Can the Visa and Mastercard moat be bridged?

[Sweet]

Visa and Mastercard are the dominant players in the credit card space and have grown revenue and cashflow steadily for years.

 

Recently I’ve been thinking that the hitherto impenetrable moats of V and MA are vulnerable.

 

Five years ago I used the plastic credit card all the time, but now I almost exclusively use Apple Pay, it’s just easier.

 

These days I go to shops and young people generally use their phones to pay whereas the older generation still use the plastic card.  
 

I estimate that the use of plastic credit cards is still the dominant means of paying but in 10 years time I think the trend will have shifted and Apple and Android pay will have greater share of payment method.

 

IF Apple and Android can get individuals to think of their phone as a payment device, and went aggressively after market share by offering great rewards on their own credit cards, could the Visa and Mastercards moat be bridged?

 

I think yes.

[LearningMachine]

I have noticed this too. 
 

This reminds me of one of the marketing successes of American Express that Buffett has recalled in the past, where AmEx came up with a card with a higher annual fee than the entrenched competitor and it was a success because of human desire for status.

 

Similarly, I wonder which company will help humans achieve signaling status by their payment method. Wonder how that company would do compared to AmEx in signaling status?

 

The business success here is not only from extra price you can charge customers but also from having a relationship with those higher-tier customers who can also be profitable for other services.

Edited June 20, 2022 by LearningMachine

[longlake95]

I believe that Apple Pay uses Visa tokens for transactions.

[LearningMachine]

1 minute ago, longlake95 said:

I believe that Apple Pay uses Visa tokens for transactions.

Visa/Mastercard maybe used underneath currently. The customer is paying by “Apple Pay”. The underlying network can be swapped out or commoditized out after some scale easily.  

Edited June 20, 2022 by LearningMachine

[longlake95]

Noted 

[Parsad]

33 minutes ago, Sweet said:

Visa and Mastercard are the dominant players in the credit card space and have grown revenue and cashflow steadily for years.

 

Recently I’ve been thinking that the hitherto impenetrable moats of V and MA are vulnerable.

 

Five years ago I used the plastic credit card all the time, but now I almost exclusively use Apple Pay, it’s just easier.

 

These days I go to shops and young people generally use their phones to pay whereas the older generation still use the plastic card.  
 

I estimate that the use of plastic credit cards is still the dominant means of paying but in 10 years time I think the trend will have shifted and Apple and Android pay will have greater share of payment method.

 

IF Apple and Android can get individuals to think of their phone as a payment device, and went aggressively after market share by offering great rewards on their own credit cards, could the Visa and Mastercards moat be bridged?

 

I think yes.

 

Absolutely!  This is where the likes of blockchain will disrupt the huge moats of financial institutions, clearing houses, brokers, etc over the next 20 years.  Even businesses like Paypal, Square, etc will be vulnerable.  These financial institutions will have to offer more than just transactional benefits, but other services that would not have been disrupted or new services to lock-in their client base.  That's what Apple, Google, Meta, American Express, Visa, etc, are all doing...they are locking in the users of their current services with other unique services.  But the shift to blockchain will be the main disrupting influence...direct transactions...zero/nominal cost...instantaneous...fraud proof.  Ironically, banks may be more shielded than the likes of AXP, V, MA, because consumers will still need savings accounts/deposits and mortgages/lending.  Cheers!

[Sweet]

@longlake95yes I mean swapping out Visa and Mastercard entirely.  Apple could easily gobble up the fees for themselves.  They have to capital to mimic.

 

@Parsadi hadn’t even thought of blockchain.  For Apple would it be easier to use the blockchain architecture, if not now then in the future, than the V / MA type architecture?  I don’t know much about the nuts and bolts of how these transactions are ferried around the world.

[Spekulatius]

Blockchain offers no advantage for financial transactions. What problem would moving on a blockchain solve? For sure would make any network way slower. it might be something for really huge transactions, but to buy a coffee or even pay a $200 bill it would increase the direction quite a bit.

