VISA

[orthopa]

 

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

 

At the same time losing 3% of something is better then getting nothing if you dont take credit when a consumer prefers that payment method. If you were a business owner how many customers walking out would you decide to take credit again?

 

If you can change the mind of the american consumer who has always known of and used credit maybe you get somewhere but....

 

Anyone want to take a guess on how you determine if someone is creditworthy in a P2P system like SD suggests will happen when saying buying a house? Car? All you have ever done was just transfer $$$ you have already saved correct? Except for stuff society and powerful institutions want still like college loans.

 

People will be expected to use only money they have saved for stuff they buy with their P2P system and either save tens of thousands for a car, hundreds for a house and college or use some form of credit/loan....exactly what has been replaced right?

 

If Im a consumer in that society I am going to want to know why I have to use cash everyday to buy stuff I can afford but can buy a car/house with money I dont have?

 

Can bears or those in favor of P2P explain their feeling on this?

 

 

 

 

[SharperDingaan]

V/MC already works closely with P2P players – as loan provision, & the payment process; are complementary products. To pay/receive from someone outside your P2P network – it is cheapest to run on the existing V/MC rails. But you can significantly reduce the amount of traffic, if you can make Google Pay/Apple Pay exchange payments directly with each other through a P2P clearing/interchange mechanism. Make it attractive to stay within the V/MC rails, & there is no need to go the direct P2P clearing/interchange route; hence the close workings.

 

To get cash back, you have to overpay for your purchase; pay me $4 so that I can give you back $3 - & make us both happy. You also do not have to have saved first before you buy something, you just need someone to loan you the money. It is still the same loan as today, made on the same lending criteria, and paid in the same digital currency. A mortgaging bank does not give you a sack of cash, it simply credits your account (digital currency) by the amount of the mortgage.

 

Music is priced by the song; it is essentially given away to drive network effect – that is scalped at the touring concert. P2P payment within the same network (ie: settlement via crosses), follows a similar business model. And the bigger the network effect, the more attractive it becomes to both payer & receiver.

 

Agreed V/MC has a great business model, but it is no longer the ONLY great business model in the space. It also has the disadvantage that its demographic is older; todays V/MC dad is tomorrow’s lower spending grandpa, & that P2P kid is tomorrow’s higher spending dad.

 

SD

 

[giofranchi]

Assume we have no idea why folks chose to use P2P; they just do.

 

If you assume that, then you are obviously right. No need for any further discussion.

But I am not so sure that consumers will accept credit and payment to be separated… Once people are used to doing just one thing, they won’t go back to the need of doing two separate things… Therefore, I assumed instead that P2P will put pressure on V and MA’s margins, but without disrupting their business altogether.

If this is the case, will their earnings trend lower? As I have said, it is not clear.

 

Cheers,

 

Gio

 

[giofranchi]

Why would the banks, Apple, and google want to be in a zero margin business.

 

They wouldn’t. And that’s why I have said that to separate credit from payment will entail new costs.

 

Cheers,

 

Gio

 

[Spekulatius]

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

 

Visa and MasterCard don't grant credit, the card issuers do. Visa and Mastercard bear no credit risk, except maybe some small float from transactions.

Google and Apple as well as Paypall have already a huge customer base as well as the infrastructure to handle huge amount of transactions and it is fairly easy to replace the functionality of a comparatively dumb credit card (even with chip) in a smartphone. Even though handling transactions is not their core business (except Paypall) it is quite conceivable that they gain market share and put pressure on the profit margins in this space, which could be a huge hit on V and M bottom line. Buying V and M at 30 X earnings is pretty much a bet that this won't happen for another 20 years or so, not a bet that I would be willing to make.

 

Edit:20 years

[wknecht]

I read in WSJ today that Apple charges 0.15% per transaction in Apple Pay. Is that correct? Presumably they add value by reducing fraud, but that is more than V/MA's cut.

[giofranchi]

Visa and MasterCard don't grant credit, the card issuers do. Visa and Mastercard bear no credit risk, except maybe some small float from transactions.

