In the rivalry between the two biggest U.S. card companies, Mastercard is betting on the rise of the open banking trend while Visa is less persuaded it will take off.

The companies’ diverging views of the trend, which envisions consumers sharing more data across banks with new software tools, was underscored last week during presentations by the companies’ chief financial officers at an investor conference.

The open banking trend was tipped off in Europe by the central bank’s 2016 update to the Payment Services Directive, also known as PSD2. The effects of that move have been seeping over to the U.S. market as well.

For Mastercard, the second-largest U.S. card company, it could be a means of catching up with its archrival Visa, the largest U.S. card company. Mastercard leapt into the open banking realm in 2020 when it purchased the Salt Lake City, Utah-based company Finicity for $825 million, and it doubled down on the effort in Europe the following year when it purchased the Danish company Aiia.

“Open banking is effectively an open data network,” Mastercard CFO Sachin Mehra said during the Bernstein Strategic Decisions Conference on May 31. “It is, with the right permissions from the consumer, being able to access the consumer information to help application providers provide services to the consumer.” 

Purchase, New York-based Mastercard has used Finicity in allowing consumers applying for mortgages to access real-time bank data with respect to their assets, income and employment, he explained. The company also sees similar applications with respect to small business lending and auto lending. Aside from those lending use cases, it can be used for digital account openings and account validation for peer-to-peer payments, he noted.

“So there are several use cases we’re going after,” he said. “We see a lot of promise.” 

In addition to generating new revenue streams by providing more services to consumers, Mastercard is tapping open banking capabilities for internal operations, such as processing payments, Mehra said. For instance, it’s using the technology for the extension of installment payment services to merchants so they can get a better view of a consumer’s creditworthiness in that type of lending.

“We see a lot of potential,” he said. “It will take time to actually grow and develop, but we see potential not only in the U.S., but in several markets in Europe as well.”

San Francisco-based Visa also got into open banking by way of an acquisition, when it bought the Swedish business Tink for about $2 billion in 2021. When Visa CFO Vasant Prabhu was asked about that acquisition at the same conference, he was less of a booster for the open banking phenomenon, saying Visa was keeping an “open mind” about the trend.

“We don't know whether open banking is going to be a big deal or not a big deal,” Prabhu said at the conference. “Nobody does. We know that in Europe, the regulators have been very keen for open banking to become very big, and I know there’s been a certain amount of frustration over the years that it hasn’t.”

With PSD2, the European Union egged on the open banking trend, not only encouraging banks to be more open in sharing data for consumers’ benefit, but also as a means to stoke more competition in the market. “PSD2 supports innovation and competition in retail payments and enhances the security of payment transactions and the protection of consumer data,” the European Central Bank said on its website regarding the directive.

Still, Prabhu expressed skepticism of the ultimate benefits. “I think the jury’s still out on whether open banking is going to be a big deal or not,” Prabhu said. “It's not clear yet. I do believe it hasn’t taken off as much as perhaps people might have expected. Some of it is because in some cases there’s no need for it. Time will tell.”

Regardless, he asserted that the European central bank was likely pleased that the biggest U.S. card company was willing to throw its weight behind the trend. “The regulators in Europe are probably happy we got into open banking because it meant that someone with a lot of influence and investment capability was getting into open banking to make a go of it.”

There is not any early sign of the new trend benefiting Visa in the European market, though Mastercard is gaining ground in Europe. While Mastercard’s purchase volume climbed 32% to $1.7 trillion in 2021, over 2020, and its market share rose to nearly 40%, Visa’s purchase volume that year rose just 16% to $2.4 trillion and its market share declined to 58%, according to a report last year from industry research outfit The Nilson Report. (Visa’s lead over Mastercard in the U.S. was a much larger 70% to 30%, respectively for the same year, according to Nilson.)

Prabhu acknowledged Visa’s lesser profile in continental Europe than in other parts of the world, vis-a-vis Mastercard, calling it an “underdeveloped market for Visa.” “The continent of Europe was a unique one in that Mastercard share was stronger than it is typically in other parts of the world,” he said at the conference.

Whether open banking will make a difference in the rivalry, time will tell.

By Lynne Marek on June 8, 2023
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