VISA

[wknecht]

What is Google Pay? Can you post a link to what you're referring to? Android Pay, Google Wallet, Google Wallet Card?

 

Other than Google Wallet Card, what Google service circumvents the current payment system in any way?

[Pauly]

Why would it be 'cooler' to use a payment system run by a company whose sole reason for being is data mining for directed advertising? Saving a fraction of a percent won't be enough if people think their financial transaction records are for sale. I'm not saying that things won't change, but doesn't Apple have the upper hand so far? And even they're accepting that they have to work with the big 3.

[SharperDingaan]

https://www.google.com/wallet/

 

The payer pays from their digital wallet, and there is no payment - if the digital wallet does not have sufficient credit. Zero credit risk to Google.

 

Reload the wallet at a $50 balance, and Google just obtained $50 of float at zero cost. Multiply by 100M users, and that is 5 Billion of free money. A 2% return (conservative) on that float is 100M; net of this return, the cost to operate google pay is essentially zero.

 

If both payer and receiver have a google wallet, settlement can easily be made via a simple general ledger cross. If you then want the cash; simply pay your bank account from your digital wallet - & draw the cash out through the banks ATM. Clean, simple, no clearing interchange; and a cost of maybe 5c/cross. Versus a total of maybe $3.50/$100 of transaction using plastic.

 

Plastic is a dying business.

 

SD

 

[rishig]

https://www.google.com/wallet/

 

The payer pays from their digital wallet, and there is no payment - if the digital wallet does not have sufficient credit. Zero credit risk to Google.

 

Reload the wallet at a $50 balance, and Google just obtained $50 of float at zero cost. Multiply by 100M users, and that is 5 Billion of free money. A 2% return (conservative) on that float is 100M; net of this return, the cost to operate google pay is essentially zero.

 

If both payer and receiver have a google wallet, settlement can easily be made via a simple general ledger cross. If you then want the cash; simply pay your bank account from your digital wallet - & draw the cash out through the banks ATM. Clean, simple, no clearing interchange; and a cost of maybe 5c/cross. Versus a total of maybe $3.50/$100 of transaction using plastic.

 

Plastic is a dying business.

 

SD

 

SharperDingaan, you seem very convinced that V/MA, the backbone to payment systems (processing both electronic and plastic payments), are going to die - are shorting it to 0? If not, why not?

[Pauly]

Oh right, Google Wallet. I remember hearing about that when it was launched...3 years ago? 4? Does anybody use it? Maybe the same people who use Google+

 

And from the Google Wallet website : "All purchases are ensured with MasterCard’s Zero Liability protection."

 

[wknecht]

I'm not a payments expert, but even beyond obvious network effects,  it's not clear to me why any buyer would want to use this. There's no credit involved, so you don't build credit history or earn rewards, and you can't spend beyond what you have (which apparently a lot of people like to do). I doubt it will be cheaper (price minus interchange), just like it's almost never cheaper to use cash, and banks can give rewards/cash back to incent credit/debit card use. It's ACH, so if you don't have a balance sitting there (why would anyone when they can use debit?) it's slow and payments aren't guaranteed.

 

Plastic will probably die (John Stumpf has even said as much), but I have a hard time imagining the current payment ecosystem changing much. At the end of the day, it's controlled by the banks. Maybe the interchange will go way down as fraud is reduced by non plastic.

[SharperDingaan]

We have no position in V/MC, and no intent to short them. We're invested in the technology of the developing fin tech instead.

 

The great claim of plastic is free credit if paid promptly, and rewards points; problem is the Kool-Aid has been called, & its come up short.

Most plastic holders have to pay an annual fee to use the card; the reward is a kick-back for overpaying (2% cash back, or points) for what you bought; cards are so routinely defrauded you have to buy insurance against it; and the credit could be obtained a lot cheaper almost anywhere else. Put up collateral, & a credit rating is not a problem.

 

Why not simply pay by debit instead, & stop the bullshit. Simply back the digital wallet with an $X auto-load from your bank account, no different to how you load your transit card. If you ever get defrauded the most you can lose is the $X balance in the wallet.

 

The ongoing financial crisis has changed how many young people around the world choose to do business; bankers are despised by young people in many countries; and the young have seen parents devastated by over borrowing. To many, excessive debt is a bad thing; and a V/MC is personification of that.

