Visa, the biggest U.S. card network, doesn’t fear competition from the Federal Reserve’s FedNow or any other real-time payments system, according to Vasant Prabhu, Visa’s CFO.
The FedNow instant payments system, recently targeted for testing this month and a launch by the middle of next year, will create a new speedier payments system, but that doesn’t mean consumers or businesses will use it, Prabhu said in comments Wednesday at the Deutsche Bank Technology Conference.
When asked about competition from FedNow, and other real-time payments, by the bank’s payments analyst, Bryan Keane, Prabhu said: “The fact that there is a pipe, right, doesn't mean there's going to be traffic or volume on that pipe. Use cases have specific needs. And if the pipe doesn't serve those needs, the pipe will not be used.”
Real-time payments systems have existed for a decade in some parts of the world, such as in the United Kingdom, but haven’t made significant inroads, Prabhu noted.
The Federal Reserve has been developing FedNow for years, drawing more than 100 companies into a pilot program and scouting for use cases. But there are still questions about how much demand there will be for its instant payment services and how interoperable it will be with existing payments rails.
While the Fed banks have published preliminary pricing schedules that are similar to the existing private real-time payments system, RTP Network, it’s not clear what costs banks, businesses or merchants will incur to build services based on FedNow. The demand for services from the big bank-backed RTP has been slow to grow.
From Visa’s point of view, there are all kinds of factors working against the uptake of FedNow by commercial and consumer actors, Prabhu said.
For consumers, their current use of credit cards is easy, convenient, secure and reliable, with an avenue for disputing charges if they have a problem, Prabhu said. Moreover, many consumers have a financial incentive to use their cards because they’re part of a loyalty program that rewards them for doing so, he noted.
“So there's a real issue with, like, if I'm happy, why do I change?” Prabhu said, rhetorically placing himself in a consumer’s shoes. “Consumers are creatures of habit, and they are also very conservative when it comes to their money.”
From banks’ point of view, they earn interchange fees from consumers using their cards, and that’s not necessarily the case with a real-time payments network, Prabhu said. “The banks certainly have an incentive to not want people to change, unless that is what consumers want to do,” he said.
Even if merchants might be beneficiaries of the change and want to encourage consumers to shift their habits, they still need to provide consumers with a reason to change and that can be a daunting and expensive proposition, Prabhu said. It won’t matter much unless a significant share of merchants are offering the services, he said.
At least one other analyst agrees, generally, with Prabhu’s line of thinking. David Koning, who follows payments for financial services firm Baird, said the real-time systems aren’t a major threat to Visa because, as Prabhu pointed out, banks earn revenue from interchange fees on debit and credit card transactions and consumers may question whether they have enough incentive to leave behind their current rewards, or the recourse they get from the card network companies when fraud occurs, he said.
“Merchants would like something cheaper, but it’s hard to force it if the banks and consumers don’t want to use it,” Koning said.
Still, Visa is willing to make use of the real-time payments networks and offer services, like tokenization, related to them so it's more a situation where the card giant can partner when it sees fit for “mutual benefit,” Prabhu said.
Keane told investors in a note Wednesday that Visa "sees threats from potential new payment networks, like FedNow, and potential regulatory changes as overblown, given the significant value the (Visa) network brings to consumers, merchants, and banks alike."