Will Credit Card Companies Reap The Benefits Of Growing Mobile Payment Market?

by Trefis Team
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Credit card giants Visa (NYSE:V) and MasterCard (NYSE:MA) have recently taken steps to capitalize on the growing mobile payment sector. These companies, which account for over 80% of the market share in terms of total credit and debit card spending, could see significant revenue boosts on this front.

According to Gartner, worldwide mobile payment transaction volume was around $235.4 billion in 2013. It was estimated to be $325 billion in 2014, and is expected to grow to $717 billion by 2017. The mobile payment market in the U.S. alone was around $50 billion in 2014. [1] The growth in mobile payments has been driven by several factors, such as the growth in smartphone users, increased acceptance of mobile payments by merchants, a shift from magnetic strips to mobile wallets, and easy access to loyalty programs and coupons.

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Financial Impact of Mobile Wallets on Credit Card Companies

Credit card companies allow customers to use their network and infrastructure to carry out transactions. In exchange for these services, they charge a transaction-processing fee from merchants, each time a cardholder uses their card for a transaction. The total transactions processed for Visa grew by 10% year-over-year to a little over 66 billion in 2014. For MasterCard, the total number of transactions processed grew by 13% y-o-y to around 43 billion for 2014. A higher incidence of mobile payments is expected to result in more transaction fee revenues generated by the credit card industry, which currently accounts for about 30% of the total revenues for both Visa and MasterCard.

However, we could see mobile payments cannibalize existing plastic card revenues or other online methods. Mobile payments will boost the earnings of credit card companies if there is an increase in the total number of consumer transactions, and/or if consumers continue to replace cash with electronic payments. There are several factors that continue to pose hurdles to mobile and electronic payments growth, such as the risk of identity theft or fraud, and other security concerns. In order to address these concerns, Visa and MasterCard launched their “tokenization” technology that replaces sensitive account information with a series of random numbers during payment authorization. This should help increase the adoption of mobile payment technology to positively impact the credit card giants.

Recent Developments in the Mobile Wallet Market

Recently, the mobile payment market has caught the attention of major tech firms. With the launch of Apple Pay (NASDAQ:AAPL) last October, other tech firms are gearing up to tap into the nascent, but fast-growing mobile payment market. Last month, Google (NASDAQ:GOOG) acquired mobile payment company Softcard. Through this deal, the mobile wallet will be pre-installed by AT&T, T-Mobile and Verizon Wireless on Android phones sold in the U.S. Meanwhile, Samsung (PINK: SSNLF) bought mobile payment company LoopPay and is set to launch Samsung Pay in summer 2015. In another development, seventy U.S. retailers, which include household names such as Wal-Mart (NYSE:WMT), Target (NYSE:TGT) and CVS (NYSE:CVS), formed a Merchant Customer Exchange consortium to take a piece of the mobile payment market by operating their own application called CurrentC. [2]

Though these recent developments have focused on the U.S. market, the mobile wallet segment is also making its way to emerging economies such as Africa – where, in at least 9 countries, there are more mobile money accounts than bank accounts. Visa recently teamed up with Bharti Airtel, Africa’s second largest mobile phone operator, to bring mobile payment services to seven markets in Africa. MasterCard also entered into an agreement with eTranzact, a pan-African mobile banking and payment services company, to make international remittance services available to consumers in the region. [3]

As mobile wallets gain market acceptance, competition may emerge for Visa and MasterCard in the form of new payment technology that could pressure Visa and MasterCard to lower fees or share the fees from mobile transactions. We will be looking out for any progress as this segment makes progress in the upcoming years.

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Notes:
  1. Global Mobile Payments transaction Ticker, December 3 2014, www.pymnts.com []
  2. Samsung buys LoopPay, all but confirming new Apple Pay rival, cnet.com []
  3. Visa, MasterCard partner with mobile money providers in Africa, ITworld.com []
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