VISA

[giofranchi]

More like 150 bps from Visa now, so that is a huge incentive to cut them out. And, yes they would need to setup a partnership with banks, guarantee transactions etc. Not sure why this would be that difficult for Apple or Google. To some extent they are already doing this with the debit transactions on Apple Pay. Merchants, consumers and banks should be eager to go in this direction.

 

Another crazy option would be to use some of the massive unused balance sheet cash to setup a "bank" themselves to offer the credit. I see that as unlikely, but it is possible.

 

Article on the fees in Canada now:

 

http://www.financialpost.com/m/wp/blog.html?b=business.financialpost.com//entrepreneur/cfib/visa-mastercard-agree-to-cut-fees-they-charge-merchants-who-accept-credit-cards

 

This thread makes me want to buy more Apple and Google... And they are almost certainly more capable of stopping fraud as well.

See HJ's post.

 

Here's another nice summary of who gets what.

 

Thank you, HJ and wknecht!

This is very useful.

 

Cheers,

 

Gio

[JBTC]

I hate to say this about the V/MA haters.

 

Investing is not about possibility - it's about plausibility, it's about the odds of your claim panning out.

 

Also remember extraordinary claims require extraordinary proof.

 

Given it has taken decades for V/MA to dominate (in spite of the non-stop attacks from merchants, governments, tech players, etc), given the network effects, given the secular growth trends, given their strong executions, claims that V/MA can be eliminated or weakened with ease surely require extraordinary evidence. But I haven't seen such evidence.

 

Moreover, some who make bold claims do not seem to have the most basic knowledge about the interchange systems.

 

To me the more pressing questions about V/MA are 1) what growth can they sustain given the high penetration in developed markets? Note that they are mostly shut out of China. 2) given they are no longer bank owned, can banks force pricing concession over time, hence eroding their margins? 3) what happens to their margins if Apply Pay etc becomes the norm in 10 years?

 

Just a few examples. Given they are at 30x, even marginal reduction in growth rates and margins will impact the investment.

 

 

[giofranchi]

To me the more pressing questions about V/MA are 1) what growth can they sustain given the high penetration in developed markets? Note that they are mostly shut out of China. 2) given they are no longer bank owned, can banks force pricing concession over time, hence eroding their margins? 3) what happens to their margins if Apply Pay etc becomes the norm in 10 years?

 

Just a few examples. Given they are at 30x, even marginal reduction in growth rates and margins will impact the investment.

 

+1

 

Cheers,

 

Gio

[blainehodder]

More like 150 bps from Visa now, so that is a huge incentive to cut them out. And, yes they would need to setup a partnership with banks, guarantee transactions etc. Not sure why this would be that difficult for Apple or Google. To some extent they are already doing this with the debit transactions on Apple Pay. Merchants, consumers and banks should be eager to go in this direction.

 

Another crazy option would be to use some of the massive unused balance sheet cash to setup a "bank" themselves to offer the credit. I see that as unlikely, but it is possible.

 

Article on the fees in Canada now:

 

http://www.financialpost.com/m/wp/blog.html?b=business.financialpost.com//entrepreneur/cfib/visa-mastercard-agree-to-cut-fees-they-charge-merchants-who-accept-credit-cards

 

This thread makes me want to buy more Apple and Google... And they are almost certainly more capable of stopping fraud as well.

See HJ's post.

 

Here's another nice summary of who gets what.

 

Thank you, HJ and wknecht!

This is very useful.

 

Cheers,

 

Gio

 

Agree. Very useful thanks!

[merkhet]

I was discussing this offline with another board member, and my concern is the following:

 

As far as I can tell, the purpose of V/MA is to act as an authenticator and a runner. My view of the way a transaction works is as follows:

[*]Customer swipes a card at a merchant

[*]Merchant sends message to V/MA about purchase

[*]V/MA makes sure this is a valid request

[*]V/MA sends message on to the issuing bank

[*]Issuing bank checks on whether you are under your credit limit

[*]Issuing bank sends message back to V/MA providing answer

[*]V/MA makes sure this is a valid response

[*]V/MA sends message on to the merchant with response

[*]Customer walks away (or not) with the goods

At various places in this process, the issuing bank sends money (6) and V/MA is responsible for taking a cut (7) and sending the remainder to the merchant/merchant bank (8 ).

