Can the Visa and Mastercard moat be bridged?

[Pauly]

Has there ever been an instance where a government agency has stepped in to give the market something it hasn't asked for, and had the market adopt it enthusiastically?

[Spekulatius]

56 minutes ago, Pauly said:

Has there ever been an instance where a government agency has stepped in to give the market something it hasn't asked for, and had the market adopt it enthusiastically?

The internet.

[Spekulatius]

4 hours ago, SharperDingaan said:

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

Note that the central bank digital currencies have nothing to do with crypto and are not based on blockchain tech.

Edited June 22, 2022 by Spekulatius

[SharperDingaan]

The hate on CBDC has nothing to do with its merits - it is because of fear of the digital yuan. If e-CNY didn't work, and very well, there wouldn't be this fear. 

https://cointelegraph.com/news/draft-bill-to-ban-china-s-digital-yuan-from-us-app-stores

 

CBDC is just another payment method - the same as crypto is. Like it or not, CBDC is a direct competitor, and just does payments better in almost all aspects. The cost is the loss of privacy, and reliance upon the CB. The antidote is zero-trust BTC - which of course has zero value, and we all hate!  

 

The place for this discussion is the crypto thread.  

 

SD

 

[scorpioncapital]

Viktor Shvets at Macquire thinks not just payments will be disrupted but the entire concept of banks. He thinks banks will have no reason to exist for the allocation of capital into the economy when there is CBDC. I see scary disruption in every direction. Heck, I even see disruption in fields that haven't even started yet really! like gene sequencing. i see a gaggle of competitors on the heels of every industry, new or old. This is scary times for moat investors because if the value of moats all flatten to a pancake then perhaps management efficiency becomes the superior variable. This would seem to argue for lower interest rates across the board though. It seems that the entry of competitors may be somewhat sensitive to economic variables therefore the more recession/inflation /etc..there is, the harder it may be for new things to get entrenched, favouring the moaty stocks like visa/mc.

[Spekulatius]

9 hours ago, SharperDingaan said:

The hate on CBDC has nothing to do with its merits - it is because of fear of the digital yuan. If e-CNY didn't work, and very well, there wouldn't be this fear. 

https://cointelegraph.com/news/draft-bill-to-ban-china-s-digital-yuan-from-us-app-stores

 

CBDC is just another payment method - the same as crypto is. Like it or not, CBDC is a direct competitor, and just does payments better in almost all aspects. The cost is the loss of privacy, and reliance upon the CB. The antidote is zero-trust BTC - which of course has zero value, and we all hate!  

 

The place for this discussion is the crypto thread.  

 

SD

 

The e- yuan is very iffy from a privacy POV, because the Chinese central bank basically knows exactly where the digital money is and what it’s doing, if this works as advertised. So it should absolutely get forbidden in every country that cares about privacy and their citizen being watched by the Chinese central bank.

Privacy is the main issue with CBDC - yes it can be done, but should it be done? It might just be better of improving the payment infrastructure and make the ACH payment almost instantaneous rather than taking 3+ days to clear. That alone would go a long way to digitize the payment system without wrecking the privacy.

Edited June 22, 2022 by Spekulatius

[SharperDingaan]

Privacy has a scale, extreme through to zero - give some of it up and you get benefits. Whether that be use of a Facebook/We Chat/Visa-MC collecting data for resale/AI use, or a CB offering guaranteed zero cost payment and liquidity via a CBDC.

 

If you want extreme privacy either use cash, or BTC. There is a reason why most Benjamin's carry traces of cocaine. If I just want to pay for coffee/lunch, there's nothing wrong with cash  Thing is ... if I walk into a car dealership, or a brokerage, and try to use a suitcase of cash to buy something - it has entirely different meaning. Cash is great, but it has limitations - as any black market vendor will tell you.  

 

So it comes down to transaction cost vs privacy cost - for making everyday transactions (privacy not an issue), VISA MC just isn't competitive against CBDC. VISA MC is really a predatory credit delivery system at 21% interest, for those who couldn't get credit cheaper elsewhere - which is sadly, a very large number of people. However, once you have the CBDC payment rail, it is very simple to add credit/points to it, and offer a much more cost effective solution than VISA MC.

 

Blockchain technology just removes intermediation, and offers the identical product via different and much more cost effective plumbing - exactly what we see here. And this IS blockchain - it's just being done on a private ledger (CB), with a privately agreed upon consensus algorithm debiting account X and crediting account Y. Identical to the process that allows high volume fully auditable securities trade, confirmation, and settlement in < 2.5 seconds vs 3 days..