 

You use Google Pay, or a debit card - because it proves you have the money. Paying by V/MC suggests you need the credit. Not quite the marketing message a platinum card claims.

 

Yes, to date there has not been the volume to hit the tipping point. It is also the same eco-system, but now with significant distribution through tech platforms - & not just V/MC (who will have lower market share). The fact that all major banks are now aggressively laying off in response to the rise of fin tech; suggests they also agree.

 

Not what we want to hear.

 

SD

 

 

 

[Picasso]

SD, I don't think you know what you're talking about on this topic.  It's fairly easy to refute all your points.  The numbers don't support your claims at all. 

[SharperDingaan]

To each his own; it is not a big deal.

 

SD

[Picasso]

I think the "millenials" have come to a point where they want everything for free. Stock trading for free. Banking for free. Payment networks for free. Content for free. Shipping for free. It's all becoming very silly.

 

There are absoutely tangible benfits for both the buyers and sellers on the existing payment networks when talking about say Visa. Go look up all the sad stories about consumers getting their bitcoins stolen (no reversible transaction, awesome) or the heavy costs of maintaining the blockchain that is paid by the miners. Sure load up your prepaid debit card so that when it gets compromised you lose all your cash with almost no ability to get it back. You suddenly pay a price by becoming the risk taker by shifting that burden off someone like a Visa merchant.

 

I don't think anyone looks down on someone paying with a Visa. Try paying with cash, bars of gold, or bitcoins that take 5 minutes to verify a transaction. I'm sure that will impress your clients at a lunch meeting. 

[orthopa]

I think the assumption that people don't want credit or wont go on credit to obtain things is silly. A quick google search shows average credit card debt per person is $7,529 and total credit card debt of 918.5 billion dollars. Nearly 50% of households carry a balance month to month. That's $7,529 of stuff people wanted NOW but didnt have money for.

 

I think a VERY small % of the population would use a service that would allow them only spend money they have but that is a debit card is it not? I dont think I have ever heard of anyone saying they are sick of taking their credit card out of their wallet bc its old fashioned etc. They want what they cant afford NOW and pulling the plastic out is a very small price to pay for that. For many people having the $$$ available currently takes the attractiveness out of the purchase because they would most likely have to wait.

 

For many people buying stuff they cant afford and having people watch them do it is very exciting. Take a trip to Vegas to observe. For those who say otherwise there is almost a TRILLION dollars waiting to argue with you.

 

With almost $1,000,000,000,000 of outstanding in credit card debt as of 10/15, 6% of GDP of the biggest economy in the world....did the financial crisis really change people that much?

[SharperDingaan]

A little humour.  Clearly the crisis HAS changed things, & probably forever …

http://www.telegraph.co.uk/finance/financial-crime/11988110/Bad-bankers-are-like-shoplifters-says-George-Osborne.html

 

"If you go and shoplift at the local WH Smiths you go to prison," he said. "But if you’re the market trader on the trading floor of a big investment bank, and you rip off people to the tunes of millions of pounds, there are no criminal offences to deal with you."  The Chancellor said that "there was a lot of totally understandable anger" at bankers, as they were in part responsible for "the biggest single economic crash of our lifetimes".  "The idea that you can just ... move on is, I think, a bit optimistic". “People on the whole would prefer, in a wine bar, to say proudly that they are a banker, rather than mumble or imply that they run a brothel or something more respectable and useful.” So despised … that you have to say that you are something else!

 

No-one is suggesting that credit card use will go to zero tomorrow, or that no-one will roll a balance. But the fact is that if you do it repeatedly; it is either because you have no other cheaper credit, or you’re too lazy to actually pay your bills on time. Neither is attractive, & you are not the target market.

 

Fin tech is not understood. The simplest digital currency is a routine cross between 2 customers of the same bank (debit customer A, credit customer B, zero cash change); it’s not just block chain, or some crypto-currency. Google Pay is also just a digital payment facilitator; functionally no different to Uber helping you find a ride. Google Pay is not a bank, and Uber is not a taxi service. The underlying cross process itself is also ancient and proven; it is just an updated and modernized version of Hawala, or Hundi. https://en.wikipedia.org/wiki/Hawala

 

Network effects are also not fully understood. Monkey see – monkey do is well understood and used every day to market card prestige. Not so understood is that the bigger the banks customer base, the greater the % of total volume that can be executed via nominal cost crosses. The Google Pay network is anyone in the world with an account; and that execution via nominal cost crosses may be 2-3x what it might be for a regular bank. Scale matters.