 

This is a process that works really well because the amount that V/MA get versus the amount that issuing and merchant banks take is very minimal, and there's some amount of scale that's required to make things profitable given the fixed costs of building the network. Moreover, there is an installed base of both credit card users and credit card POS devices, which makes it harder to develop something completely different to compete with V/MA. (And to a lesser extent AXP or DFS.)

 

However, certain parts of the moat might be smaller or more fragile now that we have things like Apple Pay and Android Pay. I think of the introduction of this NFC payments stuff as a virus or fungus. There's a fungus called ophiocordyceps unilateralis which is colloquially referred to as the zombie fungus. It lands on an ant's body and basically takes over the ant's brain. Then the fungus forces the ant to find a suitable area to stand while the fungus eats the ant and uses its resources to create a spore on its head that eventually explodes and goes to infect other ants.

 

So AP surfs "on the rails" as they say by using the V/MA system to connect customers and merchants and banks. This requires existing POS systems to undergo an upgrade where they have a NFC reader attached. Over time, this means that existing POS systems will have an installed base of NFCs. Customers, for the most part, already have an installed base of NFCs on their phones. Ergo, eventually this solves the installed base issue of creating a new network.

 

As for the "running" aspect of the network, it seems like all the POS devices can easily connect to the internet and your phone is already connected to the internet, so if you need to send information between players in the payments ecosystem, it should be relatively easy -- provided you have a connection. This seems like it would make it easier/better to make the POS connect to the internet because it shouldn't be incumbent on the phone's relatively shoddier prospects of having a connection.

 

Finally, we come to the authentication aspect. This is where it's a little trickier. V/MA provide actual value add by authenticating the messages from merchants and issuing banks. Is this an area where the tech giants can insert themselves with minimal interruption and/or a greater value add?

[giofranchi]

merkhet,

still remains the fact that any new entrant, if it is to replace V/MA, must create its new network of relationships with banks all over the world.

It doesn’t sound as an easy thing to do imo… But of course I cannot be sure… If instead it requires little capital and almost no effort, than V/MA business model might seriously be threatened.

This goes well beyond technology: any new entrant must partner with banks on a global scale, displacing the rules and the agreements those banks have become accustomed to dealing with V/MA and introducing new rules and new agreements. To me it seems that lots of work is needed… And why should the banks accept to be bothered with new rules and new agreements? We have seen the already keep for themselves the great majority of the fees in any transaction… It doesn’t seem they have much to gain for this effort of “changing the system”.

 

Cheers,

 

Gio

 

[SharperDingaan]

Just for comparative.

• Customer logs onto smart phone

• Customer pulls up Google Pay app. Logs into their account

• Customer keys in amount, details, & account number of Google Pay recipient.

• Google pay confirms existence of the recipient Google Pay account

• Google confirms via a yes/no ask if you are sure.

• Click yes.  Google debits your wallet, credits the recipients

And as this is essentially the equivalent of a debit card transaction; the cost is 6 cents versus the $1.50 you would have paid had you used VISA. 

 

Customer complains because the restaurant doesn’t have a Google Pay account. Customer is now forced to pay by cash, debit card, or even by V/MC. Customer is not coming back until the restaurant/bar gets it act together; so next weekend the restaurant/bar either has a  Google Pay account, or does less business.

 

The average restaurant/bar might open a handful of P2P accounts; GooglePay, ApplePay, Paypal, etc – but there’s a limit. Top of wallet just became redundant, & turned into a P2P popularity contest. 

 

Next time you go to a coffee shop, supermarket, or higher end bar – look at how many people are paying via their phone. They are easy to identify, because they are the ones slowing the line down. Count how many, & estimate their ages.

 

SD

 

 

 

[merkhet]

merkhet,

still remains the fact that any new entrant, if it is to replace V/MA, must create its new network of relationships with banks all over the world.

