Digital payments is the latest industry a new generation of fintechs think needs disrupting because when it comes to everyday payments Visa and Mastercard continue to dominate the space.
The debit card market in Britain is an important one to get a foothold in. Data from UK Finance shows there were 1.7billion debit card transactions in January 2022, 37 per cent more than in January 2021 and 15.5 per cent more than January 2020.
By comparison, there were 292.4million credit card transactions in January 2022.
While Mastercard provides the majority of the UK’s credit cards, it is dwarfed by Visa in the current account space.
The tide is starting to turn though. Three leading banks have switched their current accounts to Mastercard over the last couple of years. What has prompted this switch and does it mark a more significant shift away from Visa?
Visa has long held a monopoly over the UK’s debit card space but after chalking three deals with high street banks, Mastercard is starting to challenge their dominance
Mastercard started to chisel away at Visa by onboarding a swathe of challenger banks, notably Chase, Monzo and Starling, but now they are starting to take on customers from the bigger banks in a land grab.
First Direct, NatWest and most recently Santander have all moved their customers from Visa to Mastercard debit cards over the last two years, as Mastercard looks to disrupt its dominance.
First Direct last year told its customers that moving to Debit Mastercard ‘means we will be able to improve the digital payment options available to you in our app.’
High street banks have needed to step up their game with their digital offerings given the increasing number of more nimble challenger banks.
The likes of Starling and Monzo are partnered with Mastercard although neither chose to comment on their decision to partner with the payments provider.
Gary Prince, director and chief strategy officer at SimplyPayMe said: ‘The market was skewed in Visa’s favour and Mastercard has made great strides on the innovation front… Mastercard in the UK and Europe have evolved in the digital space.
‘Mastercard is a big beast but working with them as closely as I do… there’s a very joined up structure. There is autonomy in the UK and Ireland and they can act on things they need to do. It’s a fairly flat structure,’ said Prince.
Ultimately it comes down to commercial terms… flexibility on pricing, requirements, speed to market.
Gary Prince – SimplyPayMe
Another reason for Visa falling behind in the digital space could possibly be Visa Inc’s acquisition of Visa Europe.
‘A lot of the thought leadership left Europe,’ said Prince. ‘A lot went into being run from the US and their eye was off the ball… Ultimately it comes down to commercial terms… flexibility on pricing, requirements, speed to market.’
Michelle Stevens, deputy editor at website Finder, added: ‘Visa Europe, once owned by a collective of UK and European banks, is now part of the global Visa brand, removing any potential vested interest.
‘Brexit also means that the interchange fees charged by the issuers of UK cards are no longer capped by EU rules.’
British banks had been more incentivised to work with Visa as a result of this co-ownership but Mastercard has been looking to regain market share since the 2016 acquisition.
Stevens added: ‘The recent episode between Amazon and Visa – where the online retail giant threatened to suspend the use of Visa credit cards due to rising fees – showed that card charges remain an important consideration to all involved.’
Santander told its customers it was introducing a range of new features because of the partnership.
These include a temporary freeze on a lost or stolen card and card controls which can restrict certain transactions such as contactless payments, online transactions, international transactions and gambling transactions. The bank also highlighted it was helping to streamline its process.
A spokesperson for Santander said: ‘We regularly review our third-party providers, and the decision to switch our debit card provider from Visa to Mastercard was based on a wide range of commercial factors.
‘By working with just one card provider [Mastercard provider Santander credit cards], we have been able to introduce a number of new digital features for our debit and credit cards – such as enabling customers to manage specific types of payments like gambling and overseas payments – more quickly and simply than if we were creating two separate variations.’
HOW DO THEY MAKE MONEY?
Visa and Mastercard are probably some of the most recognisable brands given they are plastered across our debit and credit cards.
But how do they actually make any money?
They make money based on the volumes of goods and services purchased. Their network includes financial institutions, merchants and settlement banks and each partner receives a cut of the transactions.
When a customer swipes their card the issuing bank approves the sale with the merchant and it is cleared through its settlement partners.
The consumer is charged the full cost while the bank that issued the customer’s card pays the transaction cost minus an interchange fee to the acquirer bank.
They may make money by charging processing fees to the financial institutions on the volume of transactions. It also earns revenues from other clearing, settlement and international cross-border transactions.
It is mostly about the volume of transactions which is why it is so significant that Mastercard has managed to partner with Santander, First Direct and Natwest.
Why are there no competitors?
There is a distinct lack of competition in the payments space; in the UK, American Express is the closest competitor, but it only offers credit cards.
‘Unlike the banking sector, the payments industry has arguably not been subject to major disruption by challengers.
‘The complex nature of the payments ecosystem and the continued dominance of the big card issuers creates a tough environment for large competitors to emerge,’ said Stevens.
The introduction of Strong Customer Authentication (SCA) is a new European regulatory requirement to reduce fraud and make online and contactless payments more secure and could shake up the current landscape.
It means sparkly new digital payment fintechs like Stripe – based in the US – are going to be able to move into the space and start to challenge the incumbents.
Stripe, which was set up by brothers Patrick and John Collison from Tipperary, is an internet payment procurer which allows companies to process online payments from customers quickly.
Handling almost 5,000 transaction requests a second, it takes a cut of around 1.4 per cent and a flat fee of 20p per transaction and, thanks to the pandemic, has picked up steam.
Indeed, a spokesperson for Mastercard told This Is Money it sees the future ‘beyond card’ and that it recognises other payment channels will be ‘critical’. It is looking to move away from card ‘rails’, a platform that moves money from a payer to a payee.
As part of this it has introduced a new online checkout option that lets customers pay directly from the banking app on their phone, which it has partnered with HSBC, Barclays and Natwest on.
‘The UK has been a unique market for debit cards. Visa has had a stranglehold on the UK… Visa could only ever go one way which is down. Mastercard has, as an organisation, been working very hard on looking at how they could secure banks,’ said Prince.
Does this mean more UK banks are going to make the switch? Nationwide said it had no plans to move to Mastercard while the other leading UK banks declined to comment.
TSB had planned to transfer millions of its customers from Visa to Mastercard in 2018 and told This Is Money that while it wouldn’t comment on commercial partners ‘like any bank we will periodically review who is best placed to support TSB customers.’
All is not lost for Visa though, Prince thinks while the tide has turned in Mastercard’s favour it’s cyclical in nature.
Visa said: ‘We’re proud to be a global leader in payments and the partner of choice for banks, FinTechs and businesses looking to create the best payment experiences for their customers.
‘We remain the preferred way to pay in the UK and in November 2021, Visa was ranked the fifth best brand by YouGov.’
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