 

All it needs is a global Microsoft Windows 95 type launch with new age music; aimed at young people, ridiculing bankers, and pitching no credit required as the new sexy. It’s ours, its tech savvy, it’s not banking, and it’s not your grandpa’s f'ing credit card. F**k the banker! Flip the bum in the pin-stripe outside the door a quarter, as you leave the door of the rock concert, restaurant, or supermarket.

 

Light a match to the anger at bankers, and capitalize.

 

SD

 

[Liberty]

The existing payment rails are incredibly convenient and valuable. Nobody wants to have to get millions and millions of merchants big and small to accept a new form of payment, and have to deal with all the banks, the fraud, etc. That's why Apple built Apple Pay on top of the existing rails, and I believe that their rumored P2P system will probably use the existing system.

 

Stuff that Google and Apple will do might compete with a few functions offered by banks/payment processors (virtual prepaid debit cards? cheap digital cheques between people?), but I doubt they are ready to replace the main function and be in the middle of an incredible web of merchants, banks, and consumers.

 

Visa, Mastercard, American Express have been around a long time and have grown up with the economy and that's why they're everywhere. If you're trying to start a new payment network, you have a chicken and egg problem; why would merchants support you if nobody is paying with your system? Why would consumers sign up and use your system if few merchants support it? You just want to pay your groceries and move on, and the current system has very little friction, so whatever replaces it must be quite good (which is why Apple Pay has the most traction right now... even less friction while keeping all advantages of credit cards).

[giofranchi]

I have opened a position in both V and MA.

Apple Pay might be a competitor, but I doubt it will impair V and MA’s business: Apple Pay imo is meant to be a valuable service in the Apple’s ecosystem, but it will never be Apple’s core business. And even a company with Apple’s wherewithal might have an hard time competing against V and MA, if it doesn’t make the payment business its core business…

Furthermore, if Apple Pay is truly so much successful as to impair V and MA’s business, my investment in Apple could be viewed as a sort of hedge for the positions I have opened in V and MA.

 

Cheers,

 

Gio

 

[giofranchi]

I'm willing to pay a "fair" price for a good business but this valuation is hard to swallow. 

 

I know, and I agree it’s selling for very high multiples. Unfortunately, it is selling at these levels since at least 2010 (the beginning of this thread)… Therefore, as usual, I have opened a position, leaving room to average down.

 

Cheers,

 

Gio

 

[giofranchi]

I have read every post by SD on this thread… And sincerely I have understood very little… Can someone explain in easy to understand terms what is supposed to have so dramatically changed in V and MA’s business during the last 5 years?

 

Thank you,

 

Gio

[wknecht]

Here's a recent conversation with Richard Davis (US Bank CEO) talking a little about payments and Fintech (starts around the 25 min mark). It's from a bank's perspective. What worries him and what doesn't.

 

http://phx.corporate-ir.net/phoenix.zhtml?p=irol-eventDetails&c=117565&eventID=5212123

[SharperDingaan]

Gio; a lot has happened - it just isn’t visible yet.

No different to rust on a car; by the time you see it, it has already occurred.

 

V/MC is just a payment system; one of many, all competing to allow person A to pay person B as cheaply and efficiently as possible. It is the plumbing that allows the payment to occurr.  Cash, digital P2P (peer-to-peer), debit, crosses, Hawala, etc. are just different kinds of payment systems – unique plumbings, each with their own pro’s & con’s.  The customer uses whatever best suits their purpose.

 

Business wise this is identical to multiple vendors offering the same commodity product – a process by which to pay. Lowest cost producer wins; scale up to minimize fixed cost per transaction. Add a new & viable payment system (P2P), and everybody gives up some market share; the more mature the product is in its life-cyle - the more market share the product is likely to give up. V/MC is mature product.

 

Block chain technology is not a payment system, but it can be used as one (ie: Bitcoin). It is simply a robust digital token ID verification process, with a low cost audited transactional history of all transactions that the chain has been through. The chief cons are its slowness, and CPU processing requirements.

