Older payment companies are embracing blockchain solutions. Their infrastructure is still “fundamentally not aligned” with Web3 payments.

Older payment companies are finally embracing blockchain solutions at scale, but still lag behind the innovation that young fintech companies are bringing to the next generation of payment solutions. However, this embrace takes many forms, and there is still no guarantee that they will be up to the task.

In the last year, Visa and Mastercard have tried out new solutions, partnerships or strategies to catch up with the blockchain evolution:

• Mastercard has welcomed at least a dozen new startups from five different countries into its global engagement program, Mastercard Start Path, which aims to accelerate innovation in blockchain, web3 and fintech. It has also partnered with Paxos for crypto trading services.
• The Visa Fintech Partner Connect program expanded to include Austrian fintech company Bitpanda, giving Visa’s partners access to Bitpanda’s investment infrastructure solutions for trading and investment services. Visa now provides access to crypto trading for over 20 million European customers. The company is too collaboration with Blockchain.com to offer a crypto debit card for payment using cryptocurrencies or cash balance.

Announced even more recently, Visa is moving forward with the development of blockchain solutions for future payment systems, including the Central Bank Digital Currency (CBDC) and for the management of 4,337 paymaster contracts, while Mastercard is launching cryptocurrency credential services for secure international asset transfers.

As the old saying goes, the bigger they are, the harder they fall; the likes of Visa and Mastercard still have fierce competition as the established ones in the payment industry. Not only is their competition diverse (from countries looking to break their dependence on the US dollar to the fastest-moving innovators in blockchain), but their path to maintaining market dominance will take internal disruptions that these companies have rarely, if ever, seen. Emmanuel Daniel, founder of The Asian Banker, gives his full assessment of the state of legacy payment companies and their use of blockchain solutions, where their competition will be fiercest, and why an infrastructure overhaul is the only way to actually go head-to-head with newcomers in the industry .

Emmanuel’s thoughts

“Originally, I used to think that the reason Visa and Mastercard even bothered to invest in fintech startups, especially those in payments, was to understand where the competition was coming from, to absorb them and to neutralize them. I had friends in the fintech community who would tell me that they were able to get Visa or Mastercard as an investor or backer. The value proposition that Visa and Mastercard will provide is that we give you access to three billion customers worldwide, hundreds of millions of merchants, and all you have to do is connect to our network. But what actually happened was that it was Visa and Mastercard that tapped into the incremental changes that were brought about by these new players, absorbed them, and then either took advantage of it best practices or neutralize them altogether. But I think things have changed dramatically. Today, I think both Visa and Mastercard are genuinely interested in seeing where the transformation in payment technology takes them, and with a great interest in being transformed themselves. But there are two competitors that both Visa and Mastercard have to contend with, and they are unlikely competitors.”

Competing with governments

“Number one is the governments. Around the world, governments are reforming their respective payment infrastructures, which they haven’t bothered to do for generations, which gave both Visa and Mastercard the opportunity to build a global network that they have, the global networks that they have. But what is happening today is that many governments in the world are trying to bring payments back onshore and reduce the cost of payments and not make them credit dependent. So in Southeast Asia, for example, the government uses the debit card Volcker link platform of Mastercard, which existed in several different countries and connected them on a G2G level, that is, government to government level. In doing so, they denied Mastercard the ability to make money or generate revenue from exchange rates and transaction fees, cross-border transaction fees. And then you have a growing infrastructure for cross-border debit payments, which actually builds on the back of what Mastercard had built previously. And in the US, the FedNow infrastructure marketed by the Fed and the Consumer Protection Bureau is to make instant payments available at almost no cost, but to run the telecommunications infrastructure from bank to bank instantly. This type of infrastructure already exists in many countries around the world. When governments initiate these programs, they effectively cut away the predominance of credit card infrastructure as the sole or primary payment platform.”

Competing with Blockchain

“The other competition that both Visa and Mastercard face is some of these blockchain players. And here, the jury is still out on where the technology can develop, where it can develop to. For example, Ripple tried to create a token-based cross-border, bank-to-bank payment infrastructure, but they had to water it down because the bank said, you know, we’re not ready for this, and we’d like to take a more software approach. And that is what XRP has become today. Now if Visa and Mastercard had moved much more decisively into blockchain, they may find themselves waiting to see where the technology will take them. So the blockchain trajectory is still not very clear. And then there are several other options that are coming up, such as central bank digital currencies, which I personally think is a non-starter, but there are many initiatives on that front and the cryptocurrencies themselves, stablecoins. So Visa and Mastercard need to monitor developments in these areas to see where they want to play.”

Staying competitive means an infrastructure overhaul

“But what is very clear is that given the new technologies that are taking shape today, what Visa and Mastercard have to come to terms with is that nothing about the new payment platforms is going to be the same as the way Visa and Mastercard are currently. designed architecturally to do global payment processing. And then they are fundamentally not aligned in the architecture of the new architectures coming into production. And that will really require both Visa and Mastercard to be dramatically transformed or a new player with more natural DNA in token-based global cross-border infrastructure is going to compete with them. And a lot of the new development is happening in countries, in places like Africa. Now think about this. Payments as infrastructure is essentially a message between two points or two people. And if you and I can send messages to each other for free, technically we can send payments for free, it’s just that the organizations that want to provide this infrastructure will want to figure out how to monetize it.

In the US, the payment infrastructure built by Visa and Mastercard is multi-layered with many different actors, processing players, credit profile players and so on, generating revenue from being part of that infrastructure. And of course, the issuing and the accepting banks themselves, that’s a big part of their revenue for retail. So they will be loathe to see that kind of infrastructure dismantled without seeing how they can manage future payments. And for that reason, the future is created in countries with less heritage. And those are the countries we need to watch, because sometimes these developments happen in innocent places and then find their way back to the old infrastructure in the United States.”

Article written by Daniel Litwin.