It doesn’t sound as an easy thing to do imo… But of course I cannot be sure… If instead it requires little capital and almost no effort, than V/MA business model might seriously be threatened.

This goes well beyond technology: any new entrant must partner with banks on a global scale, displacing the rules and the agreements those banks have become accustomed to dealing with V/MA and introducing new rules and new agreements. To me it seems that lots of work is needed… And why should the banks accept to be bothered with new rules and new agreements? We have seen the already keep for themselves the great majority of the fees in any transaction… It doesn’t seem they have much to gain for this effort of “changing the system”.

 

Cheers,

 

Gio

 

Except, isn't that exactly what it's doing when you register your card with Apple Pay? How hard is it going to be for them to execute agreements once they've essentially "mapped" out the vast majority of people's credit cards using Apple Pay registration?

[physcdisp]

Barrons has a bullish article this weekend on Blockchains and how the technology may displace VISA/MC/AMEX/DFS etc.  Curious what bulls think about that.  Probably will take a while.  The article still acknowledges a role for the banks.  Thanks

[wknecht]

merkhet,

still remains the fact that any new entrant, if it is to replace V/MA, must create its new network of relationships with banks all over the world.

It doesn’t sound as an easy thing to do imo… But of course I cannot be sure… If instead it requires little capital and almost no effort, than V/MA business model might seriously be threatened.

This goes well beyond technology: any new entrant must partner with banks on a global scale, displacing the rules and the agreements those banks have become accustomed to dealing with V/MA and introducing new rules and new agreements. To me it seems that lots of work is needed… And why should the banks accept to be bothered with new rules and new agreements? We have seen the already keep for themselves the great majority of the fees in any transaction… It doesn’t seem they have much to gain for this effort of “changing the system”.

 

Cheers,

 

Gio

 

Except, isn't that exactly what it's doing when you register your card with Apple Pay? How hard is it going to be for them to execute agreements once they've essentially "mapped" out the vast majority of people's credit cards using Apple Pay registration?

There seems to me a big difference between mapping the network and it being yours and operating it. They would still have to build secure data pipes to all the relevant parties, not to mention all the rules needed to operate it (authentication, charge backs etc).

 

I think it would be very difficult to convince them. Wouldn't it require a huge process overhaul for the banks also? And for what? When V/MA (who they already trust) aren't that expensive and the banks make tons of money under the current arrangement.

 

Using P2P gets around those challenges. But that has a whole separate set of challenges.

[Spekulatius]

I hate to say this about the V/MA haters.

 

Investing is not about possibility - it's about plausibility, it's about the odds of your claim panning out.

 

Also remember extraordinary claims require extraordinary proof.

 

Given it has taken decades for V/MA to dominate (in spite of the non-stop attacks from merchants, governments, tech players, etc), given the network effects, given the secular growth trends, given their strong executions, claims that V/MA can be eliminated or weakened with ease surely require extraordinary evidence. But I haven't seen such evidence.

 

Moreover, some who make bold claims do not seem to have the most basic knowledge about the interchange systems.

 

To me the more pressing questions about V/MA are 1) what growth can they sustain given the high penetration in developed markets? Note that they are mostly shut out of China. 2) given they are no longer bank owned, can banks force pricing concession over time, hence eroding their margins? 3) what happens to their margins if Apply Pay etc becomes the norm in 10 years?

 

Just a few examples. Given they are at 30x, even marginal reduction in growth rates and margins will impact the investment.

 

Decades ago, smartphones were not available. Smartphones run on either IOS or Android, so there is already a huge network of users. Layering a payment system on top of it would not imply building a new network, it would ride on top of an existing network, so would cost may less. So, I think in terms of network buildout and network effects (critical scale), the possibility to take market away from V/MA is there. Will it happen or will Apple/GooG decides it is just easier to ride with Visa/MA?

