VISA

[giofranchi]

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

 

Thank you SD!

Just let me put it this other way: do you have a name?... I mean of course the name of a company that could disrupt V and MA business.

A technology is never enough imo. There must be the willingness and the ability to take away business from incumbents so much entrenched and mighty as V and MA are.

Which is that company?

 

Thank you,

 

Gio

[JBTC]

Seems to me the fascination with technology may be overdone.

 

V/MA rule the world not because of the technology they use.  It's the same thing over the past few decades.  It's the marketing and alliance building so powerful that both millions of merchants and billions of consumers have agreed to adopt.  V/MA own no technology. 

 

In a similar way Western Union has dominated money transfer.  It has nothing to do with technology.  WU is about marketing and compliance.  That said the outlook and moat WU has is not comparable to what V/MA have.

 

 

[blainehodder]

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

 

Thank you SD!

Just let me put it this other way: do you have a name?... I mean of course the name of a company that could disrupt V and MA business.

A technology is never enough imo. There must be the willingness and the ability to take away business from incumbents so much entrenched and mighty as V and MA are.

Which is that company?

 

Thank you,

 

Gio

 

I can think of 3 that are already on the path:

Amazon, Google, and Apple. I agree 100% with SD, and I think the rate of displacement will be shocking. 5-10 yrs from now, I imagine V/MA market share will collapse on transactions.

 

The real question in my mind is why wouldn't Amazon, Google, and Apple wipe them out and swallow up what has been a fabulous, scalable business? They already have the keys to your pocket and your mind. They have the capital to compete. Now it is just implementation.

 

The moat has proven extremely durable in the past but I believe ubiquitous smart phone use completely nullifies it. The phone allows easy access on the consumer side to replace the cards. As consumers shift, so will merchants, particularly if it saves the merchants money, which it will.

[giofranchi]

I am assidous buyer of both Amazon and Apple's products... And to do so I always use my credit card... Cannot say about Google...

Though I think I can see how Apple and Amazon might compete in the payment business, I don't think it will ever become their core business.

 

Cheers,

 

Gio

[blainehodder]

I am assidous buyer of both Amazon and Apple's products... And to do so I always use my credit card... Cannot say about Google...

Though I think I can see how Apple and Amazon might compete in the payment business, I don't think it will ever become their core business.

 

Cheers,

 

Gio

 

I think you may be missing my point. You probably have an iPhone or an Android phone. If Apple or Google (or Amazon through an application) waved a wand tomorrow and offered simple payment services, p2p pay, and even credit through the phone (at likely far cheaper rates), it would be more convenient, and save both merchants and consumers money. Need to transfer 20 bucks to someone in Turkghanostralia for close to free? No prob. Need to pay for a new computer or  restaurant bill? No problem.

 

Since that is definitely possible, and is obviously profitable, can you imagined the armies of engineers at those companies not waving that wand?

 

I don't think the 'not a core' business argument applies. Apple and Google aren't core gaming companies, but oops, they wiped out Nintendo and swallowed the profits. They pursue massive growth using the excellent platforms they have created. People even like them! This is simply another avenue of growth leveraging off the same platforms. And I imagine people would love any excuse to switch to them for p2p, payments, and credit. I would.

 

As SD has pointed out, the foundation is being laid out for this. People under 50 will likely shift quickly. V/MA will become the AOL of payments:

 

-a complete rip off

-a terrible, broken experience compared with what is possible

-targeted at old people and slow adopters.

 

 

[giofranchi]

What I meant is that to grant credit to consumers is not like developing video games. Whenerver you grant credit, you'd better make it your core business, or don't make it at all... The risks are much higher than putting together a bunch of smart app developers and producing video games.

Am I wrong?

 

Cheers,

 

Gio

[blainehodder]

What I meant is that to grant credit to consumers is not like developing video games. Whenerver you grant credit, you'd better make it your core business, or don't make it at all... The risks are much higher than putting together a bunch of smart app developers and producing video games.

Am I wrong?

 

Cheers,

 

Gio

 

I honestly don't know if you are right or wrong. Which is why I wouldn't buy the Visa shares at 30x PE.

[shhughes1116]

P2P is an interesting concept, but it is not going to replace Visa, MasterCard, Discover, AmEx, etc.  Suggesting that P2P is going to replace or substantially impair these business models fails to recognize why people started to use credit cards in the first place....CREDIT. 

