Global Payment Industry Analysis - Term Paper Example

Executive summary

This report provides a framework of the existing and future weaknesses and strengths of the global payment industry. The following analyses were done using PESTLE and Porters 5 Force framework. It was found that political and legal factors affecting the global payment industry emerge from the government. The US financial crisis, as well as the current Asian recession period, has negatively impacted the industry. The evolving technology and innovation have caused a major shift in the payment industry from paper money to paperless money. VISA and other Global payment companies have embraced environmental sustainability through the introduction of environmentally friendly services such as mobile payment. Internal rivalry in the global industry is high as major companies compete for high sales and profits. There is low supply power in the industry as major companies only use plastics to design their payment services. The major threat to VISA in the global payment industry are online payments platforms such as PayPal and mobile payment. The threat of entry of small firms in the industry is relatively low since VISA still dominates the industry. Lastly, the bargaining power of the buyers can be measured through a comparison of demand and supply. On VISA, the Dodd-Frank Act poses a major threat to VISA since it advocates for low customer fees.

1.0 Industry Overview

The global payment system industry is one most growing industries in the global market with VISA and MasterCard considered the largest stakeholders in the industry. According to a report presented in 2011 by McKinsey and company, the global payment revenues was over 1.1 trillion dollars and shifted to 1.65 trillion dollars in the year 2014. However, the overall growth is expected to rise to 2.4 trillion dollars in the next five years. The industry has been affected by technology and innovation. This is due to a substantial shift from payments based on papers to paperless payments such as mobile payments and credit cards. This shift is expected to continue as more customers continue to appreciate the services of electronic payments such as VISA that are associated with convenience, efficiency and safety. The volume of non-cash payments is increasing globally at an average rate of 8% with Asia and evolving markets growing at a higher rate than Europe and the USA. The largest contribution comes from visa with its revenue and net income estimated to be over 10 billion US dollars and 2 billion dollars respectively (Peters and Salazar, p434 2010). VISA makes earning through processing of payments done using debit and credit cards. Much of these revenues come from the USA. However, the global payment industry is set to grow further as payment revenues of VISA and other payment networks are expected to grow in the next five years.

2.0 Political/legal environment

The political factors emanating from government influence around the world have a huge impact on the global payment industry. Governments in countries such as China mostly support domestic companies such as China Union Pay and prevent entry of other companies. Despite a WTO ruling against China’s monopoly behavior, foreign companies have not been able to penetrate the Chinese market. Also, the introduction of government Acts regulates the operation of firms in the industry.

(Refer to Appendix 2 a) for additional detail on the government act (The Dodd-Frank Act) that regulate the global payment framework

3.0 Economic Impacts

The US payment industry has undergone many changes economically in the line of recovery after the global financial crisis in 2008. The volume of non-cash payment has increased by 8% globally with the US recording the highest number of payments.

(Refer to Appendix 2 b) for the economic condition in Asia that affects global payment

4.0 Social factors

The global payment system has experienced changes in the consumer tastes and preferences. Consumers want high quality and long lasting products. This has led to a shift in the payment industry from paper money to paperless. VISA along with other major companies in the global industry have introduced electronic methods of payment to meet the customer needs (Wang, p66, 2007).

(Refer to Appendix 2 c) on the social factors in developing countries

5.0 Technological factors

Technology and innovation are important transformation requirements in the global payment industry. The industry has been affected by technology and innovation. This is due to a substantial shift from payments based on papers to paperless payments such as mobile payments and credit cards. This shift is expected to continue as more customers continue to appreciate the services of electronic payments such as VISA that are associated with convenience, efficiency and safety(Trauma and Cruse, p459, 2008).

(Refer to Appendix 2d) for additional technological factors

6.0 Environmental factors

Companies in the global payment industry face the existing environmental concerns that face the global economy. As a result, many institutional approaches and goal have changed over the last few years. Payment companies have combined their principles into their commodity lines and achievable approaches. VISA has embarrassed this concept by shifting from paper money to electronic payments which are environmental friendly. Moreover, it has introduced debit and credit cards that use plastic as opposed to paper money produced from trees. Also, the company has partnered with mobile phone companies to enable mobile users to make payments through their devices. This service is made available to all consumers regardless of their environmental and geographical difference.

7.0 Internal rivalry

Internal rivalry in the global payment industry is significantly high as firms in the industry compete for the promising sales and profits in the industry. Industry leaders such as VISA are faced with stiff competition from companies such as American Express and MasterCard. These firms compete to partner with the banks available so that their cards are issued to the bank customers (Crede, 1995). Visa together with other payment card companies also face competition from private merchants such as gas stations which issue credits cards to their customers. These cards can only be used to make transactions in a specific store, but some customers may have other cards which could be used in other brand stores. This causes a shift in transactions from the major card organizations.

(Refer to Appendix 3 a) for the graph

8.0 Suppliers’ power

The process of acquiring raw materials is a major concern to any business. This also applies to the companies in the global payment industry.

(Refer to Appendix to 3c) for additional information

9.0 Threat of substitutes

The threat of substitutes and complements can be associated with the introduction of new products brought by innovation and the emerging technology. Most times, innovation leads to the introduction of new products in the market which may shape the preferences and taste of the customers. However, the threat of substitutes and complements to VISA is relatively low. Card substitute are cash and checks. Debit and credit cards are slowly dominating the global payment market as people continue to appreciate the services associated with debit and credit cards. The benefits of the cashless mode of payment include safety, convenience, and effectiveness. For users who are not comfortable with using debit or credit cards, VISA prepaid cards are available (Ondrus and Pigneur, p345, 2007)

(Refer to Appendix 3 b) for the graph indicating the distribution of VISA payment

.

10.0 Entry and exit

The entry of new firms in the global industry is relatively low as the industry is dominated by key players such as VISA, who control the larger percentage of the economy.

11.0 Bargaining power of buyers

bThe bargaining power of buyers can be measured through demand and supply. The global payment industry leaders have the ability and power to distribute evenly. This is closely attributed to their global brand recognition and product differentiation competition. The bargaining power of the products and services of VISA is high (Martin, 1996). The providers of card access customers via mobile phones and banks. As such, major mobile phone companies and banks can negotiate positive deals as a result of issuing the payment company’s cards to customers. Also, the Dodd-Frank Act advocates for reforms in the global payment industry that attempt to decrease the bargaining power of payment companies such as VISA. The reimbursement fees for debit interchange are limited. As a result, VISA has reduced fees for customers to offset their revenues. Moreover, VISA will not be able to negotiate contracts with banks as a result of this Act. There are offers encouraging switching credit cards which diversify market in the global payment industry as VISA is not the only option.

12.0 Conclusion

The global payment industry has experienced major reforms in the last few years. Based on the PESTLE and Porters 5 force framework analysis of the industry, the threats created by the global business environment are relatively lower than the opportunities thus the industry is expected to grow in the next five years (Lao and Jiang, 2009). However, this analysis shows how the current situation provides an opportunity for growth of large payment companies such as VISA.