 

As far as P2P usage is concerned, I don't think he consumer has much power to make a change. I get zero benefit , if I start to use P2P now, instead of using credit cards, but lose all the CC benefits. bye Be, cash back, extra insurance etc. Why would I do it, unless the merchant gives back the savings? Right now, I pay the same using a CC than I do using cash or P2P, except in gas stations. If merchants wood break out the cost of using CC as anextra item (similar to VAT) and let me pAy for the privilege (which merchants are not allowed to do, per Contractual terms), then I switch A hardbeat and so will many others. Come to think about it, legislation that allows merchants to tack on the CC cost on the bill is probably a large thread to CC companies as well and would immediately impact their business model. Does not seem to be likely, but one never knows.

[Jurgis]

V/MA strength beyond their network effect is that they charge only ~15bps. That's peanuts for the convenience and reach.

 

New entrants could probably displace V/MA only on basis of convenience/features, since competing just on price - even if new entrant goes 0bps - is likely to be losing proposition.

 

OTOH, V/MA can't raise fees much. This would likely draw more antitrust attention and would raise motivation for competition.

 

[Spekulatius]

V/MA strength beyond their network effect is that they charge only ~15bps. That's peanuts for the convenience and reach.

 

New entrants could probably displace V/MA only on basis of convenience/features, since competing just on price - even if new entrant goes 0bps - is likely to be losing proposition.

 

OTOH, V/MA can't raise fees much. This would likely draw more antitrust attention and would raise motivation for competition.

 

So someone takes a loss on my 2% cash back card? The 1.5% fee is net to Visa though and there are other layers on top of that. I think merchants pay 2.5% of the transaction value on average, but I could be incorrect.

[Jurgis]

V/MA strength beyond their network effect is that they charge only ~15bps. That's peanuts for the convenience and reach.

 

New entrants could probably displace V/MA only on basis of convenience/features, since competing just on price - even if new entrant goes 0bps - is likely to be losing proposition.

 

OTOH, V/MA can't raise fees much. This would likely draw more antitrust attention and would raise motivation for competition.

 

So someone takes a loss on my 2% cash back card? The 1.5% fee is net to Visa though and there are other layers on top of that. I think merchants pay 2.5% of the transaction value on average, but I could be incorrect.

 

Spek, please read the upthread of how the fee is split. :) ~1.5% does not go to V/MA. It goes to the issuing bank. If new entrant displaces V/MA, they would displace only 0.2% of the fee. They would need to displace issuing banks to get rid of the 1.5-1.8% of the rest of the fee (well issuing bank and the clearing bank, but you get the picture).

 

Displacing issuing bank is another can of worms and it's hard. Who's gonna take credit risk, etc.?

 

And if they are already displacing the issuing bank, then they should just displace the issuing bank and keep V/MA. ;) Why not pay V/MA .2% if you just saved 1.5% from getting rid of the bank? ;)

[merkhet]

merkhet,

still remains the fact that any new entrant, if it is to replace V/MA, must create its new network of relationships with banks all over the world.

It doesn’t sound as an easy thing to do imo… But of course I cannot be sure… If instead it requires little capital and almost no effort, than V/MA business model might seriously be threatened.

This goes well beyond technology: any new entrant must partner with banks on a global scale, displacing the rules and the agreements those banks have become accustomed to dealing with V/MA and introducing new rules and new agreements. To me it seems that lots of work is needed… And why should the banks accept to be bothered with new rules and new agreements? We have seen the already keep for themselves the great majority of the fees in any transaction… It doesn’t seem they have much to gain for this effort of “changing the system”.

 

Cheers,

 

Gio

 

Except, isn't that exactly what it's doing when you register your card with Apple Pay? How hard is it going to be for them to execute agreements once they've essentially "mapped" out the vast majority of people's credit cards using Apple Pay registration?

There seems to me a big difference between mapping the network and it being yours and operating it. They would still have to build secure data pipes to all the relevant parties, not to mention all the rules needed to operate it (authentication, charge backs etc).

 

I think it would be very difficult to convince them. Wouldn't it require a huge process overhaul for the banks also? And for what? When V/MA (who they already trust) aren't that expensive and the banks make tons of money under the current arrangement.

 

Using P2P gets around those challenges. But that has a whole separate set of challenges.

 

A secure data pipe is less about the physicality and more about the encryption at this point. I'm unclear about the rest (authentication, etc.) -- and if anyone has any insight, please feel free to contribute. I'd love to know more.