 

P2P is essentially a cash transaction, without having to hand over physical cash.  If you don't have dollars in your account at that point in time, than P2P does not work.  So unless we are going to a pay-as-you-go society, P2P will never work for most transactions. 

 

But let's assume for a second that P2P platforms overcome this hurdle and manage to offer credit directly.  Giofranchi hits this point spot on.  Once you transition from technology company to financial company, you become subject to a host of regulatory requirements.  I have a lot of trouble seeing these P2P platforms offer credit directly because they will never have the customer base necessary to do so in a competitive manner.  This is why the current oligopoly has such a moat.  Apple and Google will never compete with this oligopoly because they recognize it is more profitable to collect a toll on each transaction from an electronic device, than it would be to offer credit directly (and deal with all of the associated regulatory costs).   

 

But wait, maybe P2P companies try to emulate Visa and Mastercard by offering co-branded credit cards where the banking institutions offer the credit and the P2P platform simply provides the plumbing to make this system work.  You want to know why this will never happen?  Strict liability.  If something goes wrong with the P2P platform (i.e. fraud, money laundering, terrorism-related transactions), the concept of strict liability means that both the P2P platform and the banking institution will be on the hook for lawsuits.  And don't try to tell me that the banks will indemnify themselves through a robust contract with the P2P platform...indemnification doesn't work so well when your partner's pockets are empty and they will go out of business after the first lawsuit.

 

There is certainly going to be substantial change in the payment industry over the next decade, but I believe that the current regulatory regime, along with the way our current justice system works, will provide an almost impenetrable moat for the incumbent operators.

 

[Guest Schwab711]

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.

 

I agree with this and I think the market is overly optimistic about V/MA's moat at the moment. It seems like investors are assuming V/MA have an impenetrable moat when they are actually competing for a market that has a trend of deflationary pressure for multiple decades. V/MA's current moat is due to their cost advantage [in general] of transferring money between accounts at different financial institutions and their accuracy rate of verifying these balances ("low enough" fraud-rate) in real-time. V/MA have a critical-mass of deposit-taking institutions and merchants, thus creating the largest subsets of eligible participants to transfer money. For that reason, I think it will be nearly impossible for others to compete using V/MA's business model. However, there is also the possibility that deflationary pressures outweigh growth/efficiency or V/MA become an unnecessary middle-man. A new model will likely be necessary for the latter, possibly a system that can escape the Fed Reserve-like model of balance confirmation.

 

I don't see Apple Pay, Google Wallet, or Amazon Pay being competitors since they all run on top of V/MA's network to move balances between institutions (AMZN/AAPL probably do have accounts at multiple deposit institutions to lower fees) and PYPL has already set the market price [free] for p2p txns. PYPL attempts to avoid V/MA's network by having users deposit money directly to their PYPL account, making them debit txns. PYPL cannot avoid V/MA's network if you use your CC (PYPL uses their ATM access agreements to process debit transactions). Even PYPL can't avoid paying a toll to use V/MA's monopoly. Only AXP appears to be immune from V/MA, but they have their own risks. A crypto-currency network could have the necessary qualities to up-seat V/MA, but I think it will be impossible to do so with non-USD currency and while ignoring KYC/AML regulations.

 

The biggest threat I see to V/MA is increased deposit density in the US (and Europe, but I don't know as much about payments/banking there). To see why, let's look at why V/MA exist in the first place. V/MA came around in the 50's/60's when each town/city had their own bank and folks did not travel between towns at anywhere near the same rate as today. Business's and banks were truly able to know their own customers. If people did not have cash, businesses were forced to make the decision of whether to accept a check from a stranger or to decline their business. It was common for individuals to have "credit" accounts at various merchants (e.g. local grocery store) and credit cards like Diner's Club provided the same functionality for the first time. The BankAmericard was an exciting innovation because it was the first "All-purpose" card in America (at least on a mass-scale). The BankAmericard created a network of merchants and financial institutions that shared data, which allowed merchants to confirm customer account balances and transfer money in real-time (real-time circa 1960). This is still V/MA's core service to this day (their advantage is the critical number of merchants and deposit-institutions they connect with the ability to accurately confirm and move account balances in real-time).

