just as the Federal Reserve is introducing new guidelines on card routing to increase competition, a campaign has started in the UK to get card fees reduced.

This is taking place as Visa and Mastercard face a corporate card interchange class action suit, a pre-existing class action on behalf of consumers and an investigation by the regulator into additional charges introduced on UK companies accepting cards from the EU.

In addition to this increase in the interchange fee, the campaign claims that scheme and processing fees charged by Visa and Mastercard on retailers for every card payment has gone up 600% since 2014.

The ‘Axe the Card Tax’ campaign wants the government to intervene so that businesses have the opportunity to use cheaper alternative providers.

Two-Factor Authentication Reduces UK Fraud

In March this year the UK Payments Regulator required card payments with a value of over £25 to use a two-factor authentication check in an attempt to defeat online fraud. It appears to be working, since nearly 75% of retailers have seen a drop in fraud. The average reduction has been about 25%. This has been achieved even though 28% of businesses are still not fully compliant with the regulation.

Another positive outcome is that there has been a drop in consumers abandoning an online purchase, ‘basket abandonment’, from 32.4% to 28.9%.

In the first half of 2022 UK Finance report that a total of over £609.8 million was stolen through scams.

Key Drivers that Enabled China’s Digital Payment Revolution

Martin Chorzempa’s book, ‘The Cashless Revolution’, offers some interesting insights into how China moved so rapidly to today’s digital economy.

The book argues that change was boosted by four unique events. First, the help of foreign investors who introduced QR codes and other technologies. Second, China barred Visa and Mastercard to protect UnionPay, which had the monopoly on credit cards in China. UnionPay was underperforming so the public were open to alternatives to cash and UnionPay. Third, China’s economy was booming with little regulation and even less enforcement. This environment allowed companies to take risks and pursue strategies that might not otherwise have been possible.

Finally, Chorzempa emphasises the important role played by the leader of the People’s Bank of China from 2002 until 2018, Zhou Xiaochuan. He argues Zhou, ‘invited big tech into finance to compete with state-owned banks and force them to shape up, realising that simply ordering banks to become more innovative was bound to fail.’ Zhou appears to have blocked the ability of the incumbent financial institutions to block the rise of China’s fintechs.

The Chinese government appears to have decided that the super-apps of WeChat and the Ant Group had become monopolies, endangering the Chinese project. In 2020 the initial public offering of Ant Group was blocked, and regulations were significantly tightened. The book argues there are lessons for the world from China’s experience.

Kids Cash Substitute Provider to Grow

GoHenry provides pre-paid debit cards and a financial education app for children in the UK and US. It has just raised $55 million to expand into new markets with Italy’s Nexi being a new investor.

GoHenry currently has 2 million users of its app and had revenues of $42 million in 2021. It bought Pixpay in July, giving it a route into the French and Spanish markets, and says it will expand into Italy this year.

GoHenry’s appeal is that it is preparing children to live in the digital payment world where there is less cash. It says the pandemic has given interest in its solution a major boost.