In anticipation of VISA's IPO (scheduled for later this week, as if the market isn't crazy enough) Adam Levitin, a professor at Georgetown Law, has a thoughtful post outlining a payments future no longer dominated by the card networks, one in which the needs of merchants, consumers, and banks are more balanced.
The Visa IPO, along with the 2006 MasterCard IPO and the end to MasterCard and Visa's dual-exclusivity rules, which prohibited banks that issued MC/Visa cards from issuing Amex or Discover cards, is setting the stage for a major reconfiguration of the payments world in the next decade. These changes could have far-reaching effects for consumers, merchants, and banks because of potential shifts in the way payment networks will compete with each other.
Levitin discusses the threat Interchange and the anti-liability motivation for VISA's IPO. Countries worldwide have already moved against Interchange and merchant restraints, and States and regulators in the US are getting started.
He goes on to ask the question: who needs VISA? And argues that consumers and merchants don't. Banks do – but any one of the large issuers could go out on their own and be bigger than AmEx or Discover. He explains that VISA exists today because of federal banking regulations in the 1960s and 1970s that prevented multi-state banking. Of course, those regulations are no longer and now there are a handful of large, powerful national banks.
What would the world look like if banks started breaking off from the big 4 networks and becoming stand-alones? There's a whole post or two to write about that, but here's one thing to consider: the basis for competition in the payments field might switch. Payments networks need to balance demand from merchants, consumers, and banks. Currently the dominant strategy is to cater to banks, which means catering to consumers in the form of rewards that are extracted from merchant fees. But if a network isn't competing to sign up issuer banks, perhaps the incentives change. This might lead to the development of real value-added services for merchants (data mining, e.g.) or to more meaningful product differentiation (not just variations in rewards programs) for consumers. In short, shaking up the structure of the payments field might encourage payment companies to do a little more thinking outside the box.