The card payments sector has been hitting headlines lately in relation to Facebook’s June announcement revealing details of its Libra cryptocurrency. To garner an increased sense of trust, Facebook convinced incumbent network payment providers, such as Visa, Mastercard, and PayPal, to sign up to the Libra Association, a not-for-profit which oversees the development of the token, the reserve of real-world assets that give it value, and the governance rules of the blockchain. Is this a sensical move for incumbent network providers considering they will have to eventually compete against new blockchain-based systems?
Incumbent payment providers such as Visa have been faring well over the past ten years with the growth of eCommerce and the overall digitization of transactions. In developed countries, there has been diminishing value proposition of cash, while in less developed economies more people are slowly becoming banked. The recent move of the Visa and Mastercard networks joining the other 26 soon-to-be founding members of the Libra Association is seen as a collaborative play, with both incumbents thought to have already invested in distributed ledger technology. A blockchain-based infrastructure is seen as a potential way to get involved in spaces that had previously been hard to enter, such as cross-border remittances and B2B payments. Blockchain does have its challenges in terms of payments due to slow transaction speeds. A pre-existing card payment network maintains a structural advantage in that there seems little point in creating a costly parallel system when a perfectly efficient infrastructure already exists.
Going forward, emerging markets such as Vietnam offer a big opportunity from a strategic standpoint due to their potential for high growth. Because payment volume is a key metric for networks, it will be a long-term strategy to establish relationships in these emerging markets early, in order to be in a better position later to maintain a relationship, versus trying to compete or displace another player.
The threat to this strategy comes in the form of China UnionPay (CUP), the controller of one of the biggest networks in the world. CUP is showing signs of expansion across the Asia Pacific region and eventually Africa and involves a strategy that banks off the payment volume running on Visa in Southeast Asian and Pacific Rim countries. Visa and CUP currently maintain a competitive relationship through the co-badging of credit cards. Holders of co-badged cards can make payments using, for example, the CUP network in China and the Visa network in the United States, on a single card. The fear is that CUP will start to approach issuing banks and cut Visa out of the co-badge relationship, thereby reducing the potential payment volume for Visa. Regardless of strong branding and entrenched relationships, it may prove to be difficult for the likes of Visa or Mastercard to compete against a quasi-state entity such as CUP.
Incumbent payment systems have had a successful run by riding the wave of digitization of commerce and will continue to do well as an increasing number of developing countries start to come online. Visa’s recent acquisitions have been successful because it has made sure it is sticking to its core business model. Long since regarded as the leader in the network payment industry, Visa is expected to continue to outperform due to continuing strong status of its underlying issuing banks in the US.
This call was hosted on August 2, 2019, under the title: “(V) Former Visa Director of Digital Strategy Outlook on Payments M&A Deal Impacts to Visa, Disintermediation Threats & Growth.”
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