 

I'm also not 100% about the process overhaul for banks to get onto the new system, but, again, if someone has insight, then I'd love to hear it.

 

I suspect that because of the fact that Apple/Google would be grafting onto an existing network that they'd be able to charge less than V/MA and still be profitable, so maybe they can incentivize banks by giving them more of pie? i.e. if transactions come to 2% and V/MA's share was 15 bps, Apple/Google can charge 5 bps and give another 5bps to banks while giving 5bps back to merchants? Also, unclear.

[orthopa]

Just for comparative.

• Customer logs onto smart phone

• Customer pulls up Google Pay app. Logs into their account

• Customer keys in amount, details, & account number of Google Pay recipient.

• Google pay confirms existence of the recipient Google Pay account

• Google confirms via a yes/no ask if you are sure.

• Click yes.  Google debits your wallet, credits the recipients

And as this is essentially the equivalent of a debit card transaction; the cost is 6 cents versus the $1.50 you would have paid had you used VISA. 

 

Customer complains because the restaurant doesn’t have a Google Pay account. Customer is now forced to pay by cash, debit card, or even by V/MC. Customer is not coming back until the restaurant/bar gets it act together; so next weekend the restaurant/bar either has a  Google Pay account, or does less business.

 

The average restaurant/bar might open a handful of P2P accounts; GooglePay, ApplePay, Paypal, etc – but there’s a limit. Top of wallet just became redundant, & turned into a P2P popularity contest. 

 

Next time you go to a coffee shop, supermarket, or higher end bar – look at how many people are paying via their phone. They are easy to identify, because they are the ones slowing the line down. Count how many, & estimate their ages.

 

SD

 

Who pays $1.50? The customer doesn't correct? The business does. If that was the motivating factor the business would get rid of V/MC and advertise google pay not the reverse.

 

What about everyone who shopped thurs/fri for black friday? Do you think everyone had the cash to pay in cash for the items they wanted? If not those people need some form of credit/banks  and the banks take a nice chunk of the interchange fee so they are not in a rush to get rid of that $$$.

 

Again like I said you have to get consumers to care enough to switch to divert the payment of money from banks/V/MC to the retailers etc. Using your credit card is not hard enough for the consumer to want to switch.

 

A fair amount of people in this thread didnt even know what fees went to what parties and these are investors who think about this stuff. Not your common everyday consumer.

 

As I have said before getting the expensive item you want NOW on credit is a lot cooler then waiting to save up and use google to pay.

 

Unless banks have similar margins in a new system I can see them protecting V/MA's moat in trying to keep the status quo.

[orthopa]

 

 

As far as P2P usage is concerned, I don't think he consumer has much power to make a change. I get zero benefit , if I start to use P2P now, instead of using credit cards, but lose all the CC benefits. bye Be, cash back, extra insurance etc. Why would I do it, unless the merchant gives back the savings? Right now, I pay the same using a CC than I do using cash or P2P, except in gas stations. If merchants wood break out the cost of using CC as anextra item (similar to VAT) and let me pAy for the privilege (which merchants are not allowed to do, per Contractual terms), then I switch A hardbeat and so will many others. Come to think about it, legislation that allows merchants to tack on the CC cost on the bill is probably a large thread to CC companies as well and would immediately impact their business model. Does not seem to be likely, but one never knows.

 

Exactly, you need these people to care enough to switch. Using a card is not difficult enough to make people switch. If anything its emotionally much easier then paying with cash.

[Guest Schwab711]

V/MA strength beyond their network effect is that they charge only ~15bps. That's peanuts for the convenience and reach.

 

New entrants could probably displace V/MA only on basis of convenience/features, since competing just on price - even if new entrant goes 0bps - is likely to be losing proposition.

 

OTOH, V/MA can't raise fees much. This would likely draw more antitrust attention and would raise motivation for competition.

 

So someone takes a loss on my 2% cash back card? The 1.5% fee is net to Visa though and there are other layers on top of that. I think merchants pay 2.5% of the transaction value on average, but I could be incorrect.

