[V, MA] The more things change, the more they stay the same
Upcoming posts (in no particular order): Gartner, Tractor Supply, Transdigm, Waystar, CCC, Fortive, and Veralto
Every so often, a sexy new technology or theme emerges in payments that threatens to disintermediate Visa and Mastercard; and every time, Visa and Mastercard manage to absorb that threat into their network. Like the Blob, they swallow every innovation and emerge stronger. When I started following the big two nearly a decade ago, a foremost concern was that payments would circulate in a closed loop between merchants and stored funds in digital wallets, bypassing the card rails. But:
Today every major digital wallet and bank I can think of – including Cash App, PayPal, Apple, Venmo, Grab Pay, MercadoPago, Monzo, etc. – embeds or issues Visa or Mastercard credentials. It’s easy to see why. Consumers want the assurance of knowing they can spend at just about any merchant around the world, online and offline, and earn interchange-funded rewards along the way. A digital wallet that didn’t plug into card rails would soon find themselves at a steep disadvantage to competing wallets that did.
With few exceptions, the relationship between the card networks and digital wallets is a symbiotic one. Visa and Mastercard, with their combined ~170mn merchants, enable immediate global acceptance that results in lower churn, larger order values, and more profit dollars for digital wallets. In turn, digital wallets, with their direct consumer relationships, expand distribution for card networks. Far from being a critical point of integration sweeping value away from card networks, fintechs have pulled more transaction activity onto them. (A tour through payments: part 1 (Visa and Mastercard); Dec. 12, 2022)
Same deal with Buy-Now-Pay-Later. During the fintech mania, it was not uncommon to see BNPL hailed as a Visa/Mastercard killer. In 2021, Alex Rampell at a16z described BNPL as a parallel network to V/MA, one that “bypasses the issuing bank, card network, and merchant acquirer”. BNPL could still theoretically be described this way. But practically speaking, I’d say BNPL is best thought of as another checkout option, its providers acting more as partners to Visa and Mastercard than replacements. Afterpay, Klarna, and Affirm all issue Visa-branded card products. Visa and Mastercard each provide the behind-the-scenes technology that allow banks, wallets, and fintechs to offer BNPL-type solutions of their own across their respective acceptance footprints.