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Why FinTech Disruption of Payments Has Been More Bark Than Bite

Consumers have been slow to embrace mobile wallets and other alternative payments—giving established payment networks ample time to respond. Meanwhile, the most successful "disruptors" have migrated to incumbent networks.

As recently as a couple years ago, leaving the house without a wallet was unthinkable. But increasingly, consumers have other options—pay apps on smartphones or simply punching in an email and password at checkout. Paper and plastic would soon be obsolete, some of these financial-technology futurists predicted, taking with them the payment establishment of old.

So far, the predicted demise of traditional payment industry incumbents has been premature. Consumer retail and peer-to-peer pay apps and other FinTech innovations are certainly evolving, but they aren’t displacing the companies or systems that traditionally process credit and debit transactions.

In fact, the industry's two largest payment networks—which handle more than 90% of card transactions worldwide, excluding China—stand to benefit, as more consumers move from cash and checks to plastic and other forms of electronic payments, such as mobile. A recent Morgan Stanley Research report, “Payments and Processing," explains why the market has overestimated the disruptive risk of new payment systems.

Mobile Wallets Slow to Ramp Up

The rise of the mobile wallet has been talked about for years, but with the exception of urbanites flashing their phones to pay for their morning java, it is still a long way from ubiquity. “Consumer payment behavior is slow to change, as evidenced by continued use of cash and checks," says Morgan Stanley analyst James Faucette. Globally, cash and checks recently accounted for roughly 60% of transactions in developed markets and 93% in emerging markets.

Source: MasterCard Advisors, Morgan Stanley Research

At the same time, consumers have been slow to embrace alternatives in a meaningful way, and many merchants also remain circumspect of new technology. “It has taken several decades for the incumbents to establish the widespread presence they have in most developed markets today," says Faucette. “This creates high barriers to entry."

Long adaptation cycles give industry titans time to respond, whether with their own initiatives or via strategic acquisitions. Meanwhile, recent history has shown that they may need to do nothing, as many disruptors are relying on the incumbents' networks to process their payments. “Many of the biggest disrupters have ultimately chosen to rely on the incumbents' networks for new payment schemes," says Faucette.

Unlike so-called closed-loop processors, which issue cards and handle those transactions exclusively, open-loop processors earn fees for all transactions on their networks. Whether consumers choose to pay by swiping their cards or flashing their smartphones, open-loop processors stand to win.

Global Opportunities

It should be easier for alternatives to get a foothold in emerging markets—where many consumers don’t have traditional bank or credit card accounts but do have mobile phones. Even so, incumbents are leveraging their scale and experience to partner with governments around the world to bring financial services to under-banked populations. Again, for open-loop processors, any move from cash is a win, as long as transactions move over their networks.

China, meanwhile, could represent significant potential for growth. China's purchase volume exceeds that of the U.S. by 30%, but the market is currently off limits for foreign processors. Pending regulatory changes could open doors for outsiders, which may pave the way for established global players to further expand their networks.

For more Morgan Stanley Research on FinTech and the payments sector, report, ask your Morgan Stanley representative or a Financial Advisor for the full report, "Payments and Processing," (Mar 28, 2016). Plus, more Ideas.

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