 

Ok, I understand. But, whoever bears credit risk, it is a business establishment that is very long dated and that works extremely well. V/MA have built a worldwide network of card issuers that work with them and are willing to bear credit risk. It doesn’t look like an easy thing to replicate… Especially if the incumbent enjoy an advantage of a couple of decades… Therefore, the question remains: why should Apple, Google, etc. make such a huge effort for little or no gain? If, instead, they want their payment services to be profitable, how is it that V/MA, with the huge advantage of having their networks of “credit risk bearers” already in place, should fail to be the low cost producers?

 

Cheers,

 

Gio

 

[orthopa]

Is anyone aware of regulation Apple, Google, etc would run into if they began to process payments this way?

[orthopa]

V/MC already works closely with P2P players – as loan provision, & the payment process; are complementary products. To pay/receive from someone outside your P2P network – it is cheapest to run on the existing V/MC rails. But you can significantly reduce the amount of traffic, if you can make Google Pay/Apple Pay exchange payments directly with each other through a P2P clearing/interchange mechanism. Make it attractive to stay within the V/MC rails, & there is no need to go the direct P2P clearing/interchange route; hence the close workings.

 

To get cash back, you have to overpay for your purchase; pay me $4 so that I can give you back $3 - & make us both happy. You also do not have to have saved first before you buy something, you just need someone to loan you the money. It is still the same loan as today, made on the same lending criteria, and paid in the same digital currency. A mortgaging bank does not give you a sack of cash, it simply credits your account (digital currency) by the amount of the mortgage.

 

Music is priced by the song; it is essentially given away to drive network effect – that is scalped at the touring concert. P2P payment within the same network (ie: settlement via crosses), follows a similar business model. And the bigger the network effect, the more attractive it becomes to both payer & receiver.

 

Agreed V/MC has a great business model, but it is no longer the ONLY great business model in the space. It also has the disadvantage that its demographic is older; todays V/MC dad is tomorrow’s lower spending grandpa, & that P2P kid is tomorrow’s higher spending dad.

 

SD

 

I guess I just don't understand your point why its a must that you pay in full for something or not others, and if your argument is that the same service can be provided at a lower cost or zero cost why does Apple/Google/chase, BAC, C, etc want to get into a zero margin business? Why do they care? The loan is the same either way like you said. Same digital currency.

 

How are you going to explain to this "young generation" that they are to use P2P for stuff they can afford and credit for others? Its either one or the other in my mind because people especially young Americans want stuff they cant afford and usually find a way to get it.

 

Secondly in paying $4 for $3 how is that any different then any type of loan with interest?  Thirdly how many people don't care if they pay $4 for $3. (Sometimes I think we forget how we think about $$$ on an investing/money conscious message board).How does Apple or Google market P2P as a way to not pay interest for every day expenses when that same person is spending hundreds of thousands in interest for a house?

 

If we lived in a society where people saved 80-90% of the cost of a house, paid cash for nearly all items I can see the attractiveness of P2P. America/world is no where near that outside of maybe China but policy there now is pushing a consumer society, ie more debt.

 

Ultimately the consumer has to drive this and it has to make the purchase and the satisfaction of the process way more desirable then using a credit card. I just don't see this happening, especially with cash needed up front.

 

In regards to little to no fees for the merchants P2P is no doubt the better way to go to save 2-3%. But as a customer why do I care if walmart, or target or anyone else gets dinged on each swipe?  I want my purchase now or as fast as possible.

 

You need the consumer to care enough to use Apple/Google and in turn making margins better for everyone else involved in the transaction right? Compress those margins! Do you honestly see the young generation as you put it giving a crap if are helping lower margins?

 

Im rambling here but I guess you could see advertisements like this...

 

Switch to Apple/Google ****P2P to help lower margins and fees target/walmart pays with the cash you already have!!!

 

OR

 

Stay with Visa/MC and we will give you 5% cash back and or points you can use for FREE stuff. The more you spend the more FREE stuff you get!!!

 

With this are the competing advertisement I take Visa at 30x earnings all day long.

 

 

 

 

[SharperDingaan]

I think we are just talking past each other.  Some minor rebuttal, and we will call it done.

 

If you are content to always borrow from V/MC, & repay by the card due date; it doesn’t affect you. Pay your annual $100-$150 card fee for the convenience, & be happy. If you are OK with paying the 24% rate on those occasions when you do not repay on time, V/MC is a great deal. 

