Mastercard On Why VocaLink – And Why Now

Lock, stock and barrel.

That may be the perfect way to sum up Mastercard’s announcement yesterday (July 21) that it struck a deal to purchase nearly all – at 92.4 percent – of VocaLink for approximately $920 million.

Though the purchase of London-based VocaLink is sure to open the door for Mastercard to play a role in the company’s key payment technology platforms for U.K. payment schemes, it also contributes to Mastercard’s overall vision for the future of commerce.

As Michael Miebach, Mastercard’s Chief Product Officer, shared with Karen Webster shortly after the news was announced, the move will enable Mastercard to power the connection between any digital payment method, including bank accounts, and any connected device its network supports.

Just last week at the unveiling of Mastercard’s new digital payments strategy, Mastercard CIO Garry Lyons explained that the global acceptance network is looking to enable commerce anywhere that a consumer and a connected device happen to be – powering issuer-branded digital payments credentials anywhere buyers and sellers want to do business, including the “yet-to-be-imagined” connected devices that sit on the edge of that network.

VocaLink is clearly part of that strategy.

The network operates BACS, the automated clearing house that acts as a conduit to direct credit and direct debit payments between bank accounts; faster payments, which is the real-time account to account payments service conducted over mobile, internet and phone rails, and LINK, the U.K.’s ATM network.

According to Miebach, VocaLink’s capability to leverage Fast ACH technology for digital debit payments through its Zapp mobile payments app will naturally come together with Mastercard’s contactless acceptance network.

“[VocaLink] is quite fine in m-commerce and eCommerce, but the physical part was missing so that’s a natural synergy,” he explained, adding that the “marriage of the two offerings” makes a lot of sense.

Mastercard’s overall digital strategy looks to the future of digital payments as Masterpass going across all channels to enable payment connections for how consumers live, work and play – basically it’s a vision of Masterpass doing everything payments.

“Though Masterpass can do everything, when it comes to the underlying payment source as a choice, where in many markets debit isn’t an option, but by providing this ability to link into a bank account as an option and give an additional choice to a consumer through Masterpass or a mobile banking app, that is what we believe completes the offering,” Miebach added.

Miebach says that this not only puts Mastercard in a unique position, but also its bank and merchant partners as well.

With VocaLink’s Zapp proposition, Miebach explained, a consumer can go to a merchant’s checkout, use their mobile device to access their trusted bank’s mobile app, and see a variety of payment options including Zapp’s pay-by-bank offering.

This option enables a push payment that accesses the consumer’s bank account to complete the transaction. This provides the consumer with a full rail of digital payment choices, whether it be credit, prepaid, debit, or direct to bank account without a debit card in between.

“The more interesting aspect for the merchant, I would argue, beyond being a merchant that offers full consumer choice on how to pay, is that the merchant is enabled with this particular product to engage in direct negotiations with the acquirer on how they want to construct economics of that,” Miebach explained.

He describes this as a marked difference from other offerings out there because it’s not an interchange-based product, giving more freedom to the merchants.

Succumbing to Regulatory Pressure?

In recent months there’s been a lot of discussion surrounding the recommendation from regulators to break up VocaLink and its ownership by the banks.

As of February of this year, it was estimated that the company processed 90 percent of the U.K.’s salaries, 70 percent of household bills and nearly the entirety of state benefits — meaning there is basically no business or person in the U.K. that didn’t use its technology in some capacity last year. All in, VocaLink processes 11 billion transactions with a net value of $8.4 trillion.

It has often been suggested that that small number of U.K. banks that control VocaLink ought to sell their stake in the name of providing more innovation and competition to the market.

Miebach noted that the regulatory conversation taking place in the U.K. is aimed at creating a more open access market and ensuring that the large payment schemes provide direct access to non-bank parties.

Though Mastercard’s acquisition of VocaLink addresses this in some ways, he noted, the company must still continue down a path on which VocaLink is providing open access kind of products.

“A big part of VocaLink’s business is gateway business and providing seamless access points to corporation and other entities that want to link directly into faster payments,” he added. “We believe that is the right way to go, and we will continue to drive that business with them.”

As the race for faster payments rails around the world continues to heat up, the debate continues about who is best positioned to do the job — and do it right.

The acquisition of VocaLink may leave many looking to Mastercard to modernize the payment infrastructure needed to establish an interoperable set of payment rails that enable faster payments to travel around the globe.

Miebach said the company is excited about the trend of ACH moving from basic batch-based payments to faster ACH, and that VocaLink has enabled it to play in that huge growth opportunity.

In describing the benefits of the procurement, he also noted that VocaLink will provide Mastercard with a complementary set of technology will enable it to participate in a much broader range of payment flows.

“And it will allow us to continue to grow our services business across their customer base and their payment flows and vice versa for their services business,” Miebach added.

“It’s amazing.”