Throughout the years, the biz obituary has been repeatedly written for Visa and, to a lesser extent, MasterCard. Just about every movement that has threatened to destroy them—such as mobile firms creating their own rails to handle payments—has generally made them stronger, such as when those same mobile firms ended up realizing that it’s cheaper to just use what the card brands already spent billions to create.
Every few years, another supposed card-brand-killer comes up. Remember how Durbin was supposed to be the end of Visa? And then it was ISIS/Softcard and Google Wallet? Not only were those obits wrong then, but given the realities today of card-brand-controlled tokenization, it’s even more wrong now.
The latest obit crafted was this investment column, which even went so far as to pencil in a date for the Visa/MasterCard tombstone, with a hed declaring “MasterCard and Visa Stock Could Crumble in 2016.” (An old journalism professor years ago told a colleague that he should look at any headline that says “could” or “may” and see if it would be just as true were it changed to “could not” or “may not.” If it was, kill that headline.)
The underlying premise of this latest piece is that “there is one looming, almost inevitable threat that could be catastrophic to both Visa and MasterCard stock.” That threat is competition. It’s ironic that the author thinks that simple competition like that which is faced by every other company on the planet is what is going to bring Visa/MC down. I’d argue that they could handle some simple competition. In addition, the competition that he thinks they will face just isn’t there, so his premise is flawed at multiple levels.
The column argues that “MA and V now face at least half-a-dozen potential competitors who could become legitimate threats” and lists Amazon, Apple, Alphabet (Google), Samsung, Square, and PayPal. But payment processing involves moving money from banks to merchants. The banks are Visa/MC’s power base because the banks hold consumers’ funds on behalf of consumers.
Visa/MC control the pathways through with merchants can extract those funds and they continue to control those pathways for the simple reason that Visa/MC help the banks monetize that service. Banks that process payments outside of Visa/MC earn much less for the funds transfers, those that process through Visa/MC earn more. Banks will naturally resist any payment solutions that cut into their revenue streams.
Therefore, for anyone to truly compete with Visa/MC, they must get the banks on board. To get the banks on board, they must provide a vehicle for banks to monetize their payments and do so within a set of services that are competitive both commercially and economically. As long as Visa/MC continue to service their needs, banks will have no reason to turn to a competitor.
Even worse, none of the companies listed are actually competitors to Visa or MC. Instead, they are customers. Amazon is an e-commerce retailer offering value-added services that make it easier for consumers to transact with their Visa/MC accounts. Amazon facilitates using Visa/MC and has no direct banking relationships. It is a merchant, not a competitor.
The same can be said for Square, which has no direct banking relationships and which earns 95+ percent of its revenue by facilitating the acceptance of Visa/MC/Amex/Discover accounts.
Apple, Google and Samsung all have adopted a card-emulation model where their wallets store Visa/MC payment credentials and pass them to merchants as Visa/MC transactions. Multiple companies (ISIS/Softcard and Google) tried creating their own alternative network solutions and failed, both subsequently deciding to partner with Visa/MC rather than compete with them. Prior to launching Apple Pay, Apple filed numerous mobile payments patents that indicated a desire to develop direct banking relationships, but when it came time to launch, Apple reversed direction and chose to partner with the existing networks. If Apple doesn’t feel strong enough to compete with Visa/MC, who will?
PayPal is the closest thing to a competitor that Visa/MC faces today. Much of its revenue does come from facilitating Visa/MC payments, but it also offers direct to bank transactions via the Fed’s ACH system. Banks have shown no predisposition to work directly with PayPal outside of the Visa/MC umbrellas and PayPal’s efforts to penetrate the point of sale have been a total flop. As a result, PayPal remains a strong e-commerce player, a facilitator of Visa/MC and a minor competitor. It’s competitive position has not changed dramatically in the last decade, so PayPal’s existence should have minimal impact on Visa/MC stocks.
The networks do actually face a couple of serious threats, but those threats aren’t currently coming from the companies named in the column. Rather, those threats come from the banks themselves. Chase has made a decision to partner with MCX and work outside of the payment networks to do so.
Direct merchant-to-bank relationships could eventually erode Visa/MC marketshare. But banks and merchants have been working together for decades on private label card products and that hasn’t slowed the growth of the open loop networks. There’s no reason to believe that it will have any significant impact now.
Another potential threat could potentially emerge from Early Warning Services, a joint venture owned by Bank of America, BB&T, Capital One, JPMC, PNC, U.S. Bank, and Wells Fargo that is working to build a real-time payments network. The network will focus first on displacing checks, which is not directly competitive to Visa/MC. It could eventually become a Visa/MC competitor, particularly as it relates to debit transactions, but that’s a long way off.
The tendency to predict the demise of market leaders—especially those who have been dominant for as many decades as these card brands have been—is understandable. But the payments space is a different reality and the way we easily morph rivals into partners can be confusing to those who are used to a more black-and-white world.
Some day, market forces may end Visa’s and MasterCard’s run. But that day is not today.