Visa, the biggest U.S. card network company, doesn’t fear competition from the Federal Reserve Banks’ FedNow Service, or any other real-time payments system, according to Vasant Prabhu, Visa’s CFO.
The FedNow instant payments system, recently ballyhooed as launching by the middle of next year, will create a new speedier payments system, but that doesn’t mean consumers or businesses will necessarily use it, Prabhu said in comments this week at the Deutsche Bank Technology Conference.
When asked about competition from FedNow, and other real-time payments, by the bank’s payments analyst, Brian Keane, Prabhu said: “The fact that there is a pipe, right, doesn't mean there's going to be traffic or volume on that pipe. Use cases have specific needs. And if the pipe doesn't serve those needs, the pipe will not be used.”
Prabhu noted that real-time payments systems have existed for a decade in some parts of the world, such as in the United Kingdom, but haven’t made significant inroads.
The Federal Reserve Banks have been developing FedNow for years, drawing more than a hundred companies into a pilot program and scouting for use cases, but there are still questions about how much demand there will be for its instant payment services and how interoperable it will be with existing payments rails.
While the Fed banks have published preliminary pricing schedules that are similar to the existing private real-time payments system, RTP Network, it’s not clear what costs banks, businesses or merchants will incur to build services based on FedNow. The demand for services from the big bank-backed RTP has been slow to grow.
From San Francisco-based Visa’s point of view, there are all kinds of factors working against the uptake of FedNow services by commercial and consumer actors, Prabhu pointed out.
For consumers, their current use of credit cards is easy, convenient, secure and reliable, with an avenue for disputing charges if they have a problem, Prabhu said. Moreover, many consumers have a financial incentive to use their cards because they’re part of a loyalty program that rewards them for doing so, he noted.
“So there's a real issue with, like, if I'm happy, why do I change?” Prabhu said, rhetorically placing himself in a consumer’s shoes. “Consumers are creatures of habit, and they are also very conservative when it comes to their money.”
From banks’ point of view, they earn interchange fees from consumers using their cards, and that’s not necessarily the case with a real-time payments network, he explained. “The banks certainly have an incentive to not want people to change, unless that is what consumers want to do,” he said.
Even if merchants might be beneficiaries of the change and want to encourage consumers to shift their habits, they still need to provide consumers with a reason to change and that can be a daunting, expensive proposition, Prabhu said. In addition, it won’t matter much unless a significant share of merchants are offering the services, he said.
At least one other analyst agrees, generally, with Prabhu’s line of thinking. David Koning, who follows payments for financial services firm Baird, said the real-time systems aren’t a major threat to Visa. That’s because banks earn revenue from interchange fees on debit and credit card transactions and consumers don’t have any incentive to leave behind their current rewards, or the recourse they get from the card network companies when fraud occurs, he said.
“Merchants would like something cheaper, but it’s hard to force it if the banks and consumers don’t want to use it,” Koning explained.
Still, Prabhu said Visa is willing to make use of the real-time payments networks and offer services, like tokenization, related to them so it's more a situation where the card giant can partner when it sees fit for “mutual benefit.”
With respect to business-to-business uses of real-time services, there are other hurdles, but Visa is taking the same approach where it can find opportunities to provide services, the CFO said.
Credit routing legislation
On another front where the U.S. government is making its presence felt in the card universe, Keane also asked Prabhu about legislation proposed by U.S. Sens. Dick Durbin and Roger Marshall, targeting the duopoly Visa and Mastercard, to impose new restrictions on credit card transactions to spur more competition in the industry.
The bill would require additional networks, beyond those two, be available for routing credit card transactions. Durbin helped create an earlier law that imposed such requirements for debit cards more than a decade ago.
The proposed law isn’t necessary to spur competition in the industry, Prabhu argued. He noted that most Americans are already using cards from more than one card network company and that there are a host of upstart digital alternatives, such as buy now-pay later options, also increasing competition.
“So this idea that there is no competition is obviously flawed,” Prabhu said.
The CFO also stressed that the credit card infrastructure isn’t set up for multiple networks so the industry faces a “massive” effort to revamp the infrastructure to implement the new law if it is enacted. He also raised the fear that consumers may lose loyalty program rewards if credit card companies face a major change in how credit transactions are routed.
In a follow-up Wednesday, Deutsche Bank’s Keane told investors in a note that Visa "sees threats from potential new payment networks, like FedNow, and potential regulatory changes as overblown, given the significant value the (Visa) network brings to consumers, merchants, and banks alike." The analyst also rated the company as a "buy" for investors.