 

However, with each passing year, bank regulations and technology improvements (pseudo-minimal requirements) have dramatically shifted American deposits from community banks and credit unions to national banks (such as the big-4; which have ~45% of US deposits). An example of my concern is Canada's Interac. Canada has such a high deposit density at 8 banks (nearly 100%) that merchants can assume customers will have an account at one of these banks (skipping V/MA network for many txns). Thus, the network node pain-point is gathering merchant as opposed to it being equally difficult gathering deposit institutions like in the US, Europe, or some of Asia. If the US banking industry continues to consolidate then it will eventually reach a critical density that will allow the US big-4 to partially, but materially, circumvent the V/MA network. AXP is much better insulated from this risk because it has a fully closed-network with a subset of in-demand users.

 

big-4 US banks:

http://www.forbes.com/sites/greatspeculations/2015/05/22/q1-2015-u-s-banking-review-total-deposits/

CAD Deposit info (~100% of CAD deposits are at 8 institutions):

http://www.cba.ca/contents/files/statistics/stat_bankq_en.pdf

 

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

 

Spot-on imo. Deposit density in the US is making this a real concern (merchants need less bank accounts to accomplish what you propose). The only thing preventing this is American's love-affair with "credit" txns as opposed to debit (not necessarily credit cards). This is definitely a major concern that could quickly sneak up on V/MA.

 

Cool article that shows how complex systems can be up-turned with seemingly small changes:

https://www.quantamagazine.org/20151117-natures-critical-warning-system/

 

I still think V/MA are fantastic businesses.

[rishig]

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.

 

I agree with this and I think the market is overly optimistic about V/MA's moat at the moment. It seems like investors are assuming V/MA have an impenetrable moat when they are actually competing for a market that has a trend of deflationary pressure for multiple decades. V/MA's current moat is due to their cost advantage [in general] of transferring money between accounts at different financial institutions and their accuracy rate of verifying these balances ("low enough" fraud-rate) in real-time. V/MA have a critical-mass of deposit-taking institutions and merchants, thus creating the largest subsets of eligible participants to transfer money. For that reason, I think it will be nearly impossible for others to compete using V/MA's business model. However, there is also the possibility that deflationary pressures outweigh growth/efficiency or V/MA become an unnecessary middle-man. A new model will likely be necessary for the latter, possibly a system that can escape the Fed Reserve-like model of balance confirmation.

 

I don't see Apple Pay, Google Wallet, or Amazon Pay being competitors since they all run on top of V/MA's network to move balances between institutions (AMZN/AAPL probably do have accounts at multiple deposit institutions to lower fees) and PYPL has already set the market price [free] for p2p txns. PYPL attempts to avoid V/MA's network by having users deposit money directly to their PYPL account, making them debit txns. PYPL cannot avoid V/MA's network if you use your CC (PYPL uses their ATM access agreements to process debit transactions). Even PYPL can't avoid paying a toll to use V/MA's monopoly. Only AXP appears to be immune from V/MA, but they have their own risks. A crypto-currency network could have the necessary qualities to up-seat V/MA, but I think it will be impossible to do so with non-USD currency and while ignoring KYC/AML regulations.

 

The biggest threat I see to V/MA is increased deposit density in the US (and Europe, but I don't know as much about payments/banking there). To see why, let's look at why V/MA exist in the first place. V/MA came around in the 50's/60's when each town/city had their own bank and folks did not travel between towns at anywhere near the same rate as today. Business's and banks were truly able to know their own customers. If people did not have cash, businesses were forced to make the decision of whether to accept a check from a stranger or to decline their business. It was common for individuals to have "credit" accounts at various merchants (e.g. local grocery store) and credit cards like Diner's Club provided the same functionality for the first time. The BankAmericard was an exciting innovation because it was the first "All-purpose" card in America (at least on a mass-scale). The BankAmericard created a network of merchants and financial institutions that shared data, which allowed merchants to confirm customer account balances and transfer money in real-time (real-time circa 1960). This is still V/MA's core service to this day (their advantage is the critical number of merchants and deposit-institutions they connect with the ability to accurately confirm and move account balances in real-time).

 

However, with each passing year, bank regulations and technology improvements (pseudo-minimal requirements) have dramatically shifted American deposits from community banks and credit unions to national banks (such as the big-4; which have ~45% of US deposits). An example of my concern is Canada's Interac. Canada has such a high deposit density at 8 banks (nearly 100%) that merchants can assume customers will have an account at one of these banks (skipping V/MA network for many txns). Thus, the network node pain-point is gathering merchant as opposed to it being equally difficult gathering deposit institutions like in the US, Europe, or some of Asia. If the US banking industry continues to consolidate then it will eventually reach a critical density that will allow the US big-4 to partially, but materially, circumvent the V/MA network. AXP is much better insulated from this risk because it has a fully closed-network with a subset of in-demand users.

