Domestic national payment schemes globally are generally more positive about their prospects than they were two years ago, with 56% being optimistic about their future compared with 32% that are pessimistic, new survey data show.
Such optimism among domestic payment schemes about their future is shared by the authors of a new research report from Anthemis Group, which contend local schemes more so than international players such as Visa or MasterCard provide a lower cost option and can better address local markets.
The purpose of the research behind the report “National Payment Schemes: Drivers of Economic and Social Benefits” was to determine whether national markets should invest in domestic payment schemes or “bow to the inevitable that in a globally interconnected world, domestic card payments should in effect be outsourced to the international giants."
Such research hits home especially in Russia, where the government is moving to adopt a national payment scheme to compete with Visa and MasterCard, which froze the assets of several local banks because of U.S. sanctions tied to the country’s move to reunify with Crimea.
For its research, Anthemis received 25 survey submissions from national payments providers (mostly card schemes and some national switches) from all five continents. The company also received input from 10 central banks/regulators from three continents. Moreover, the researchers received input from international schemes via proxy through interviews with six recently departed executives and from retail banks that have to make the choice between the two approaches to payments.
Optimism was generally high among domestic schemes for two key reasons, the research found. They offer lower costs to participants than do international schemes, and they can deliver products suited to local markets and integrated with other domestic service providers.
The main reason for pessimism was the perceived difficulty coping with the ability of the international card schemes “to deploy extensive financial firepower, particularly in the form of incentives, to persuade issuers to switch to their brands,” according to the report. Among the chief threats, cited by 66 percent of domestic schemes, were incentives offered by international card schemes, followed by investment resources at 46 percent.
And collaboration between card schemes appears to be a fading prospect, the report found. “The traditional model whereby domestic debit schemes could concentrate on meeting local in-market needs and cobrand with either MasterCard or Visa for international usage no longer seems to be an option,” the report notes. “The international schemes are clearly seeing the domestic schemes and also domestic infrastructure providers as competitors and a major impediment to them driving revenue from a market which is now much more important following stock market listing."
The domestic schemes cited low cost as one of their key advantages, but so did the international card schemes. The research, however, found that domestic card schemes, which are predominantly debit-based, operate at an average of 45 percent of the cost of using the international schemes’ products for domestic transactions, with a range of 25 percent to 75 percent.
Chief reasons for the cost discrepancy are the in-built frugal approach to budgeting and cost control in most domestic payment schemes, and the scale economies of the international schemes are more than offset by their marketing and sponsorship costs, significant acquisition and innovation costs and higher profit margins demanded by the stock market, the report found.
Moreover, according to the report, the building blocks of a domestic scheme and infrastructure (switching systems, chip specifications and scheme rulebooks) are more readily available from competent providers at a reasonable cost. “And there does seem to be evidence that the domestic schemes, because of their proximity to the market, can develop some unique capabilities despite lower innovation budgets than the international players,” the researchers noted.
The Portuguese ATM network and the Nigerian Quickteller system are just two examples of the creativity of domestic players, they said.
Achieving mobile money interoperability is a key policy goal in developing markets, and all the stakeholders support the central bank enforcing technical interoperability if market forces fail to create it, the authors said.
"However, there is a concern that, if central banks attempt to set the commercial interoperability rules, they are exceeding their remit,” the authors said. “Domestic debit card schemes as low-cost providers are ideally placed to play a major role in enabling financial inclusion in developing markets, especially as the currently unbanked population are likely to prioritize low-cost above international acceptance,” the report notes.
Freedom from external political interference in domestic schemes is becoming a more significant factor for a number of parties, as witnessed by the debates that are being held in Russia about sovereignty in payments, the authors noted. “Although technologically processing of payments transactions in a global cloud is becoming more feasible, the risks of doing this are seen by many central banks/regulators as material and they are considering whether this justifies intervention,” they said.
Ultimately, there is a place and a future for domestic card schemes and infrastructures, and eventually domestic mobile solutions, despite the globalization trend, the authors noted.
"It is hard to imagine that the international card schemes will not play a role in all markets, and in some cases they may be the sole providers,” they noted. “But there are very sound reasons why a number of markets will choose to operate domestic schemes as the preferred solution for in-country payments that in most cases are the vast majority of the transactions."
To see the main benefits of domestic schemes, click here.
To see the threats to domestic schemes, click here.