Payments News Digest for April 2020
Mar 5th - Payments firms say that spend is shifting due to the coronavirus, but the real risk is how the creditors will hold up. (Source: WSJ)
AQN's Take - Rapidly shifting spend, driven by coronavirus, will impact issuers in multiple ways. The first is the COVID-19 impact on charge off rates overall. With unemployment soaring, consumer's FICO scores will not adequately reflect the probability of an account going delinquent. Issuers that are not cautious with granting new lines at this time may find themselves facing large early charge offs from prime populations that have historically exhibited lower early risk. The second impact will come in the form of interchange, the revenue issuers receive for every transacted dollar, also known as swipe fees. AQN expects downward pressure on interchange driven by two large macro variables - lower T&E spending (high interchange category) and higher grocery spending (low interchange category). The combination of these two impacts can potentially crater the economics of near prime and prime targeted products with high rewards constructs. It will be interesting to monitor the impact through time to see which products are resilient to COVID-19 related shifts.
Mar 18th - Square gets approved after a two and a half year campaign to launch a bank, Square Financial Services, based out of Utah. (Source: WSJ)
AQN's Take - This move comes at an ideal time for Square. As capital market funding is drying up, they can now tap other forms of capital for SMB lending efforts. The next few months they may see many competitors in the SMB lending space go out of business or unable to originate new loans due to a funding crunch which may present additional market share upside for the remaining players, namely Square. Given Square's continued growth within their core payments processing offering, and its vertical integration strategy, AQN believes they are well positioned to continue challenging more banking products in the future.
Mar 23rd - Digital payments soar due to coronavirus worries; Grocery delivery services are one of the main winners of the social distancing movement. (Source: WSJ, Techcrunch)
AQN's Take - While it's obvious why digital payments are becoming more popular as individuals shift to e-commerce and contact-less measures, AQN believes the type of transactions that is fueling those is the true insight. Consumers have been slowly shifting to online purchasing for many goods over time, but there are certain categories such as groceries where the trend has not been as strong. COVID-19 has changed that and grocery delivery services like Instacart are now experiencing hypergrowth. While this is driven by a temporary need, AQN expects some households that adopt these behaviors will continue to display them going forward. AQN is interested to see if / how the networks adjust interchange for these transactions as they are now being treated as card not present transactions, which carry a significantly higher interchange rate compared to in-person grocery transactions.
Mar 27th - Visa and Mastercard to delay new interchange rate table releases until July from previously planned April release (Source: Bloomberg)
AQN's Take - This delay makes sense as there were two main changes that Bloomberg had reported on early in February - Visa's change that enabled grocery stores to pay lower interchange and higher interchange rates for card-not-present transactions. In a time when grocery stores are unable to keep their shelf stocked due to the increased demand and the last thing they need is a higher margin on the their transactions at the expense of online businesses. This will also provide more interchange to the issuers as grocery becomes a higher proportion of spend, easing the potential loss bubble they are ultimately in for given the spike in unemployment. It will be interesting to see if these changes will be re-worked given the impacts of the last few months when they launch in July. Namely, AQN will be looking at how both Visa and Mastercard will shift restaurant interchange rates as any change to those rates could have significant impacts due to restaurants’ low margin nature.
Mar 30th - Visa announces that COVID-19 is impacting overall transaction volumes, down 4% March to date, and sees a 'rapid deterioration' of cross-border spending (Source: Reuters)
AQN's Take - This reduction in spend and subsequent revival will be interesting to track over time within industries, geographies, and from an overall standpoint. While there is no question that absolute card spend will recover and continue growing as part of the larger macro trend of cash/check transactions to debit/credit there will definitely be some changes that come along with the recovery. AQN's perspective is that there will be clear winners and losers coming out the other side of this crisis as some learned spend behaviors stick around indefinitely. Some areas that AQN will be keeping a close eye on are: international share of spend, restaurant vs bar spend recovery, and card present vs card not present share of spend.