 

big-4 US banks:

http://www.forbes.com/sites/greatspeculations/2015/05/22/q1-2015-u-s-banking-review-total-deposits/

CAD Deposit info (~100% of CAD deposits are at 8 institutions):

http://www.cba.ca/contents/files/statistics/stat_bankq_en.pdf

 

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

 

Spot-on imo. Deposit density in the US is making this a real concern (merchants need less bank accounts to accomplish what you propose). The only thing preventing this is American's love-affair with "credit" txns as opposed to debit (not necessarily credit cards). This is definitely a major concern that could quickly sneak up on V/MA.

 

Cool article that shows how complex systems can be up-turned with seemingly small changes:

https://www.quantamagazine.org/20151117-natures-critical-warning-system/

 

I still think V/MA are fantastic businesses.

 

Schwab711, this is a real risk that the large money center banks that control most of deposits start their own "closed-loop" networks. In fact, Chase is the way ahead in this game relative to other banks. They started ChasePay in partnership with MCX. At Money2020 conference held in Las Vegas on November 11, Gordon Smith from Chase talked about the success they have been having with the initial launch. IIUC, international transactions for a long time, will continue to occur on Visa's payment processing system.

[physcdisp]

Thanks for the discussion.  Curious how does the Chase Pay work.  I understand it goes through VISA's 'rails'.  Is it that Chase Bank sets the interchange as opposed to VISA and just pays a token amount to VISA for using its network?  How big is the threat in the long-term? 

[rishig]

Thanks for the discussion.  Curious how does the Chase Pay work.  I understand it goes through VISA's 'rails'.  Is it that Chase Bank sets the interchange as opposed to VISA and just pays a token amount to VISA for using its network?  How big is the threat in the long-term?

 

Here's more on ChasePay. In the intermediate term, PayPal is the one that has most to worry. In the longer-term, if it is successful, they could process payments on their own "closed-loop" network instead of relying on Visa's. In my opinion, in the longer-term, American Express has more to worry than Visa/MasterCard as they could become a more successful closed-loop network than American Express given its reach.

http://www.pymnts.com/news/2015/through-the-mobile-payments-looking-glass/

 

pymnts.com is a great website to follow developments in the Payments industry. Another one to follow is http://glenbrook.com/

[Guest Schwab711]

It certainly makes JPM, WFC, and BAC all the more appealing. It seems like JPM stands the best chance of creating the next network of the 3.

 

I didn't realize ChasePay was live and I really like the potential.

[SharperDingaan]

We agree - the current names are Amazon, Google, & Apple; Microsoft & one of the big Chinese firms as well – but as enablers, not the platforms themselves. Initially the industry will be everyone and his dog; but it will rapidly consolidate to achieve scale. Don't compete by trying to replicate the V/MC business model; change the game by competing on global consumer distribution - & offering faster, cheaper, & more reliable payments; at similar quality and flexibility.

 

Nothing says the platform provider has to give you credit; Uber is not a taxi service, & the platform provider is not a bank. If you want credit, simply borrow from your bank & pay the cash to the provider. They will credit your wallet; then simply pay who you want. No need to pay the annual V/MC fee, and no fee to make the payment. No credit risk to the platform provider either, as there is no payment if there are no credits.

 

So what. Pay 22x trailing earnings, when the stock normally trades at 27x, and you must have got a hell of a deal. If you think that P2P is not going to result in V/MC earning less than the most recent trailing earnings - at any point over the next 22 years, you may be right. But if P2P outside of V/MC becomes commonplace - at any point over those next 22 years, you could be seriously wrong. The first internet URL went up in 1993; 22 years later we cannot do anything without the internet.

 

Block chain makes little sense for payment purposes (i.e.: Bitcoin). We tried to over simplify & illustrate that the mine cost is essentially the cost of the electricity used to run the CPU; nominal per verification. The actual calculation is of course more complex, & comparison to today’s numbers illustrates the power of Moore’s Law https://en.wikipedia.org/wiki/Moore%27s_law.

 

Much of the resistance is because we cannot imagine a plastic world without V/MC. No one wants to hear that their favorite cow could well be delivering less milk over the future.