 

The problem with moving off from Visa and MC is how would Apple include all the merchants? The vast majority of the world does not live within the Apple ecosystem. We have already stuff like cash app, but even those go mostly over VISA and MC rails.

Edited June 21, 2022 by Spekulatius

[Parsad]

31 minutes ago, Spekulatius said:

Blockchain offers no advantage for financial transactions. What problem would moving on a blockchain solve? For sure would make any network way slower. it might be something for really huge transactions, but to buy a coffee or even pay a $200 bill it would increase the direction quite a bit.

 

The problem with moving off from Visa and MC is how would Apple include all the merchants? The vast majority of the world does not live within the Apple ecosystem. We have already stuff like cash app, but even those go mostly over VISA and MC rails.

 

Blockchain would allow transactions with no intermediary...no merchant fees, no delay, direct one-to-one transactions.  You pay the merchant directly...no intermediary charging the merchant 2-3% on each transaction.  The funds would transfer instantaneously with no withholding or delay to the merchant.  The transaction would be completely secure.  There may be nominal fees from the blockchain company holding your wallet, but the fees would be far less than the 2-3% charged by V, MA and AXP now...or the fees charged by Paypal, Square, etc.  

 

Where the credit card companies/financial institutions would still rule is on the ability to use credit cards.  Those that don't have enough in income or capital in their wallets, would continue to borrow on their credit cards.  An exchange organization like Interac would be ideal for blockchain, since they have access to all of the merchants and already charge a nominal fee far less than credit card companies.  The lower risk of contingent liability reduces transactional costs even further using blockchain.  

 

Recommend reading this article:

 

https://www.frontiersin.org/articles/10.3389/fbloc.2020.00024/full

 

There are a number of other articles/studies out there also worth reading.  The one thing almost certain is that blockchain will reduce transactional costs dramatically.  Cheers!

[Spekulatius]

VISA and MC themselves only charge 0.2% though , the rest goes to other participants. Thats why everyone still uses VISA and MC because replacing them isn’t worth it.

The blockchain needs to be maintained and because it is terrible inefficient relative to centralized networks  the transaction costs are terrible (see the Etherium gas fees). They can never beat a simple centralized networks on transaction speed and cost.

I would even think that consumer protection is an issue. If you buy and pay for something , and the product or service is defective , there would be no recourse with blockchain, depending on how it’s designed. Who would handle request to reverse a transaction if noone is responsible? This blockchain stuff makes no sense, if you think it through from a simple user perspective.

[Pauly]

I've never heard a real benefit for the purchaser in giving up V/MA cards and moving to blockchain payments. So the merchant doesn't have to pay the credit card fee....as the buyer, what do I care? Is he going to knock his prices down 2%, or will he just pocket it? I'm betting on the latter. When I use my Visa card (or Mastercard, Amex, whatever), I collect travel points/get cash back, I have a 500lb gorilla in my corner if I want to dispute a charge, I have a strong layer of security between my bank account and whatever seller I'm dealing with. Why would I want to move away from that?

[Sweet]

3 hours ago, Pauly said:

I've never heard a real benefit for the purchaser in giving up V/MA cards and moving to blockchain payments. So the merchant doesn't have to pay the credit card fee....as the buyer, what do I care? Is he going to knock his prices down 2%, or will he just pocket it? I'm betting on the latter. When I use my Visa card (or Mastercard, Amex, whatever), I collect travel points/get cash back, I have a 500lb gorilla in my corner if I want to dispute a charge, I have a strong layer of security between my bank account and whatever seller I'm dealing with. Why would I want to move away from that?

Remember the thread isn’t about blockchain.

 

The original question is why can’t the likes of Apple mimic the Visa and Mastercard architecture and collect the fee themselves.

 

Apple has deep pockets and could offer better rewards that either Visa and Mastercard if they were serious about entering the business.