 

We live in 2022, not 2002, and over the last 20 years - technological ability has radically changed. 

A moat only holds up when the underlying technology is NOT changing.

 

SD

Edited June 22, 2022 by SharperDingaan

[Sweet]

If in ten years crypto has disrupted payments systems I’d be very surprised.

 

I’m in Spek’s camp, I just don’t see how it is a better all round package than the current system.

 

For all the trying to create crypto based currencies none have widespread adoption.
 

Many crypto currencies are either get rich Ponzi schemes, outright scams, or in the case of Bitcoin a store of value (for some people).

[KJP]

12 hours ago, Spekulatius said:

The e- yuan is very iffy from a privacy POV, because the Chinese central bank basically knows exactly where the digital money is and what it’s doing, if this works as advertised. So it should absolutely get forbidden in every country that cares about privacy and their citizen being watched by the Chinese central bank.

Privacy is the main issue with CBDC - yes it can be done, but should it be done? It might just be better of improving the payment infrastructure and make the ACH payment almost instantaneous rather than taking 3+ days to clear. That alone would go a long way to digitize the payment system without wrecking the privacy.

My understanding is that is what FedNow is intended to become:  https://www.frbservices.org/financial-services/fednow/about.html

 

Note that FedNow's architecture appears to entrench current US financial institutions rather than displace them. 

 

[Spekulatius]

21 minutes ago, KJP said:

My understanding is that is what FedNow is intended to become:  https://www.frbservices.org/financial-services/fednow/about.html

 

Note that FedNow's architecture appears to entrench current US financial institutions rather than displace them. 

 

Fednow is for banks. You won’t have an account with the Federal reserve and run your payment for a six pack of beer or a coffee through central bank account. We have discussed the Fednow payment utility on another thread.

[SharperDingaan]

 

If you don't wish to look at China's experience, look at Sweden's

https://www.itu.int/hub/2022/01/e-krona-sweden-riksbank-central-bank-digital-currency-cbdc/

https://www.riksbank.se/globalassets/media/rapporter/pov/engelska/2020/economic-review-2-2020.pdf

 

The reality is that if Riksbank, and the Peoples Bank of China (PBOC), did not think that it was a better all round package than the current system, they would not be developing it. The fact that these entities actually issue the currency, and are/have developing/developed a CBDC, strongly indicates that it IS a better all round package.

 

SD

 

[Spekulatius]

17 hours ago, SharperDingaan said:

 

If you don't wish to look at China's experience, look at Sweden's

https://www.itu.int/hub/2022/01/e-krona-sweden-riksbank-central-bank-digital-currency-cbdc/

https://www.riksbank.se/globalassets/media/rapporter/pov/engelska/2020/economic-review-2-2020.pdf

 

The reality is that if Riksbank, and the Peoples Bank of China (PBOC), did not think that it was a better all round package than the current system, they would not be developing it. The fact that these entities actually issue the currency, and are/have developing/developed a CBDC, strongly indicates that it IS a better all round package.

 

SD

 

The Riksbank paper is very well worth the read. Thanks for posting. I think it is most notable that they don’t want to lose control over the payment system to private enterprises that they have no control over. I thought their remarks about the central bank losing control over their currency when private market solutions (stable coins - Libra etc) or other currencies prevalent is also interesting. The latter is more important for a smaller economy with its own currency (Swedish Krona) than for US or Euro based economies.

.

Edited June 23, 2022 by Spekulatius

[SharperDingaan]

The Eurozone is the next jump, and the CBDC will be the digital Euro - supported by multiple CBs settling wholesale via their DSIB's and GSIB's. Lots of economic and political implications to that, particularly to southern and eastern Europe, hence the delays - the limitation is not the technology. Demonstrate the precedent in the Eurozone, and you have the template for something similar in SA, East Asia, Caribbean etc. Technology acceleration.

 

Not spoken to in the Riksbank paper is the impact on state corruption, the biggest obstacle to development in most parts of the world. Do everything via CBDC, and materially more money in the hose gets to the end user, simply because holes are being plugged up - less aid money is required to deliver the same result. Estimates in some quarters, place the cumulative dollar value at around the size of the globes annual 'peace' dividend.

 

Inferred but not spoken to, is what the corrupt do when CBDC is in widespread use - as corruption doesn't go away.

The obvious alternatives are greater use of physical cash and BTC. Given that cash is issued by CBs, change the cumulative physical cash in circulation, and you change the demand on the fixed 21M token supply of BTC. CBs get control over the price of BTC, in much the same way that monetary policy works over control in setting interest rate.  