 

SD

 

[giofranchi]

However, with each passing year, bank regulations and technology improvements (pseudo-minimal requirements) have dramatically shifted American deposits from community banks and credit unions to national banks (such as the big-4; which have ~45% of US deposits). An example of my concern is Canada's Interac. Canada has such a high deposit density at 8 banks (nearly 100%) that merchants can assume customers will have an account at one of these banks (skipping V/MA network for many txns). Thus, the network node pain-point is gathering merchant as opposed to it being equally difficult gathering deposit institutions like in the US, Europe, or some of Asia. If the US banking industry continues to consolidate then it will eventually reach a critical density that will allow the US big-4 to partially, but materially, circumvent the V/MA network. AXP is much better insulated from this risk because it has a fully closed-network with a subset of in-demand users.

 

Isn’t this supposed to be a global service? If consumers have to travel abroad, a service that grant them access to credit wherever they go is surely valuable. Isn’t it?

Why would consumers choose a service that provides them with credit in the US, when they already have a service that provides them with credit globally?

 

Cheers,

 

Gio

[giofranchi]

Nothing says the platform provider has to give you credit; Uber is not a taxi service, & the platform provider is not a bank. If you want credit, simply borrow from your bank & pay the cash to the provider. They will credit your wallet; then simply pay who you want. No need to pay the annual V/MC fee, and no fee to make the payment. No credit risk to the platform provider either, as there is no payment if there are no credits.

 

If it were so easy, banks would be doing that already, wouldn’t they? But the job of granting credit is not that easy at all. It would require many costs banks are not sustaining right now, and therefore it would certainly not be free to consumers.

My understanding is that V and MA are able to assume those risks exactly because they are just two players in a very large market: they couldn’t extend credit like banks give loans, they couldn’t be studying in detail the spending habits of hundreds of millions of consumers. Instead, it seems to me they extend credit much like insurance companies underwrite insurance contracts: basing their judgements on statistics. The fact V and MA share between themselves the whole market gives them access to a large enough population, assuring that overall delinquencies will be manageable and, as a consequence, overall results will be satisfactory.

The larger the number of players which grant credit to consumers, the lower the population each player will be able to reach, the higher the required controls will be, the higher the costs.

Am I wrong?

 

Much of the resistance is because we cannot imagine a plastic world without V/MC. No one wants to hear that their favorite cow could well be delivering less milk over the future.

 

I am attached to neither V nor MA… I have just started a small position to study and monitor them… If I am wrong, no problem: I’ll sell them and buy GOOG instead!

I just want to understand their market better.

 

Cheers,

 

Gio

 

[SharperDingaan]

Separate the loan making process from the payment process. Agreed loan granting is a specialized process, usually best done by bankers; but the payment process is all about cost/transaction, speed, reliability, flexibility, etc. Bankers are not so good at the payments side - if they were; there would be no PayPal, Apple Pay, etc.

 

The reality of course is that bankers are actually very good at payments, but they have allowed their high fees to price them out of the market. You can price skim, only so long as users have no other alternative; alternatives are getting developed.

 

End result is lower future earnings for V/MC.

 

SD

 

[giofranchi]

Separate the loan making process from the payment process.

 

Now consumers have a service that does both. And it works very well. They have to do just one thing instead of two. I don’t see why consumers will ever accept to separate the loan making process from the payment process… Especially because it is not clear their overall costs will diminish substantially, since the loan making process, if performed by banks, will entail new costs. And the service, taken as a whole: the payment process done by Apple Pay + the loan making process done by banks, will lead to a much worse user experience than the service provided by V/MA.

 

End result is lower future earnings for V/MC.

 

Will V/MA have to reduce their fees in the future? Probably yes. Will they penetrate new markets like India and China, where payments are still 90% cash payments? Probably yes. Which factor will prevail? Difficult to say, but it is not at all clear to me V/MA’s future earnings will be lower.

 

Cheers,

 

Gio

[SharperDingaan]

Gio, you are missing the point; consider a very simple back-of-the envelope

 

Imagine tbere is currently $200 of total business. Asia expands the total business by 25% to 250. XYZ Credit Card Company currently has a 50% total market share, & expects it to remain that way with the addition of Asia;  XYZ  business goes from $100 (50% x $200) to $125 (50% x $250). Shareholders anticipate higher earnings from the additional business, and everybody is happy.

 

Now imagine that P2P shows up, & collectively reduces the XYZ Credit Card Company to a 40% total market share. Total business (including Asia) is still $250, but that 40% share is now only worth $100. Same as it was before the Asian addition, but zero growth. Assume we have no idea why folks chose to use P2P; they just do.

 

What happened?  The equivalent of that anticipated Asian growth in the total business went to our P2P friends; XYZ Credit Card Company just trod water.