 

[thowed]

I'm no expert, but my understanding is that the infrastructure that V/MA have built over the years is almost impossible to replicate - would certainly take vast, vast time & money.  This is why everyone else piggybacks on them.  If you dig around, it's not heard to learn all about this.

 

But personally I hope that people keep believing they can be disrupted, so I can buy more shares at a vaguely reasonable valuation (given they are by no means cheap).  I started last year when everyone thought they were toast because of Square/Blockchain.

 

 

[Sweet]

It can’t be impossible to replicate if Visa/Mastercard/American Express have done it.
 

If it requires deep pockets to mimic both Google and Apple have it.

 

The problems as I see it are penetration, both user and merchant adoption.

 

Getting people to use phones as payment is one penetration issue and I’m certain that trend will continue.

 

The other, as someone mentioned above, is getting merchants to accept the new way of paying.

I’ve not heard of anyone saying that either Visa and Mastercard are done, so when you say ‘everyone thought they were toast’ it’s a reality I don’t recognise.  In fact, if there is a consensus I’d say it’s that they cannot be displaced easily.

[SharperDingaan]

You all really need to take a powder ....

 

If I pay 15x earnings, what I am REALLY doing?

I am saying current earnings, growing at the inflation rate or better for 15 YEARS, discounted at todays market rate of interest. Yet I know that both blockchain and CBDC are severely disrupting payment rails, and that historic inflation has been a lot higher than the 2-3% CBs are targeting? Most would suggest that future earnings will be a lot less than forecast as activity is lost to competing solutions, and discounted at too low a rate.   The multiple is too high.

 

The moat is the payment rails ! it can't be replicated !! Yada, yada ....

Back in the day the moat was horse and buggy infrastructure across the land ! yet the motor car utterly replaced it in how long a period? That vaunted 'rails value' is little more than a melting ice cube, melting faster the closer it gets to expiry day.

 

CBDC instantly displaces rails. There is no charge to transact, no fees to pay (or be paid) by anyone, payments are in live-time and guaranteed by the CB, and there is no need for a Visa/Debit card period  If you really want points, just buy them at their cash cost. Sure, but it'll never happen !. Yada, yada.

 

Until very recently, Ali Pay and We Chat Pay, held a combined 94% of the payment market in China.- two private companies in a communist country with a near monopoly control over ability to make payment. China took steps, and hard launched the Digital Yuan with the Beijing Olympics ... today that 94% is a lot lower, and continuing to fall quarter over quarter. So much for it'll never happen !!

 

So ,, if you're a VISA/MC investor, and weren't aware of this .... you need to ask yourself why?

Leave the cool aide behind.

 

SD

 

[LC]

Visa MC for a couple of bps offer fraud services, warranty services, the ability to pay a month or so after purchase, enable lenders to offer centralized financing services (12/24 mo zero-APR loans etc)…this seems like a good deal to me. 

Edited June 21, 2022 by LC

[SharperDingaan]

49 minutes ago, LC said:

Visa MC for a couple of bps offer fraud services, warranty services, the ability to pay a month or so after purchase, enable lenders to offer centralized financing services (12/24 mo zero-APR loans etc)…this seems like a good deal to me. 

 

The central bank guarantees is a lot better than the VISA MC guarantee, doesn't cost anything, and includes fraud guarantee. Credit can be obtained for a lot cheaper from a secured Line of Credit, and it is very simple to pay daily interest on the credit balance in your digital wallet. Payment via the CBDC digital wallet centralizes financing services automatically - if you don't have the credit, you have a linked line of credit with available capacity. Excess cash auto-swept into a linked MM Fund account overnight, No capacity, no payment, no fraud.

 

VISA MC was a great innovation in the 1950s. but it's had a 70 year run over multiple product extensions, and is really at the end of its product life cycle. We just cannot imagine an alternative to what we have all grown up with, and refuse to see that the world has changed. That VISA MC has to be torn from my cold dead hands !!

 

SD

 

Edited June 21, 2022 by SharperDingaan

[Minseok]

But the points! Why would I use apple pay if i can get 2% cashback on my mastercard?