 

Against all this is VISA MC in its current form? and we want a multiple of todays earnings to own it?

Nothing wrong with paying a multiple, but with this much headwind - it's not going to be very much.

 

SD

Edited June 23, 2022 by SharperDingaan

[Sweet]

On 6/22/2022 at 8:59 AM, scorpioncapital said:

Viktor Shvets at Macquire thinks not just payments will be disrupted but the entire concept of banks. He thinks banks will have no reason to exist for the allocation of capital into the economy when there is CBDC. I see scary disruption in every direction. Heck, I even see disruption in fields that haven't even started yet really! like gene sequencing. i see a gaggle of competitors on the heels of every industry, new or old. This is scary times for moat investors because if the value of moats all flatten to a pancake then perhaps management efficiency becomes the superior variable. This would seem to argue for lower interest rates across the board though. It seems that the entry of competitors may be somewhat sensitive to economic variables therefore the more recession/inflation /etc..there is, the harder it may be for new things to get entrenched, favouring the moaty stocks like visa/mc.

 

I would much rather have many commercial banks allocating capital than central banks.

 

Commercial bank: A contained balance sheet with the risk of bankruptcy or shareholders getting wiped out if they make bad loans = more prudent allocation of capital.

 

vs

 

A central bank making decisions with no consequences for themselves if they get it wrong because they can just create more money.  That to me ensures less prudent allocation, and a huge systemic currency risk for everyone.

Edited June 23, 2022 by Sweet

[jfan]

What is the downside of having multiple competing currencies within a single nation especially if tied to a basket of commodities?

 

 

[Spekulatius]

9 hours ago, Sweet said:

 

I would much rather have many commercial banks allocating capital than central banks.

 

Commercial bank: A contained balance sheet with the risk of bankruptcy or shareholders getting wiped out if they make bad loans = more prudent allocation of capital.

 

vs

 

A central bank making decisions with no consequences for themselves if they get it wrong because they can just create more money.  That to me ensures less prudent allocation, and a huge systemic currency risk for everyone.

If you read the Riksbank article it's not about allocating capital (making loans), it's about keeping control of the currency the payment infrastructure and creating having access to make payments that are swift and digitized for everyone.

 

If you think about this, the US banking system fails miserably on this. ACH payments take 3 days plus and many are underbanked and have no access to payments conveniently. They need to go to a Walmart desk and pay up to pay their utility bill. So if there is a public or government sponsored fast payment system, then this could benefit quite a few people, especially when cash is phased out. These people shut out of the banking system need an alternative.

 

Perhaps the SS (or welfare)  payment in the future will have an option to get paid to a treasury account (just like treasury direct) and they also create an app (or someone else will) to allow payments from this account just like the cash app does currently. I don't see a reason why this wouldn't work, technically.

The digital currency would enable this because there is no temporary lending involved because these transfers are quasi instantaneous. Current payments are involving short term loans because they are not instantaneous and take days to settle.

 

Edited June 23, 2022 by Spekulatius

[texual]

I see disruption with Paypal, Block, with their enormous transaction volumes. They have inroads to small businesses and trending to the crowd that uses Shopify, modern platforms and hardware. There are very few stores and shops I go to that don't have these setups - and many places I go, I use tap to pay with whichever card gets me the best value at that moment. I see these companies building out more and more banking functions in their apps. Take a look into CashApp, see the growth, the added benefits of having a 'bank account' as well as trading stocks, crypto, buy now pay later and doing your taxes. This may not seem appealing to us but for a great many, this solution is elegant. Musk recently told Twitter that he was eager to build the native US version of WeChat in China which is a super-app. It does everything in one place. I don't think this is likely to happen here as we prefer to have some fragmentation societally (even if some of those products are owned by the same company!).

 

They will likely partner with the larger tech ecosystem Apple, Google and legacy banks, as well as Mastercard/Visa, too. Or, they will possibly rival those systems in the future. Some recent articles posed the idea that Apple is diversifying the wallet app feature set and this has definite moats within their ecosystem which can be disruptive to the legacy moat. However, I still see a great need for legacy banks and payment processors as they are worthwhile investments. 

 

I am investing in shares of paypal block and shopify

[Sweet]

4 hours ago, Spekulatius said:

If you read the Riksbnak article it's not about allocating capital (making loans), it's about keeping control of the currency the payment infrastructure and creating having access to make payments that are swift and digitized for everyone.

