“Open banking? It’s both threat and opportunity” An interview with Mastercard’s Europe boss
AltFi sits down with Mark Barnett, Mastercard’s Europe President, to discuss crypto, open banking and what one of the world’s largest financial services incumbents thinks of fintech.
Since the start of the fintech boom a decade ago a good place to invest has in fact been at the centre of the incumbent finance duopoly.
Both Visa and Mastercard have, despite the recent sell-off in equity markets, rewarded investors - not including dividends - with a 10x return on their cash via oaring share prices over this ten-year period.
Nonetheless, disrupting the core of the payments system is still one of the biggest potential prizes for the digital startup world. Open banking and crypto are the key areas where fintech evangelists expect to see this materialise.
What does the senior leadership of these incumbents actually think about this still nascent space? AltFi recently sat down with Mark Barnett, president of Mastercard Europe, to find out.
Barnett says the 56-year old payments giant sees itself as at the heart of the burgeoning fintech industry.
“Fintech is incredibly important to us. We should be at the centre of the ecosystem. We'd like to say about 80 per cent of fintechs are with us of those that are in payments in any sort of way in Europe,” he said.
This recent history stems from when Mastercard had a very low share of debit in the UK and focused heavily on the prepaid market. This included early deals with the likes of Revolut, and many other digital startups launching payment cards.
“That whole prepaid movement turned into the paytech movement. It means a lot to us. We have a strategy around fintech, being partners with the neobanks and the issuers. We are still very big in the prepaid programme and that might be in disbursements in the public sector or pretty much any kind of payment,” said Barnett.
By 2017 Mastercard was working with about 30 new digital players. Two years later it had doubled this figure, leaving arch rival Visa in its wake.
Today Monzo is still exclusively with Mastercard as is Starling Bank.Revolut, however, works with both Visa and Mastercard in different markets. Nonetheless, it is clear Mastercard was early to the opportunity presented by digital disruption from startups.
“There were all these neobanks that all came with us because we were very focused on not just dealing with the bin sponsors, but the programmes that sat underneath them too,” Barnett said.
The march of the neobanks and other banking-like platforms represented a clear opportunity for the likes of Mastercard to win business as well as future-proof itself among the fintech boom.
Open banking, which in part offers new payment ‘rails’ that compete with Visa and Mastercard, is more nuanced in its long-term potential.
Going to zero (cost)?
Open banking to many in the fintech industry represents an opportunity to take market share away from the two companies, which have a combined market capitalisation of c.$700bn.
“I think open banking is interesting. That's obviously why we're looking at it” said Barnett.
Open banking though, he adds, is both a potential threat as well as an opportunity for Mastercard.
“I think it's both,” he said.
For example, he says, Mastercard has an open banking service with both Lloyds and Tesco. In the UK allowing users to pay off their credit cards via bank account.
In the use case of ‘person to merchant’ payment, Barnett is more sceptical when it comes to open banking.
“Why would I choose to click on a button that says pay by open banking rather than using a debit card? A debit card is quite a sophisticated thing. It's got global acceptance, it's got all these protections. Those just aren't needed for a simple transaction like that,” he said.
Mastercard does currently have an open banking product in this space in the UK called Pay By Bank app, which effectively runs on ‘account to account’ - not card - rails.
“It’s a very different sort of payment. The consumer experience is really good. It's in real-time. The money is actually gone. There's no shadow or pending transactions or anything like that. But I've been going at it for seven or eight years now and it's pretty difficult to build up a two-sided market,” he said.
“We do pretty well on the bank side but no merchants want to put the button up until you've got all the banks and the mobile banking app enabled. its a chicken and egg scenario and you can't have half a chicken to lay half an egg,” he said.
The bigger competitive front, he says, will come from the direct debit space.
“What we're competing with there is a direct debit, most people pay off their credit card with a direct debit. In that case, it's a really good different version of direct debit. It doesn't need all the bells and whistles of a debit card and so why not? In some ways there we’re competing against ourselves. But if we don't do that, somebody else will.”
Barnett agrees we're starting to see the start of the hockey stick when it comes to open banking payments but that it's going to displace direct debit volume, rather than debit volume in the main.
“Open banking is definitely both a threat and opportunity. Digital disintermediation is a thing. What we're seeing is a competition changing shape and form. We welcome competition, but it is competition,” Barnett said.
At the core of the open banking debate though is cost. Mastercard and Visa are the primary route for payments and have often been accused of representing an industry crying out for more competition so as to lower prices for payments.
Cheaper payments mean more economic activity and lower prices for consumers. Something becoming ever more important given the cost of living crisis as well as rampant inflation.
It doesn’t help merchants or consumers that both Visa and Mastercard have hiked their rates in the post-Brexit era nearly six-fold.
Open banking which is certainly of strategic interest is often touted as being the digital disruption needed for payment fees to go down substantially. Perhaps even to zero.
“If you look at the cost of acceptance, the cost that's attributable to us it's a tiny fraction. So it's already extremely good value for money, said Barnett.
Much more important to its fintech strategy is however to add in more services.
“One of our strategies over the last 10-15 years has been wrapping services around the payment. That started off in things like marketing and analytics and loyalty. But actually, it's more in the cyber and intelligence and fraud prevention. That's really the value add, the payment is a pretty simple thing,” he said.
“You have got to make it very safe, secure and fast. But it's a pretty simple thing. It's the value add around the outside, which where the growth is coming from,” he added.
Changing gear (with crypto)
If embracing open banking were not enough, Barnett says Mastercard is rapidly growing its interest in crypto. This represents one of its biggest shifts in attitude in recent years.
“Increasingly, we're interested in being on an on/off ramp for crypto and crypto exchanges. We were very cautious about that to start with and I think rightly so because what you've seen recently is we are having a bit of readjustment with that space.”
What made Mastercard shift its crypto strategy? I’s biggest move into crypto came when it acquired CipherTrace, a crypto security and fraud outfit, last September that allows the company to assess the level of risk of a crypto exchange which can also be sold to third parties.
“There were questions brought up there in the early days with KYC/AML. These things are very important to us, we operate within a very strongly regulated consumer protected environment which is all KYC AML compliant.”
Within the crypto space, Barnett is most excited about the potential for Central Bank Digital Currencies.
“The early days of crypto were more about free-floating crypto, which isn't really very suitable for payments. Once we got on to private stablecoins, that was quite interesting.
Most interesting is going to be central bank digital currencies (CBDCs).
When it comes to CBDCs it's not an ‘if’, but a ‘when’ question, he said.
“I think that it’s just an inevitability. CBDCs will be another category. Currently, you can only settle in using fiat currencies.”
“It's going to need distribution, it's going to need to be accepted by merchants and online and it is going to need to be distributed to consumers by wallets. There's no reason that it can't run on our rails.
He says Mastercard is currently “doing the work to enable this” at present.
“We also have a sandbox that central banks can use to play with digital currencies, but we're also enabling settlement via our network of CBDCs, as well.”
There is still a looming question about what problem CBDCs are there to solve for of course as well as the usual privacy concerns raised by some commentators.
“Central banks have to be very thoughtful about the way they implement [CBDCs], because commercial bank money is the vast majority of money circulates. and the way credit gets created in the economy. It's the fractional reserve banking system has been around since it was invented in Lombardy in the 1500s. You don't want to screw all that up.”
Equally, he says, he can understand that central banks want to be able to control the currency.
“With cash disappearing pretty quickly, that's clearly the motivation.”