 

If cachet is worth more to you than cost, V/MC remains a great deal.  So long as the overpaying is reasonable, & you like the rewards; treat it as simpy another cost of doing business.

 

If you are young and poor, you cannot be so charitable. You want the lowest possible interest rate , no annual fee, lower prices (because merchants don’t have to recover the 2-3% fee), rewards that you will actually use (concert tickets/access), and societal change. P2P does all of it.

 

Google Pay would charge a nominal cost/transaction because of the large zero-cost float. Google has 1.4B users;  if just 50% of their users sign-up to a Google Pay wallet, and the average balance is $30 – they obtain 21B of float (1.4B users x 50% x 30). Invested at 1.5%, they would earn 315M.

 

Google is also a distribution platform; very similar to your grocery store. The more popular it is the higher the stocking fee it can charge suppliers.  Ultimately it will be the incremental advertising revenue that pays for it.

     

SD

 

[giofranchi]

Google Pay would charge a nominal cost/transaction because of the large zero-cost float. Google has 1.4B users;  if just 50% of their users sign-up to a Google Pay wallet, and the average balance is $30 – they obtain 21B of float (1.4B users x 50% x 30). Investedt at 1.5%, they would earn 315M.

 

Which is peanuts for a company that could convince 700 million people to use its service… If they have to build from scratch the global infrastructure of “credit risk bearers” that V/MA already have in place, it doesn't look like worth the effort.

 

Google is also a distribution platform; very similar to your grocery store. The more popular it is the higher the stocking fee it can charge suppliers.  Ultimately it will be the incremental advertising revenue that pays for it.

 

This might be true, and it might be true for Apple too. But if for both of them their payment services are only a mean to reach more people, it is not clear why they should invest all the time and the resources need to build from scratch new global infrastructures of “credit risk bearers”, while instead they could decide to simply partner with V/MA and use those two infrastructure built throughout the years, already in place, and perfectly functioning.

 

Cheers,

 

Gio

[giofranchi]

Im rambling here but I guess you could see advertisements like this...

 

Switch to Apple/Google ****P2P to help lower margins and fees target/walmart pays with the cash you already have!!!

 

OR

 

Stay with Visa/MC and we will give you 5% cash back and or points you can use for FREE stuff. The more you spend the more FREE stuff you get!!!

 

With this are the competing advertisement I take Visa at 30x earnings all day long.

 

Well, basically I agree… But 30x earnings is a very high price to pay… Therefore, it remains a small position right now, while I keep track of business developments, and hoping to buy more in the future at an attractive price.

 

Cheers,

 

Gio

 

[JBTC]

One more announcement of the death of the credit card model...

 

http://www.forbes.com/sites/bruceupbin/2013/02/15/tokenization-and-the-collapse-of-the-credit-card-payment-model/

[bargainman]

Google Pay would charge a nominal cost/transaction because of the large zero-cost float. Google has 1.4B users;  if just 50% of their users sign-up to a Google Pay wallet, and the average balance is $30 – they obtain 21B of float (1.4B users x 50% x 30). Invested at 1.5%, they would earn 315M.

 

Um Google has 1.4B?  I assume you mean Android has 1.4B != Google.  Google Play has 1B.  Google does not control all Android users.

[giofranchi]

One more announcement of the death of the credit card model...

 

http://www.forbes.com/sites/bruceupbin/2013/02/15/tokenization-and-the-collapse-of-the-credit-card-payment-model/

 

I would really like to understand… but I don’t! How is all this supposed to handle credit risk? The article ends with the following sentence:

in a world where everyone is known, there is no need for an omniscient middleman.  That feels like a scary fact for the networks.

But the fact “everyone is known” (whatever it means…) doesn’t automatically imply that everyone knows if everyone else is worthy of credit or if he/she is not, right? As long as consumers want credit, there must be credit risk bearers. And those credit risk bearers have partnered with V/MA in two global networks that work very efficiently. Who is going to replace those networks? How? And why? If new entrants are supposed to be profitable, and have to build a similar infrastructure to the one V/MA already have in place, how could they compete with V/MA on price?