 

If you think about this, the US banking system fails miserably on this. ACH payments take 3 days plus and many are underbanked and have no access to payments conveniently. They need to go to a Walmart desk and pay up to pay their utility bill. So if there is a public or government sponsored fast payment system, then this could benefit quite a few people, especially when cash is phased out. These people shut out of the banking system need an alternative.

 

Perhaps the SS (or welfare)  payment in the future will have an option to get paid to a treasury account (just like treasury direct) and they also create an app (or someone else will) to allow payments from this account just like the cash app does currently. I don't see a reason why this wouldn't work, technically.

The digital currency would enable this because there is no temporary lending involved because these transfers are quasi instantaneous. Current payments are involving short term loans because they are not instantaneous and take days to settle.

 

 

thanks for summary - I had not read it

[Spekulatius]

Just a reminder that even if disruption is possible, it doesn’t mean it’s going to happen. The super app in the US exists already and is called the iPhone!

[SharperDingaan]

Look at Baba, before and after the Beijing Olympics.

Baba used to have the material majority of the Chinese payment market, and earned a small piece on every transaction -  Baba now has a much lower % of the payment market, and a lot less revenue as a result. Worse still - if Baba was part of an optimized (Black Litterman) portfolio, all the historic co-variances are wrong, as the world has suddenly and materially changed; the portfolio is not optimizing. CBDC disruption.

 

Change Baba to Wells Fargo.

If migrants can send money home via a CBDC for free - what do they need a Wells Fargo for? If they don't have to cash cheques at a Walmart? Most would expect that a good chunk of the Wells Fargo remittance earnings goes up in smoke. As with Baba losing market share to a CBDC, and the portfolio issues - so it goes with Wells Fargo as well. CBDC disruption.

 

There is still a need for banks, but they get paid for access to the CBDC infrastructure, and value-add.

How many people do they still collectively employ? A mystery 

 

SD

 

Edited June 24, 2022 by SharperDingaan

[Spekulatius]

Looks like Fednow service is about to launch. I think this will be more disruptive to some Fintech than to VISA and Mastercard:

https://www.frbservices.org/financial-services/fednow/about.html

 

Hopefully, it will replace the painfully slow ACH transfer (for which some banks are still charging money).

 

Fees look low:

https://www.frbservices.org/resources/fees/fednow-2023

Edited January 10, 2023 by Spekulatius

[LearningMachine]

3 hours ago, Spekulatius said:

Looks like Fednow service is about to launch. I think this will be more disruptive to some Fintech than to VISA and Mastercard:

https://www.frbservices.org/financial-services/fednow/about.html

 

Hopefully, it will replace the painfully slow ACH transfer (for which some banks are still charging money).

 

Fees look low:

https://www.frbservices.org/resources/fees/fednow-2023

 

Thanks @Spekulatius for sharing.

 

This is very disruptive for Paypal, and still somewhat disruptive for Visa/Mastercard.

 

Canada has that today with Interac e-Transfer, and you can see a lot of the transactions that Canadians do already with e-Transfer that Americans are currently doing with Paypal and Visa/Mastercard.

[backtothebeach]

3 minutes ago, LearningMachine said:

This is very disruptive for Paypal, and still somewhat disruptive for Visa/Mastercard.

 

Possiblly Paypal/Venmo "friends and family" payments, but for purchases, a buyer can always dispute a PayPal or credit card payment and claw back the money if the product was not delivered, for example. It looks like that's not possible with Fednow, or am I missing something?

 

It could replace ACH and Zelle. Could banks just use it as the new "plumbing" behind ACH?

[Gregmal]

I don’t know. But I do know stuff throughout history often rhymes. And the rhyme repetitious and redundant throughout almost all great compounding businesses is universally this fear of competition/displacement. Once you are this big, it’s pretty damn hard to be displaced.

[Spekulatius]

I don’t think we need to be worried about V and MA. The larger implication are for some of the Fintech that facilitate certain aspects of the payment process. Companies like Adyen or PayPal come to my mind or the owners of Zelle (large banks etc). Some might be able to take advantage of the new Infrastructure provided by FedNow and others may be disrupted. I think something like Adyen in particular could get disrupted, but I don’t know the inner working of payment well enough to be certain. I do know that Adyen facilities payments for large companies and that seems like something that Fednow can address, if not right away then later.

 

I think it also makes competition easier for smaller financial institutions , as they get access to the Fednow infrastructure at the same terms than larger ones. So if you are a low cost tech savvy internet only bank, you may love Fednow, as you can now provide services to the customer better than before.

Edited January 11, 2023 by Spekulatius