 

Most of the merchant fee (2% to banks 0.15% to V/MC) is charged by the banks backing the credit. And most of that is going to consumers in the form of kickbacks.

 

In order for a new payment processing provider to tear down the moat, it needs to first win over the customers.

 

Who will bribe 2% of transaction fee to customers just so they can earn measily 0.15% in transaction fees?

 

So you say they can just copy the business model. Just look at the history of V/MC. Each bank used to have their own cards, compatible with select registered merchants. Industry went through consolation to pool compatible merchants to arrive at two “standards” who are largely compatible.   Now we are seeing once a gain fragmentation, but will customers prefer V/MC which are compatible with 99.9% of merchants or X-pay who may only have 20-% of merchants registerd. to whose benefit is it to overtake the duopoly? Certainly not in the customer’s interest.

 

visa and mastercard themselves cant erode their own moats. They are still using a dozen or so character limit for the transaction description because this was the limit of database software of the 60’s.

 

There is just no incentive to overtake V/MC. They can reduce their fee by half to kill all competition and they can operate business as usual.

[LearningMachine]

In case some folks might have missed the news on following. So sharing:

https://www.apple.com/newsroom/2022/02/apple-unveils-contactless-payments-via-tap-to-pay-on-iphone/

 

 

https://developer.apple.com/documentation/applepaywebmerchantregistrationapi

Edited June 21, 2022 by LearningMachine

[Minseok]

31 minutes ago, LearningMachine said:

Wondering if some folks might have missed the news on following. So sharing:

https://www.apple.com/newsroom/2022/02/apple-unveils-contactless-payments-via-tap-to-pay-on-iphone/

 

 

https://developer.apple.com/documentation/applepaywebmerchantregistrationapi

This is bearish for POS terminal vendors( e.g square).

[Spekulatius]

I think the most likely fang to disrupt  Visa/MC is Amazon. They have already many customer contacts as well as vendors payment info, as well as substantial payment infrastructure under the hood

 

The way I think it may work is AMZN buying DFS (Discover) which has it's own payment rail. Current DFS market cap is ~$26B and they make $5B in profit (post tax) so it's dirt cheap. Even if they pay $40B its dirt cheap for AMZN to buy and hugely accreditive as is.

 

Then they ditch JPM's card and replace it with Discover and start to boost the Discover infrastructure (which i think is behind V/MC) and build it out more.

 

By the way, they also get a direct bank and deposits thrown in for free. I think the only reason they don't do it is regulatory pushback.

[Pauly]

2 hours ago, SharperDingaan said:

You all really need to take a powder ....

 

If I pay 15x earnings, what I am REALLY doing?

I am saying current earnings, growing at the inflation rate or better for 15 YEARS, discounted at todays market rate of interest. Yet I know that both blockchain and CBDC are severely disrupting payment rails, and that historic inflation has been a lot higher than the 2-3% CBs are targeting? Most would suggest that future earnings will be a lot less than forecast as activity is lost to competing solutions, and discounted at too low a rate.   The multiple is too high.

 

The moat is the payment rails ! it can't be replicated !! Yada, yada ....

Back in the day the moat was horse and buggy infrastructure across the land ! yet the motor car utterly replaced it in how long a period? That vaunted 'rails value' is little more than a melting ice cube, melting faster the closer it gets to expiry day.

 

CBDC instantly displaces rails. There is no charge to transact, no fees to pay (or be paid) by anyone, payments are in live-time and guaranteed by the CB, and there is no need for a Visa/Debit card period  If you really want points, just buy them at their cash cost. Sure, but it'll never happen !. Yada, yada.

 

Until very recently, Ali Pay and We Chat Pay, held a combined 94% of the payment market in China.- two private companies in a communist country with a near monopoly control over ability to make payment. China took steps, and hard launched the Digital Yuan with the Beijing Olympics ... today that 94% is a lot lower, and continuing to fall quarter over quarter. So much for it'll never happen !!

