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Speaking at a Deutsche Bank conference, Vasant Prabhu, vice chairman and CFO of Visa, said he does not think that competition building on the upcoming US FedNow service will have a big impact on its bottom line.
“[T]he fact that there is a pipe, … doesn't mean there's going to be traffic or volume on that pipe,” Prabhu said at the Deutsche Bank Technology Conference.
“[U]se cases have specific needs and if the pipe doesn't serve those needs, the pipe will not be used,” the CFO added.
The FedNow is scheduled to launch next year and enable businesses of all sizes to provide innovative financial products on top of the new instant payment system.
Although large US banks already provide real-time payments to their customers via The Clearing House’s RTP system, the service is far from being ubiquitous. The RTP network currently reaches 61 percent of US bank accounts. FedNow will enable more than 10,000 financial institutions, including small and community banks, to offer end-to-end instant payments.
Prabhu does not believe FedNow will make a huge impact and cites the UK as an example ”of why having a network in itself … doesn't mean there's going to be certain use cases on those pipes.”
Despite processing over 3bn transactions annually, Faster Payments in the UK has had limited impact in use cases where cards dominate, such as merchant payments. This is despite the launch of services, such as Pay by Bank app.
From the consumers’ perspective, cards are easy to use, provide a frictionless experience and are available almost anywhere. Card payments are very secure and reliable, and offer a dispute resolution in case of fraud, mispayments or when they want to return a purchased item.
Credit cards additionally offer rewards or loyalty points meaning that consumers in fact have a financial incentive to use that method.
“So, consumers are really happy and they don't want to switch,” according to the Visa CFO.
Banks also have a financial incentive to encourage the use of debit and credit cards as they earn significant revenue from interchange fees.
“So, the banks certainly have an incentive to not want people to change unless that is what consumers want to do.”
On the opposite side are merchants who bear most of the costs of card usage. However, in order to change consumers’ paying habits, merchants must give them a reason to change, which is expensive and requires a huge effort, according to Prabhu.
In addition, they should do it in large numbers otherwise consumers would need to use one form of payment in one place and another in another place, something they may not be willing to do.
Change unlikely without a push
All of these factors lead the Visa executive to conclude that “there's lots of reasons why just the existence of an RTP network doesn't mean much.”
Although Prabhu points to the UK and the EU as examples where the launch of real-time payments systems has not led to a wide-scale change in payment habits, elsewhere, services such as India’s UPI, Brazil’s Pix and Thailand’s PromptPay have transformed the payments landscape in their respective countries.
In India and Thailand in particular, instant payments have leapfrogged card payments in just a few short years, including usage across a variety of use cases such as in-store purchases and e-commerce.
Nevertheless, the growth of instant payments can also benefit card schemes, particularly in developing markets, by helping to grow the digitalisation of payments in these markets.
For example, despite the remarkable growth of India’s UPI, which has increased 270 percent over the last three years reaching 45 billion transactions in the year ending March 2022, Visa has cited strong payments volume growth in the country, increasing 80 percent over a three-year period.
Part of the reasons behind the large popularity of these networks has been the significant government and regulatory push.
For instance, when PromptPay launched, the government instructed all welfare benefits to be processed through the system creating mass adoption almost instantaneously, and the Pix service is mandated for every Brazilian bank and payment institution with more than 500,000 active customer accounts.
It is highly unlikely though that the US government would make such a hard intervention to back the adoption of its FedNow service but it may have some soft tools to encourage its use.
Policymakers could adopt new legislation and regulations aimed at promoting competition in the market, such as Senator Richard Durbin’s Credit Card Competition Act, which would mandate large card issuers to enable double routing on credit cards.
The Fed may also work with banks to help expand and develop a number of use cases that allow banks to monetise transactions by building services on top of FedNow rails.
For instance, FedNow use cases include a number of B2B, consumer-to-business (C2B) and business-to-consumer (B2C) features, such as bill payments, e-invoicing, request for payment, payment reversal due to insufficient funds, non-recurring disbursements and on-demand payments.
Prabhu acknowledged that there will be cases in the B2B space that would work better on real-time payment networks.
“We think large enterprise B2B… that's hard nut to crack.”
For instance, he said, businesses may find FedNow more attractive for making “high-ticket transactions” because of the lower costs.
“[T]here will be use cases that work better on RTP networks. There's no question about it. And our intent would be to then use them for those use cases where we can provide everybody a one-stop solution where some of their transactions may not be usable,” the Visa CFO said.