 

Spek, please read the upthread of how the fee is split. :) ~1.5% does not go to V/MA. It goes to the issuing bank. If new entrant displaces V/MA, they would displace only 0.2% of the fee. They would need to displace issuing banks to get rid of the 1.5-1.8% of the rest of the fee (well issuing bank and the clearing bank, but you get the picture).

 

Displacing issuing bank is another can of worms and it's hard. Who's gonna take credit risk, etc.?

 

And if they are already displacing the issuing bank, then they should just displace the issuing bank and keep V/MA. ;) Why not pay V/MA .2% if you just saved 1.5% from getting rid of the bank? ;)

 

This is so true. Merchants already have the opportunity to be issuers and most decline.

 

Some stuff I have on payments:

http://imgur.com/a/l3CKY

[wknecht]

merkhet,

still remains the fact that any new entrant, if it is to replace V/MA, must create its new network of relationships with banks all over the world.

It doesn’t sound as an easy thing to do imo… But of course I cannot be sure… If instead it requires little capital and almost no effort, than V/MA business model might seriously be threatened.

This goes well beyond technology: any new entrant must partner with banks on a global scale, displacing the rules and the agreements those banks have become accustomed to dealing with V/MA and introducing new rules and new agreements. To me it seems that lots of work is needed… And why should the banks accept to be bothered with new rules and new agreements? We have seen the already keep for themselves the great majority of the fees in any transaction… It doesn’t seem they have much to gain for this effort of “changing the system”.

 

Cheers,

 

Gio

 

Except, isn't that exactly what it's doing when you register your card with Apple Pay? How hard is it going to be for them to execute agreements once they've essentially "mapped" out the vast majority of people's credit cards using Apple Pay registration?

There seems to me a big difference between mapping the network and it being yours and operating it. They would still have to build secure data pipes to all the relevant parties, not to mention all the rules needed to operate it (authentication, charge backs etc).

 

I think it would be very difficult to convince them. Wouldn't it require a huge process overhaul for the banks also? And for what? When V/MA (who they already trust) aren't that expensive and the banks make tons of money under the current arrangement.

 

Using P2P gets around those challenges. But that has a whole separate set of challenges.

 

A secure data pipe is less about the physicality and more about the encryption at this point. I'm unclear about the rest (authentication, etc.) -- and if anyone has any insight, please feel free to contribute. I'd love to know more.

 

I'm also not 100% about the process overhaul for banks to get onto the new system, but, again, if someone has insight, then I'd love to hear it.

 

I suspect that because of the fact that Apple/Google would be grafting onto an existing network that they'd be able to charge less than V/MA and still be profitable, so maybe they can incentivize banks by giving them more of pie? i.e. if transactions come to 2% and V/MA's share was 15 bps, Apple/Google can charge 5 bps and give another 5bps to banks while giving 5bps back to merchants? Also, unclear.

Agreed the pipes don't need to be physical. But they need a set of rules to find all the relevant parties and transfer data.

 

I think Apple charges 15 bps, compared to the 10 bps charged by V/MA. I think their sell is that they reduce fraud because you have to use biometrics or a password to login before you can 'swipe'. If they reduce enough fraud they may be able to grab more of the pie.

[giofranchi]

How hard is it going to be for them to execute agreements once they've essentially "mapped" out the vast majority of people's credit cards using Apple Pay registration?

 

There are 5,441 commercial banks in the US as of Q2 2015 (https://ycharts.com/indicators/us_number_of_commercial_banks). In Europe there are many more banks. Think about Latin America and Asia… Most of those banks issue credit cards and bear credit risk, don’t they? And most of those banks have established relationships with V/MA.

It doesn’t not seem an easy thing to do to replace those established relationships, which have been hugely profitable for all the banks involved, with new relationships…

But I might be wrong. If instead it is an easy thing to do, V/MA moats might shrink in the future.

We will see.

 

Cheers,

 

Gio

 

[oddballstocks]

How hard is it going to be for them to execute agreements once they've essentially "mapped" out the vast majority of people's credit cards using Apple Pay registration?