 

Obviously the numbers are manufactured, but it’s pretty clear that it will not take much of a collective market share loss to materially erase much of the Asian expansion benefit.

 

SD 

 

 

[Pauly]

Interesting points being made. The bear case for V underplays a couple of important factors, IMO:

 

-V/MA have built up incredible reputations in the last few decades. A lot of people *hate* their bank, and the banking industry in general. Yet V+MA are two of the most well respected financial services brands. This won't change overnight and will be very difficult to compete with, even with very deep pockets.

It's like Buffet's quote regarding Coke: if you were given $100 billion to dislodge V/MA, could you do it? I'm doubtful.

 

-the talk of new technology overtaking the duopoly seems to assume that V/MA are standing still. These are nimble, asset light firms whose sole business is payment processing. It's all they think about. I'm confident in their ability to adapt to new technologies, they've done it wonderfully so far.

 

[orthopa]

SD.

 

I guess a have a couple questions since I don't know enough about the technology. 

 

1. Why doesn't V/MA develop a similar technology they can exploit?

 

2. If a decline is imminent and coming soon why haven't V and MA seen this/thought of this yet?

 

 

[blainehodder]

SD.

 

I guess a have a couple questions that I have since I don't know enough about the technology. 

 

1. Why doesn't V/MA develop a similar technology they can exploit?

 

 

2. If a decline is imminent and coming soon why haven't V and MA seen this/thought of this yet?

 

They can see it but what can they do about it?  Lets say Apple and JPMorgan partner to offer credit and payment through the phone... Visa would like to be in the transaction somehow, but what can they really do about it?  They may offer similar services, but market share goes down, competition goes up, and margins go down.

 

Further, p2p margins go to zero.  Whether Apple, Google, Paypal, JPM, or V/MA or some combination are the ones that do it, it is irrelevant. That cow is milked.

 

 

[Pauly]

SD.

 

I guess a have a couple questions that I have since I don't know enough about the technology. 

 

1. Why doesn't V/MA develop a similar technology they can exploit?

 

 

2. If a decline is imminent and coming soon why haven't V and MA seen this/thought of this yet?

 

They can see it but what can they do about it?  Lets say Apple and JPMorgan partner to offer credit and payment through the phone... Visa would like to be in the transaction somehow, but what can they really do about it?  They may offer similar services, but market share goes down, competition goes up, and margins go down.

 

Further, p2p margins go to zero.  Whether Apple, Google, Paypal, JPM, or V/MA or some combination are the ones that do it, it is irrelevant. That cow is milked.

 

Does Apple (or Google, or anyone) really want to partner with JPM, then have to go and partner with BAC, C, WFC... then go to Canada and partner with TD, RY, BMO, then go to the UK, then Europe and on and on...all to get into a business that's not within their core competency and has a very high risk of not succeeding?

 

Or, would they rather just partner with Visa, who already has the network in place, and be done with it.

[orthopa]

SD.

 

I guess a have a couple questions that I have since I don't know enough about the technology. 

 

1. Why doesn't V/MA develop a similar technology they can exploit?

 

 

2. If a decline is imminent and coming soon why haven't V and MA seen this/thought of this yet?

 

They can see it but what can they do about it?  Lets say Apple and JPMorgan partner to offer credit and payment through the phone... Visa would like to be in the transaction somehow, but what can they really do about it?  They may offer similar services, but market share goes down, competition goes up, and margins go down.

 

Further, p2p margins go to zero.  Whether Apple, Google, Paypal, JPM, or V/MA or some combination are the ones that do it, it is irrelevant. That cow is milked.

 

Why would the banks, Apple, and google want to be in a zero margin business. How do they benefit? The banks already offer credit now and not have to deal with the payment processing. If the payment processing is a zero margin business why take on the additional work for nothing, at a minimum if you have to hire people to market/staff/monitor that part of the business it would be a money losing venture.

 

Not to mention any regulation costs....for a zero margin business? Damn.

[dabuff]

From a consumer's perspective, say I have a nice V/MA or even AXP credit card offering me a 1-3% cash back on purchases (or even waiving foreign transaction fees when I'm traveling). Not to mention some of the fringe benefits like rental insurance, buyer's protection, etc. Why in the world would I use a P2P service that offers none of these perks, requires that I pay immediately, and risks my accounting/routing numbers being hacked?

 

However from a merchant's perspective P2P is great if you can shave off the 2.9% +0.30. Those "basis points" add up.