It’s time for another edition of Payments Post and (surprise!) we’re thinking about the Visa Flexible Credential again. You may recall that we compared the capabilities of the VFC to a single issuer wallet. As such a wallet might, it allows issuers to roll multiple payment types into a single payment instrument. It can then determine the characteristics of a given transaction based on preset logic, answering questions like “should debit or credit be used to pay” or “ should this purchase be automatically enrolled in our institution’s pay-in-four offering?” We thought this idea was attractive, particularly if the VFC could be provisioned in the Apple Wallet. But now that Apple has plans to open up the NFC chip and Secure Element to third party developers, we’re scratching our heads. Who benefits from this newfound NFC access? What opportunities can fintechs unlock? How will conventional financial institutions react? And to tie it all back, does the VFC still matter? Let’s get into it.
I’ll come right out and say it: I think the opportunity is greatest for fintechs. Why? Consider the current state. PayPal is a great example of a digital wallet that would like to have more of a presence at the POS. But relatively few merchants in brick and mortar stores accept PayPal for in-person payments, simply because, when compared to cards, the complexity of integration has outweighed the potential for incremental sales and the (potentially) more favorable economics of a PayPal transaction. PayPal recently announced the PayPal Everywhere, a suite of offerings that includes digitally provisioned Mastercard debit card that can be used anywhere Mastercard is accepted. Cue Will Ferrell. This isn’t a new concept; PayPal has already offered a variety of debit products that can be used in the Apple Wallet. But it represents an evolution in their approach that matches a growing preference for contactless payments. The holy grail here would be facilitating transactions using the NFC chip in users’ phones or other devices. Until now, Apple has stood in the way of achieving scale by limiting access to their chip.
Opening access to the NFC chip and Secure Element ushers a sea change in payments at the physical POS. Fintechs like PayPal have an opportunity to offer a “seamless” (read: card-free) checkout experience, where a PayPal user could theoretically tap their phone on a merchant POS device to execute a PayPal transaction. Apple’s announcement also opens up the chip for use in loyalty applications, another place where we observe fintechs differentiating themselves. Of course, the ability to offer an NFC-enabled payment service depends on the merchant’s ability to accept the payment, so acquirers will determine fintechs’ fate here to a certain degree. Another snag: an NFC-enabled closed loop payments model precludes taking advantage of the debit card interchange revenue fintech debit issuers have built into their economics. And, of course, Apple will charge fees to use their technology environment. All three of these points (the need for acquirer support, interchange revenue considerations, and the yet-unknown “Apple tax” on NFC transactions) will impact which fintechs dive into the opportunity first and which will watch from the sidelines. Apple, as a fintech company themselves, will continue to innovate and adapt in the face of this new competition.
As that unfolds, issuers will surely be weighing their options. There’s of course an opportunity for Paze to compete with Apple Wallet, although they will have to differentiate themselves meaningfully in order to do that. Likewise, large issuers have an opportunity to build their own single issuer wallets. For both, differentiation could look like logic to automatically select the best card for a particular transaction and enroll certain cards in installments. Which brings us full circle. Isn’t that what VFC does, at least at the physical point of sale?
We leave you with a common refrain: time will tell. We have to see if issuers embrace VFC, create their own NFC-enabled wallet solutions, or leverage a combination of the two. In the meantime, (at least some) fintechs will build new closed-loop products that threaten issuers’ entire value proposition. It’s a story to watch. In the meantime, we’re here to answer your questions.