Could someone tell me what I am missing here?

 

Thank you,

 

Gio

 

[JBTC]

Sorry I can't help you.  :)

 

V/MA post such fat margins and growth that attracts a lot of skeptical minds.  Some think the tech startups will win.  Some say the tech stalwarts.  Some say the banks.  The fact that they can't quite agree gives clues about the strength of their ideas.

 

Payment systems are not just technology.  As I said before technology is a small part of it.  It's only natural that banks were the central part of the payment system that is V/MA today.  Merchants, while having benefited enormously from V/MA, grew unsatisfied, because merchants make anemic margins.  Walmart led an alliance to try to come up with its own system, which failed to fly.  So far all the victories merchants have had against V/MA come from the courts, not the marketplace.

 

It's highly unlikely a bank such as JPM can take on V/MA.  Unless all the banks in the world try to come together and start over again, given V/MA are no longer bank owned.  Even in Canada and Australia where banks are highly consolidated, V/MA rule.

 

The tech companies should not try to kill V/MA.  They should try to sell to V/MA and cooperate, as Apple has done.

 

[SharperDingaan]

Google Pay would charge a nominal cost/transaction because of the large zero-cost float. Google has 1.4B users;  if just 50% of their users sign-up to a Google Pay wallet, and the average balance is $30 – they obtain 21B of float (1.4B users x 50% x 30). Invested at 1.5%, they would earn 315M.

 

Um Google has 1.4B?  I assume you mean Android has 1.4B != Google.  Google Play has 1B.  Google does not control all Android users.

 

 

We just used this; & assumed that ultimately 1 in 2 of those on the company’s Android mobile operating system maintains an active Google Pay account.  Used once/day or once/year; don’t much care. Point was, a free cash float in the billions. http://www.wsj.com/articles/google-says-android-has-1-4-billion-active-users-1443546856

 

Sept. 29, 2015 1:14 p.m. ET. Incoming Google Inc. Chief Executive Sundar Pichai said Tuesday that the company’s Android mobile operating system had added 400 million users since May 2014, for a total of 1.4 billion. Make your own estimate.

 

SD

 

[Guest Schwab711]

One more announcement of the death of the credit card model...

 

http://www.forbes.com/sites/bruceupbin/2013/02/15/tokenization-and-the-collapse-of-the-credit-card-payment-model/

 

I would really like to understand… but I don’t! How is all this supposed to handle credit risk? The article ends with the following sentence:

in a world where everyone is known, there is no need for an omniscient middleman.  That feels like a scary fact for the networks.

But the fact “everyone is known” (whatever it means…) doesn’t automatically imply that everyone knows if everyone else is worthy of credit or if he/she is not, right? As long as consumers want credit, there must be credit risk bearers. And those credit risk bearers have partnered with V/MA in two global networks that work very efficiently. Who is going to replace those networks? How? And why? If new entrants are supposed to be profitable, and have to build a similar infrastructure to the one V/MA already have in place, how could they compete with V/MA on price?

Could someone tell me what I am missing here?

 

Thank you,

 

Gio

 

Payment networks do not have credit risk nor do they supply credit (though in AXP's case, they both supply credit and have a payment network). When discussing payment networks, there are credit and debit transactions. Credit transactions do not imply that the payment network is supplying credit to anyone (some outside of the payment network is). Payment networks only help complete payments from 3rd parties.

 

I hope this helps some.

[blainehodder]

How?

 

Step 1) Apple Pay, Google Wallet, etc.: Partner with merchants to accept it, use Visa/MA to offer credit transactions.  Credit supplied by banks to V/MA.

 

Step 2) Rapidly expand network and get people used to transacting with phone (Or other). Offer digital wallet (float) and/or partner with the large banks to offer direct debit transactions and cut out V/MA for debit. Merchants happy to cut down transaction fee - check. Customers happy with convenient new tech  - check.

 

Step 3) Cut V/MA out of the credit transaction since they aren't adding any value anymore, and are just a highly paid middleman between the credit supplier and the transaction.

 

We are currently halfway through Step 2.

 

Why for Apple/Google?

 

User tie-in effect. Profit. 10 bps/transaction + float.

