In some countries, in-store payments are still dominated by their domestic card schemes, like Interac Debit in Canada and JCB in Japan. When compared with international card schemes, domestic card schemes typically offer significant cost advantages to consumers and merchants and are an attractive revenue generator for the local banking industry. Sovereign control of a low-fee payment system also strengthens the position of national regulators in setting market controls.
But despite all these advantages, the market share of the domestic card systems is declining, under attack from international behemoths Visa and Mastercard. Can these domestic schemes survive or is it just a matter of time before they succumb to market pressures? The answer depends on whether the domestic schemes are prepared to learn some important lessons from past failures and exploit the opportunities presented by the latest payment technologies.
Take Australia’s Bankcard as an example. Launched in 1974 by a joint venture of Australia’s nine largest banks, Bankcard was a ground-breaking innovation that started the Australian public’s love affair with credit cards. At its peak, there were more than 5 million Bankcards in use—a remarkable success story given the nation’s population at the time was a meagre 15 million. The demise of Bankcard resulted from its failure to embrace international acceptance of the card, opening the door to Visa and Mastercard. The coinciding growth in international travel accelerated Bankcard’s decline, and, later, the shift towards e-commerce finally sealed its fate, withdrawing from the market in 2006.
In Japan, the point-of-sale debit and credit card market has for many years been dominated by JCB. But, like Australia’s Bankcard, JCB’s international acceptance is also limited, both in off-shore online webstores and brick-and-mortar physical stores. Although JCB’s hold on its domestic market remains strong in older demographics, young Japanese prefer an internationally accepted card for travelling outside Japan and shopping online. And according to Worldpay November 2015 Global Payments Report , this has resulted in a widening gap between JCB’s in-store and online market share.
And in Canada, in-store payments are monopolized by Interac Debit. Interac provides Canadian merchants with a fee-less POS transaction service, funded by customers through their bank account fees. Interac has a cross-border arrangement with a US payments provider, but coverage of the US market is small and outside North America it’s non-existent.
You might think that by being fee-less, Interac’s market position was safe, but Visa and Mastercard continue to make inroads despite their high transaction fees. Visa and Mastercard are luring Canadian customers away from Interac by promoting the rewards programs of their premium debit and credit cards. And because the merchant carries most of the cost, the consumer’s choice is simply to either earn a reward by using a premium Visa or Mastercard debit card or earn no reward by using Interac. According to the Canadian Federation of Independent Business (CFIB), “international experience has shown that the entry of credit card companies into the debit card market has pushed out the domestic, low cost debit network which is then followed by large increases in debit fees for merchants”.
So what lessons can we learn from these past failures and present-day mistakes? Firstly, there is no longer a distinction between domestic and international markets: the market is global. And that means, to be successful, a “domestic” card must be internationally recognized and accepted. To be recognized, the “domestic” consumer’s card and the merchant’s terminal must display a universally recognizable symbol, just like Visa and Mastercard.
Secondly, both merchants and consumers must see value in the scheme. Through their involvement in the banking sector, Visa and Mastercard currently exert considerable influence on how card issuers and merchant acquirers (the banks, in the main) position their products in the market. In particular, contractual obligations imposed on merchants, such as no-discrimination, no-surcharging and honour-all-cards rules, are designed to impede transparency and consumer choice. Limiting the power of the large card schemes is a matter for the regulators, but most banks would welcome anything that shifted the balance away from Visa and Mastercard.
The Visa-Mastercard Card Scheme is built on an ageing technology. And despite their attempts at modernizing it and making it safer for e-commerce, the plastic card and POS terminal are doomed for extinction. The latest mobile and online payments technologies are much faster, cheaper, safer and easier to use than any plastic-card-based system can ever be. These new technologies are designed from the ground-up for real-time, low-cost, fraud-free payments. The point is that, although the Card Scheme currently wields considerable power in the domestic payments markets, their position is not unassailable. With the right combination of technology and branding, the domestic card schemes can fight back.
So, what do the domestic schemes need to do to defend themselves? Just two things: They need to stop propping up the old card-based technologies and embrace the new. And they need access to a globally recognized brand. A strong national regulator, committed to fee transparency and a free market, would also be a big help, but let’s not get carried away with fantasy.
It’s probably too late to resurrect Bankcard, but if Interac, JCB or other domestic systems offered a locally managed, sovereign-controlled scheme that was also globally recognizable and accepted and, like Bluechain, gave merchants ultra-low transaction fees, protected consumers from online fraud, and could be used on any type of phone, tablet or PC, their market positions would be virtually impenetrable.