Fintech comes to America at last
A digital-payments system that favours consumers,not banks and credit-card firms, is long overdue.
America is home to both Silicon Valley and Wall Street, yet it has long seemed in the dark ages on digital payments. Until 2018 card purchases required hand signatures, 15 years after Europe switched to chip-and-pin. A cosy credit-card duopoly, consisting of Visa and Mastercard, works with the banks to issue cards, with the result that there has been too little competition and sky-high profit margins. Asia has leapt ahead, with pervasive, fast and dirt-cheap payments services, and a new generation of dynamic fintech firms that have rapidly reached scale. Having outdated and expensive digital financial plumbing is no mere technicality: as online shopping becomes a bigger part of everyday spending, it threatens to become a heavy tax on innovation. And it means too few people, especially in poorer households, have access to cheap and simple financial tools.
The good news is that the picture in America is changing for the better. Thanks to the pandemic, there has been a surge in payments online and experimentation by consumers with new services provided by digital-payments firms. In the past quarter the volume of transactions on PayPal was 36% higher than a year earlier. The number of people using Square’s digital Cash App rose by 50% to 36m during 2020. Investors are now betting that these two firms, together with Stripe and Adyen (which is Dutch), form a quartet that can take on America’s stodgy financial establishment. (The chairman of The Economist’s parent group is a director of Square.) PayPal is worth $275bn, nearing Bank of America, the country’s second-biggest lender.
Yet there is a catch. Despite the rise of innovative firms, fees for American consumers have yet to fall by much. Square charges 2.6% on the average transaction; Stripe’s fee nears 3%. By contrast, China’s big fintech firms charge below 0.5%. Fees have been kept low by a fierce price war.