Weekly News Digest 2 August 2019

Of the many eye-catching events in the consolidation of the merchant acquiring business currently underway, one of the biggest has to be Bank of America's decision this week, after months of speculation, to exit its decade-old joint venture with First Data: Banc of America Merchant Services (BAMS). Although Fiserv, in announcing its takeover of First Data earlier this year, had revealed an intention to invest half a billion dollars in the firm, BofA executives were understandably uneasy about its merchant acquiring activities being at a remove, especially as the value of the customer relationship blossoms through digital innovation. In May, Payments Journal, quoting Bernstein analysis, estimated that BAMS was responsible for around 11 percent of First Data's revenue. However, the companies have pledged to cooperate closely in the new service provider relationship that will commence after the June 2020 dissolution; current BAMS clients will also enjoy uninterrupted processing with no price hike for four more years.

While JPMorgan Chase and Bank of America have managed to increase value substantially in the post-Financial Crisis era to approximately $225 billion apiece, Citigroup has yet to reach $80 billion. In the course of an in-depth report, the Financial Times neatly encapsulates Citi's strongest consumer line: "it is the largest card issuer globally, measured by loans, and second-biggest in the US market. Yet the business has underperformed expectations, as the US card industry fell into a rewards war, though it is again building momentum: profit grew eight percent to $1.7bn in the first half of this year ". One of the key challenges for Citi is the diverse business model. Legally unable to reach all domestic markets until the 1980s, it was forced to expand globally instead, while a series of acquisitions in investment banking, wealth management and insurance led to a disjointed organisation prone to silos. "Should Citi scale back its consumer business where underperforming has become the norm? Or double down and invest heavily ahead of the curve across all segments in a bid to strengthen its core?", says Lorna Baek of Verisk Financial Research, framing the dilemma. "It remains to be seen whether the current chief executive has an appetite for risk at all."

By contrast, Mastercard beat expectations with its latest earnings report on the back of processed card transactions rising year-on-year by almost 21 percent to reach 26.8 billion. "We continue to execute well against our strategy and had another strong quarter of revenue and earnings growth," commented chief executive Ajay Banga. "We are driving growth in our core products with key wins around the globe, and our recent acquisitions, such as Transfast, and new partnerships, like P27 in the Nordics, will help us address our customers' evolving payments needs, particularly in the areas of real-time account-to-account and cross-border payments."

In Europe, many of the big banks were also reporting their second-quarter results, with low interest rates in the Eurozone putting the brakes on Société Générale, BNP Paribas and BBVA, although the latter managing to do better than expected in terms of lending income, partly because of its operations in Mexico. In the UK, the numbers from Barclays failed to meet expectations, as a self-imposed curb on risk-taking reduced performance in cards, one of its traditional concentrations. Incidentally, its competitors are proving more adventurous: in news from earlier this summer, NatWest (an RBS subsidiary in Britain), has come up with an interesting innovation to encourage app usage on its cards – a fixed fee rather than applied APR for cardholders spending between £300 ($363) and £3,000 each month.

Finally, India's Economic Times has an op-ed from a payments veteran that is well worth reading, not just because of the country's importance but also because it puts the commercial and social case for merchant service charges (also known as the merchant discount rate, or MDR) and disentangles the role of the card schemes from other parties in any potential reform of practices. The article was prompted by the government's decision to do away with the MDR for cashless transactions involving merchants whose annual turnover exceeds $7,240. Narendra Modi's government has a pronounced taste for grand gestures, most notably demonetisation, but, says the opinion's author, besides the fact that the MDR supports the activities of the multiple players now involved at the POS, "the government should really focus on reshaping payment system economics by facilitating choice, rather than trying to control the cost of proliferation of infrastructure. The most significant component of MDR is bank interchange, comprising up to 75 percent of all MDR, depending on whether the funding instrument is a debit or a credit card. And while it is true that merchant acquirers set MDR (accounting for all costs, including interchange, to create a blended rate), it is the payment networks that set interchange."

To end, links to some other stories of interest this week...

• India: Amazon may shop for stake in Reliance Retail
• UK: Digital bank Atom starts to make money on loans (Paywall)
• US: Apple Card release date set for August
• US: Federal Reserve cuts interest rates for first time since 2008
• US: Kroger is charging a fee if you want cash back at checkout