 

There are 5,441 commercial banks in the US as of Q2 2015 (https://ycharts.com/indicators/us_number_of_commercial_banks). In Europe there are many more banks. Think about Latin America and Asia… Most of those banks issue credit cards and bear credit risk, don’t they? And most of those banks have established relationships with V/MA.

It doesn’t not seem an easy thing to do to replace those established relationships, which have been hugely profitable for all the banks involved, with new relationships…

But I might be wrong. If instead it is an easy thing to do, V/MA moats might shrink in the future.

We will see.

 

Cheers,

 

Gio

 

Gio,

 

I think you misunderstand MA/V.  There are 6,300 banks or so, but the actual banks aren't issuing credit cards.  Sure they issue a card with their name on it, and the customer think they have a "First Bank of Smallville" credit card, but it's a branded relationship card.

 

Say a small bank wants to do credit card lending.  They buy a package from their core system to support it.  This is the network effect.  They receive MA or V cards.  The bank itself didn't do much.  They extend their balance sheet to an extent, but can even outsource that if they want.

 

The value isn't the pipes, or encryption, or credit checks or anything, it's purely relationships.  That's the value, it's the relationships and a trusted brand.  The brand is so powerful that well read investors on this thread still aren't sure exactly what MA/V does.  They just associate the logos with credit and cards.

 

More than anything I think MA/V are simply brands.  A new merchant starts, what do they need?  They want a machine that takes V/MA and sometimes Amex, but Amex is optional, Discover an after thought.  They trust those networks.

 

Seems like everyone on here is more tuned in, hipper than the general population.  Sure, a little boutique gourmet cupcake place will probably do ApplePay because the trendy customers might want it.  But the value of Mastercard is I can be driving through the middle of Kansas and if I need car repairs I know the small town mechanic will accept my payment.  Do small business owners in Manhattan, Kansas know what Apple Pay is?  I know some very intelligent individuals who still marvel at "the little white thing on an iPad that takes cards" and we think Square is passé.

 

Maybe these businesses are dead.  The thing is world-wide acceptance at the lowest common denominator takes a LONG time.  If MA/V are dead today from ApplePay or the block chain it might take another 20 years before there's some payment system that I can use in Punxsutawney one day and then Leige the next.

 

Credit cards started in the 1960s and they finally hit world wide acceptance at the lowest common denominator in the late 1990s.  Are Apple and Google willing to stick with their payment plans grinding along for 30 years before they hit critical mass?  Maybe, I don't know.

 

The best way to think of MA/V are as clearing houses for banks. 

[SharperDingaan]

Barrons has a bullish article this weekend on Blockchains and how the technology may displace VISA/MC/AMEX/DFS etc.  Curious what bulls think about that.  Probably will take a while.  The article still acknowledges a role for the banks.  Thanks

 

We don’t have a Barron’s subscription, but some related comment.

 

A fundamental re-plumbing of financial services is coming; & it’s not just automation of existing processes. The technologies themselves are disruptive, there are no direct comparatives, & the established interests have most to lose. Those that can adapt will thrive, they will have far smaller workforces, & they will emerge with far easier to operate businesses. It is not going to happen tomorrow; but it will not take 10 years either. http://www.coindesk.com/deutsche-bank-letter-touts-expertise-in-blockchain-tech/

 

The investment angst is because historic metrics are rapidly becoming obsolete. If the future is likely to resemble the past, valuation based on historic multiple makes sense. Not so much, if the future could well look very different. V/MC does not have to lose much market share, for their Year-on-Year growth to either stop dead, or reverse.

 

The best & nearest practical example is derivatives. When first introduced to financial services, very few understood what they did. You pretty much had to be a PhD, & maybe a handful of people even perceived the overall industry ramifications. Yet - whatever ones opinion of them, derivatives have fundamentally changed the industry; & done it very rapidly.

 

If you believe V/MC will successfully adapt, it probably means lower earnings for quite some time; & an eventual smaller more nimble, & more valuable business. Higher tech spend, & market share loss to P2P being the main culprits. Whether they remain independent businesses, is an open question.