 

Used as crypto-currency - block chain technology allows anonymous, unlimited sized payments to be made; in zero trust environments, entirely outside of the global banking system. Hence the global AML/ATF interest in the technology.

 

P2P transactions are dirt cheap, so long as both parties are on the same network; if one of them isn’t – you have to touch the banking system; & pay. To avoid V/MC machine & processing fees, all a restaurant or bar owner need do is open an account on each of the major P2P networks, & advertise it on the door of their establishment.

 

The mystery is to what extent establishments will do it, & to what extent will their clientele use it. Usage is likely to differ widely across both generation & type of clientele. I advocate a more rapid than expected take-up by the young and disaffected; and by those in Asia.

 

At present; game theory argues working with versus against P2P rivals. Anyone's guess as to how long that will last.

 

SD

 

[Picasso]

What proof do you have that operating the blockchain is low cost? 

 

The attractiveness of bitcoin is ridiculous.  I mean how about this for irony:

 

https://blog.coinbase.com/2015/11/20/introducing-the-shift-card/

 

Cool!  I get to spend my bitcoin at any merchant!.....that accepts Visa.... oh.....

[rishig]

I have read every post by SD on this thread… And sincerely I have understood very little… Can someone explain in easy to understand terms what is supposed to have so dramatically changed in V and MA’s business during the last 5 years?

 

Thank you,

 

Gio

 

I am very open to a rational discussion. In fact, I want to know about any disconfirming evidence for any company I am long in. However, SD's arguments have mostly being academic and has put forth very little empirical data to show why Visa/MasterCard are dying, as he suggests in all his threads. Sorry SD, but I am going to ignore your threads until we can engage in a meaningful discussion.

 

Having said that, I reduced my position recently with the run up. I still have a reasonably sized position, but personally I think it is prudent risk management to take some profits off the table when valuations are in the fair value range for a business that is a "compounder".

 

[KCLarkin]

SD, you seem to be ignoring the consumer's incentives. Visa uses kickbacks to reward consumers for using their credit cards. Even ignoring the major avantage of credit, consumer's have a negative incentive to switch to an alternate payment platform. Other technologies may take some share from cash payments, but the likelihood of them signficantly harming Visa is close to zero.

 

There are regulatory risks but the disruption risk is way overblown.

[Picasso]

Or how about this for P2P:

 

https://www.cryptocoinsnews.com/ghostsec-isis-bitcoin-wallet-worth-3-million/

 

The Islamic State does use cryptocurrencies as a form of income to fund their ongoing operations and we have managed to uncover several Bitcoin addresses used by them.

 

Must be awesome when your digital wallet ends up on the same chain as an ISIS transaction. 

 

Sure there will some some niche for people who want to implement this kind of P2P (ISIS, drug smugglers, people upset about fiat money for some reason, etc.), but it's not going to be some large percentage of global transaction volumes.

[SharperDingaan]

What proof do you have that operating the blockchain is low cost? 

 

The attractiveness of bitcoin is ridiculous.  I mean how about this for irony:

 

https://blog.coinbase.com/2015/11/20/introducing-the-shift-card/

 

Cool!  I get to spend my bitcoin at any merchant!.....that accepts Visa.... oh.....

 

You can look up the current hashing rate here: http://bitcoin.sipa.be/ It's around 30,000 Gigahashes/second. Divide the hashing rate of your hardware by that number. I will use my GTX-260 as an example, it's hashing 40 Megahashes/sec, so is 1.3 x 10-6 of the total network power. Therefore I expect to earn that fraction of the 3600 new coins generated per day, or 0.0048 coins/day. At current prices, that is worth $0.1632/day. You would compare that to the cost of running the equipment, to tell if it earns a current profit. My graphics card costs an incremental 94 watts of power to mine (above what the computer draws anyway). I don't count my base PC power usage, because I am doing other things at the same time, like writing this post :-). If you have a dedicated mining machine, then you need to count the full hardware and electricity costs. So at my electric rates, it costs 2.25 kWh = $0.27/day to mine.

 

The operating cost is the electricty for the computer.

If all the miners CPU power were from just these  GTX-260 CPU’s , the operating cost would be $202,500/day (0.27/(3600/0.0048); or $56.25/coin. The value of that coin today is approx USD 320  https://exchange.coinbase.com/. 

