Is the end nigh for Visa, Amex and Mastercard?

September 11, 2018
Adrian Holliday

The card payment industry is huge as well as hugely profitable. But why bother with a pricey old-timer to pay and borrow when there’s a raft of super-cheap blockchain and fintech entrants?

Bluntly, do the likes of Visa, Amex and Paypal get the potential for major decentralized disruption?

Credit card players, claim some, face the shredder

Kevin Murcko, CEO at CoinMetro, says the card giants are well aware of the threat bearing down on them.

Banks and financial institutions, he told OpenLedger, “are investing large amounts of capital in proprietary blockchains that are looking to replace current solutions – once they are actually able to provide better alternatives to what is currently available.”

Still holding all the cards?

How the tech will disrupt precisely is unclear. What is clear is that the business the legacy card operators grew and nurtured since the 1960s was never designed for a digital world.

New York 42nd Street, 1960s – Americans embraced the credit card and nothing’s changed

To see where blockchain tech may be most disruptive, check out the interbank transfer market says Matthew Tyler of Blackfoot Information Security Consultants. It’s where SWIFT, preeminent financial messaging player for finance’s biggest guns, reigns supreme. He says SWIFT is dying on its feet.

Tyler thinks ripple will “likely replace SWIFT over the next couple of years as it is instant and costs a fraction of what SWIFT charge to transfer money from one bank to another”.

Craig Parkin, associate partner at Citihub Consulting, which specializes in a wide range of technologies across security and regulation, says bank-to-bank blockchain transfer, from either stellar or ripple, looms closer by the day.

Settlement was slower in the 1970s – first-mover advantage was still important; Flickr, Peter Hamer

Whatever comes “probably won’t revolutionize the payments industry,” he told OpenLedger, “but it will make it better for the everyday person”. Some integration between blockchain and credit card players looks, at some level, looks likely.

Boss of payment services Intrapay, Koen Vanpraet, tips IBM and its partnership with stellar to possibly win big thanks to its brute market muscle.

Is Western Union the next Blockbuster?

Western Union is one of the most extortionate remittance players in the card payment sector says co-founder of CryptoCurrencySimplified Erica Stanford. “They know,” she told OpenLedger, “they can’t get away with charging the poorest people around the world 14% [fee] to send money with a several-day delay – when the same people can send money for free and instantly to anyone with an internet connection.”

Stanford: Western Union’s days look limited

Back in February boss Brad Garlinghouse told CNBC  that Western Union was bench-testing ripple settlements. He said these were “a thousand times faster and a thousand times cheaper than bitcoin’s”. So he’s had the memo.

New crypto entrants such as Bakkt – Bakkt won’t support trading on margin or leverage to win market trust – will make crypto acceptance mainstream Stanford thinks.

PayPal, Visa and Western Union are like the old high street video rental firm Blockbuster, “sitting there thinking they’re indispensable – until Netflix casually takes over.”

Abide by us? Why?

Huge stability and other growing pains remain, especially when they edge close to the consumer card space – E-money volatility is the opposite of what is needed from a bona fide currency.

“Card payments,” says Matthew Tyler, “have an entire eco-system around them which protects consumers from fraud and transactions they don’t recognize. These rules are laid down by the card brands and all in the system abide by them.”

Pan Am stewardess, 1970; travel lapped up consumer credit

To truly disrupt this market many protections need to be in place. There also needs to be less pricing drama though Tyler says resources are being directed at this.

“It is only a matter of time until the margin has been stripped out by a digital disruptor”.

Open territory to be claimed

Most technology tends to meld badly with existing regs. Especially financial ones. Think of the clanking grind the law has endured to keep on top of the online environment.

Kevin Murcko of CoinMetro says GDPR took two decades to become a reality. “The point is that tech moves fast, whereas legal and regulatory move much slower. Tech issues are always solvable with further innovation, legal issues, however, are sometimes not.”

Much of the financial world – still – remains untouched by blockchain potential. For how long?

While much regulatory energy is directed at trading, exchanges and investor protection, swathes of financial services ground remain untouched: cast an eye over risk and fraud management, for example, where consumer identity and audit oversight could be improved by blockchain tech.

Look to the next layer

Jez San, founder of gaming blockchain startup FunFair Technologies – he helped design the first ever 3D graphics chip for Nintendo – says real progress for payment blockchain players will come from scaleability and functional improvements, like Layer 2. Think bitcoin’s Lightening Network.

“These are extra networks,” San told OpenLedger, “built on top of the blockchain that provide super-fast payment and confirmation; they’re the piece of the puzzle which allows a blockchain to be used for seamless payment.”

Credit card rear view: all the info a fraudster can ever want; Wikimedia Commons

He’s adamant the tech will push payment and credit tech into the 21st century. Payment confirmation will be almost instant and the cost tiny – quite possibly. The modern-day credit card incumbents, says San, are broken and irrelevant.

One small example: fraud risk. All the info needed to abuse a situation sits in front of you. “Once you’ve the card number and the three or four digits on the back, you’re away. A lot of energy taken [from the credit card players] is spent chasing fraud. This industry was never designed for the internet.”

Paypal, what happened to you?

Real change from some big financial players can be glacial. Writing for Irish Tech News near the end of August, tech writer Aubrey Hansen excoriated PayPal. If the payments giant had embraced bitcoin a few years ago, it could be butting heads in NYC for Wall Street money with Coinbase.

Is PayPal sitting on the edge of a cliff?

“Instead,” she wrote, “their long-time partners are fleeing, and there is no word from their management about how they plan to maintain the company’s position in a world that is leaving them behind.”

Friday 1 June – a black day for centralisation

Visa-using consumers across Europe fumed on 1 June 2018 when a hardware failure plunged the financial player into crisis, unable to process card payments.

This was no hack. But there was a big problem with Visa’s back-end processing system. For a company that handled 150,000,000 transactions a day this was bad news. In a decentralized system, there are many hundreds – even thousands – of peer-to-peer nodes. If several go down, the system runs regardless.

Post written by Adrian Holliday
Adrian has written about investing for 20 years, from Teletext to the Observer and AOL. He is a believer in diversity, low transaction costs and the future of fintech.

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