 

SD

 

[HJ]

There is no doubt from the little that I have read about blockchains that it is an interesting and likely very useful piece of technology.  But to my mind, perhaps more geared towards cost saving / minimizing fraud or just plain human error in the settlement / clearing function of the financial service industry. The client facing piece of the industry is likely further removed from its impact.  Perhaps the financial institutions themselves will adopt the technology voluntarily down the road.  After all, the industry did voluntarily establish sophisticated settlement/clearing protocols through entities like DTC / Clearstream and until their privatizations, entities like NYSE, NASDAQ, Visa and Mastercard.  And many of these protocols are designed to satisfy regulatory concerns, rather than purely efficiency concerns.  Why do we still have physically settled securities, for example.  It wouldn't be surprising at all if these entities one day decide to adopt some version of the technology in their daily activities in the future to take advantage of what the technology has to offer. 

 

But to position this as something based on which the entire financial service industry (including all the client facing aspects of the business) will be overhauled is a bit far fetched.  The financial service industry is constantly "re-architecting" the settlement / clearing aspects of its business, whether it's in credit card transactions or equity/fixed income / derivative sales & trading, and will continue to do so, applying the latest advances in technology.  Think how trades are confirmed before all the modern communication technologies are available.  I'm inclined to think this is yet another advance of this nature.  The future is in all likelihood not a fight to the death between blockchain and the establishment entities, but some complex coexistence of blockchain and these establishment entities.  And the industry will be all the better for it.

[giofranchi]

Gio,

 

I think you misunderstand MA/V.  There are 6,300 banks or so, but the actual banks aren't issuing credit cards.  Sure they issue a card with their name on it, and the customer think they have a "First Bank of Smallville" credit card, but it's a branded relationship card.

 

Say a small bank wants to do credit card lending.  They buy a package from their core system to support it.  This is the network effect.  They receive MA or V cards.  The bank itself didn't do much.  They extend their balance sheet to an extent, but can even outsource that if they want.

 

The value isn't the pipes, or encryption, or credit checks or anything, it's purely relationships.  That's the value, it's the relationships and a trusted brand.  The brand is so powerful that well read investors on this thread still aren't sure exactly what MA/V does.  They just associate the logos with credit and cards.

 

More than anything I think MA/V are simply brands.  A new merchant starts, what do they need?  They want a machine that takes V/MA and sometimes Amex, but Amex is optional, Discover an after thought.  They trust those networks.

 

Seems like everyone on here is more tuned in, hipper than the general population.  Sure, a little boutique gourmet cupcake place will probably do ApplePay because the trendy customers might want it.  But the value of Mastercard is I can be driving through the middle of Kansas and if I need car repairs I know the small town mechanic will accept my payment.  Do small business owners in Manhattan, Kansas know what Apple Pay is?  I know some very intelligent individuals who still marvel at "the little white thing on an iPad that takes cards" and we think Square is passé.

 

Maybe these businesses are dead.  The thing is world-wide acceptance at the lowest common denominator takes a LONG time.  If MA/V are dead today from ApplePay or the block chain it might take another 20 years before there's some payment system that I can use in Punxsutawney one day and then Leige the next.

 

Credit cards started in the 1960s and they finally hit world wide acceptance at the lowest common denominator in the late 1990s.  Are Apple and Google willing to stick with their payment plans grinding along for 30 years before they hit critical mass?  Maybe, I don't know.

 

The best way to think of MA/V are as clearing houses for banks.

 

Thank you for the explanation.

My question, though, remains the same: is the V/MA system a very efficient mean devised by banks to extend credit to consumers effortlessly? If so, why should banks, which already keep for themselves the great majority of the fees involved in any payment transaction, accept to change that system? What’s their incentive?

 

Cheers,

 

Gio

 

[physcdisp]

The tariff for using VISA/MA "rails" is just 10 bps.  Therefore, they probably can innovate in blockchains or any new technology as that evolves.  Their current solution does not tax the system heavily and hence has more staying power.  The regulatory nature of the business probably can provide ample time for nimble players (as long as current incumbents are nimble) to take on disruption before competition reaches critical mass.  Curious what other folks here think of this.  Thanks