 

http://www.thestar.com/business/2014/02/26/ontarios_big_industries_plead_for_lower_hydro_rates.html 

http://michaelbluejay.com/electricity/computers.html

In Quebec, with its big hydro facilities, industries paid 4.5 cents a kilowatt hour. In Manitoba, which is also hydro-rich, the price was 3.6 cents. Most laptop computers use about 15-60 watts, far less than desktops.

 

Simply run these miners out of high end 15 watt laptops in Manitoba, and it would cost roughly CAD 1.20/coin (15/94)*(3.6/27)*56.25. Use real computers with lower power consumption, and the cost will be under CAD 1.00 per 3rd party verification - and this is very back of the envelope. 

 

SD

 

 

[orthopa]

I'm willing to pay a "fair" price for a good business but this valuation is hard to swallow. 

 

I know, and I agree it’s selling for very high multiples. Unfortunately, it is selling at these levels since at least 2010 (the beginning of this thread)… Therefore, as usual, I have opened a position, leaving room to average down.

 

Cheers,

 

Gio

 

Yeah it has always been priced as a great business. I fortunate enough to buy some a couple summers back when there was the swiping fee scare. As a compounder IMO this will do great over time but getting a great price will help all that much.

[nodnub]

What proof do you have that operating the blockchain is low cost? 

 

The attractiveness of bitcoin is ridiculous.  I mean how about this for irony:

 

https://blog.coinbase.com/2015/11/20/introducing-the-shift-card/

 

Cool!  I get to spend my bitcoin at any merchant!.....that accepts Visa.... oh.....

 

"You can look up the current hashing rate here: http://bitcoin.sipa.be/ It's around 30,000 Gigahashes/second. Divide the hashing rate of your hardware by that number. I will use my GTX-260 as an example, it's hashing 40 Megahashes/sec, so is 1.3 x 10-6 of the total network power. Therefore I expect to earn that fraction of the 3600 new coins generated per day, or 0.0048 coins/day. At current prices, that is worth $0.1632/day. You would compare that to the cost of running the equipment, to tell if it earns a current profit. My graphics card costs an incremental 94 watts of power to mine (above what the computer draws anyway). I don't count my base PC power usage, because I am doing other things at the same time, like writing this post :-). If you have a dedicated mining machine, then you need to count the full hardware and electricity costs. So at my electric rates, it costs 2.25 kWh = $0.27/day to mine."

 

 

SD,

 

I don;t see the relevance. This reddit comment is from March 2013. A lot changed since then in bitcoing. People on reddit.com/r/bitcoin now are talking about using custom bitcoin mining hardware just to try to heat their apartment and breakeven. The hash rate has gone up by a factor of 17,000 since March 2013!!

 

This example is a graphics card running on a desktop PC has been a non starter for a long time now.  Any profitable bitcoin generation is done on ASIC custom hardware for the last couple of years. If you are not a large operation you can not mine bitcoin efficiently enough to be profitable. There will be further concentration/centralization of bitcoin mining in the future which is likely to create other problems.

http://www.thestar.com/business/2014/02/26/ontarios_big_industries_plead_for_lower_hydro_rates.html 

http://michaelbluejay.com/electricity/computers.html

In Quebec, with its big hydro facilities, industries paid 4.5 cents a kilowatt hour. In Manitoba, which is also hydro-rich, the price was 3.6 cents. Most laptop computers use about 15-60 watts, far less than desktops.

 

Simply run these miners out of high end 15 watt laptops in Manitoba, and it would cost roughly CAD 1.20/coin (15/94)*(3.6/27)*56.25. Use real computers with lower power consumption, and the cost will be under CAD 1.00 per 3rd party verification - and this is very back of the envelope. 

 

SD

 

It's not that simple.  The math is wrong... and it doesn't work like this. There is no such thing as a high-end 15 watt laptop that is capable of efficiently mining bitcoin.  The change rate of mining difficulty makes it difficult to determine if your hardware investment will have positive ROI over it's lifetime. A couple years ago there were a bunch of people that bought ASIC bitcoin miners and if they were unlucky with timing of bitcoin mining difficulty changes or it shipped 30 days late then they might barely recover the cost of electricity to run it...  Your bitcoin mining "power" is constantly eroded by inflation of the difficulty of the mining algorithm.