 

So ,, if you're a VISA/MC investor, and weren't aware of this .... you need to ask yourself why?

Leave the cool aide behind.

 

SD

 

 

A lot of assumptions here. You 'know' that blockchain and CBDC are disrupting payment rails? 'Most would suggest that earnings will be a lot less than forecast'? I haven't seen any evidence that either of these things are true.

China's reaction to Ali/We Pay doesn't have a correlation to anything that would happen in NA/Europe. V/MA have no chance of taking over payments in China, and I'd say that western governments have no chance in taking over payments in their respective countries.

 

And from the Apple release:
'Tap to Pay on iPhone will work with contactless credit and debit cards from leading payment networks, including American Express, Discover, Mastercard, and Visa.'

So Apple wants to displace JPM, Citi, RBC in the payment space and take over that cash stream? Fair enough. It sounds like V/MA is still going to get their fractional cut though.

[thowed]

I have great respect for you, SD, & seem to recall that you were teaching a Crypto course - so know what you're talking about.

 

I suppose longer term of course there's a chance that V/MA will be disrupted.  But my feeling is that it will happen very gradually, allowing a window to adjust as necessary.  But I can't see it happening it in the short to medium-term, so happy to hold for now.

[Sweet]

51 minutes ago, Spekulatius said:

I think the most likely fang to disrupt  Visa/MC is Amazon. They have already many customer contacts as well as vendors payment info, as well as substantial payment infrastructure under the hood

 

The way I think it may work is AMZN buying DFS (Discover) which has it's own payment rail. Current DFS market cap is ~$26B and they make $5B in profit (post tax) so it's dirt cheap. Even if they pay $40B its dirt cheap for AMZN to buy and hugely accreditive as is.

 

Then they ditch JPM's card and replace it with Discover and start to boost the Discover infrastructure (which i think is behind V/MC) and build it out more.

 

By the way, they also get a direct bank and deposits thrown in for free. I think the only reason they don't do it is regulatory pushback.

 

 

I can see that happening on the Amazon website, but not for purchases from other sites, or in person.

 

[SharperDingaan]

For the doubters ... the BIS link is the underling technical report, the Globe and Mail link is a more digestable summary

 

https://www.theglobeandmail.com/business/international-business/us-business/article-crypto-fears-now-materialising-central-bank-body-bis-says/

Roughly 90% of monetary authorities are now exploring CBDCs as they are known. Many hope it will equip them for the online world and fend off cryptocurrencies. But the BIS wants to co-ordinate key issues such as making sure they work across borders.

 

https://www.bis.org/publ/arpdf/ar2022e3.htm

Retail CBDCs and fast payment systems .....

 

Nobody wants a FANG with any kind of significant market share in cross border payment systems. Before Apple there was Facebook Libra; rapidly shut down for very good reason. Where FANGS have been used, it has been primarily to develop/implement domestic payment systems (China, Russia, Nigeria, Caribbean) - that are subsequently 'partnered' with the state.

 

Those payment systems are CBDC's and they make the ancient technology that credit/debit cards run on - instantly obsolete. Of course, you can still get around using horse and buggy - but the motor car is just multiple times more effective, efficient, practical, etc. However ... if we can't see a mainstream CBDC in the US or Europe, it doesn't exist !

 

The EU, the US, and Canada are amongst that 90% of monetary authorities. The big issues are privacy and integration with CB protection of DSIBs and GSIBs in wholesale CBDC; technical mechanics to making a payment were resolved long ago. They will be in service well within the next 15 years, and when they arrive - most would expect a lot less transactional activity on the VISA MC rails. Hence ... projecting 15 years of current inflation adjusted earnings to arrive at a valuation, makes very little sense. 

 

Nobody wants to hear obsolescence, hence the reaction. We get it.

We just prefer to drive - by looking through the front-window, and not the rear one! 

 

SD

Edited June 21, 2022 by SharperDingaan