 

Why for banks? Eating at least some of the transaction fees that go to V/MA today.

 

Obivously a hand-wavy explanation but I think at least some variant of the above gets transactions done without the need for V/MA.

 

 

[wknecht]

How?

 

Step 1) Apple Pay, Google Wallet, etc.: Partner with merchants to accept it, use Visa/MA to offer credit transactions.  Credit supplied by banks to V/MA.

 

Step 2) Rapidly expand network and get people used to transacting with phone (Or other). Offer digital wallet (float) and/or partner with the large banks to offer direct debit transactions and cut out V/MA for debit. Merchants happy to cut down transaction fee - check. Customers happy with convenient new tech  - check.

 

Step 3) Cut V/MA out of the credit transaction since they aren't adding any value anymore, and are just a highly paid middleman between the credit supplier and the transaction.

 

We are currently halfway through Step 2.

 

Why for Apple/Google?

 

User tie-in effect. Profit. 10 bps/transaction + float.

 

Why for banks? Eating at least some of the transaction fees that go to V/MA today.

 

Obivously a hand-wavy explanation but I think at least some variant of the above gets transactions done without the need for V/MA.

At some point, wouldn't Apple or Google would have to set up a payment network? Transacting with phones is just a different way to connect to the network than plastic. Not an actual network (set of rules to find banks, deal with charge backs etc).

 

Apple already costs more than the networks if reports I've read are accurate.  15 bps vs 10 bps. So are V/MA really that expensive? It seems the best way to reduce costs is to reduce fraud not cut out V/MA.

[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.

[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.

 

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.

 

They would probably want to make tons of money for the minimal work of partnering with 20-30 banks, while bolstering their platform tie-in. Why wouldn't they?

 

Why is it so risky? The banks will be eager to cut out Visa. Consumers will be eager to use it. It won't take a ton of capital to pursue.

 

Looking backward the moat was solid. Looking forward it seems weak. The tech players are in the perfect spot to edge out V/MA with minimal capital or effort.

 

...Or maybe I'm completely off my rocker. Not sure.

[HJ]

People really need to fully understand interchange fee, who gets what.  Here's from Wikipedia:

 

"For one example of how interchange functions, imagine a consumer making a $100 purchase with a credit card. For that $100 item, the retailer would get approximately $98. The remaining $2, known as the merchant discount[11] and fees, gets divided up. About $1.75 would go to the card issuing bank (defined as interchange), $0.18 would go to Visa or MasterCard association (defined as assessments), and the remaining $0.07 would go to the retailer's merchant account provider. If a credit card displays a Visa logo, Visa will get the $0.18, likewise with MasterCard. Visa's and MasterCard's assessments are fixed at 0.1100% of the transaction value, with MasterCard's assessment increased to 0.1300% of the transaction value for consumer and business credit volume on transactions of $1,000 or greater. On average the interchange rates in the US are 179 basis points (1.79%, 1 basis point is 1/100th of a percentage) and vary widely across countries. In April 2007 Visa announced it would raise its rate .6% to 1.77%.[12]"

 

So the card issuing banks get the bulk of the interchange!  Visa and Master gets their assessment, which is a much smaller fraction of the overall interchange. 

 

V and MA are creation of the banks.  They weren't operated as profit maximizing commercial entities till the banks decided to spin them out to distance themselves from the antitrust lawsuits by the retailers.  These entities set the interchange fees, but they don't get the bulk of the interchange fees.

 

Now, debit volume has outgrown credit volume forever.  With the Durbin Amendment effectively capping the debit interchange in 2010, banks are no longer pushing the debit card spends.  For the last 2 years, growth of credit spend volume has been higher than growth of debit spend volume for the first time since debit cards have been pushed beyond ATM's. 

 

Not to say things can't change, but these are facts as of now.

[wknecht]

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.

[giofranchi]

The tech players are in the perfect spot to edge out V/MA with minimal capital or effort.

 

Well, you seem to believe that to replicate the network of credit risk bearers (banks) V/MA have partnered through the years on a global scale requires only minimal effort and no capital.

If that is correct, then I agree V/MA moats might become weaker over time.

 

Cheers,

 

Gio