Why payment giants Visa and Mastercard are partnering with crypto firms

In the payments industry, two companies reign supreme: Visa and Mastercard. These are the two largest card networks in the world, with cards accepted in more than 200 countries and territories.

They are also some of the largest companies in existence – both Visa and Mastercard are listed in the S&P 500.

However, a look at their recent activity and partnership might raise a few eyebrows. Both companies have had a partnership spree, and many of these companies have something in common: they are cryptocurrency companies.

In October, Mastercard partnered with Paxos for cryptocurrency trading and previously partnered with Nexo to launch a cryptocurrency-backed payment card. They have also signed deals with Coinbase, Gemini, BitPay and many more.

Visa, for its part, has not stood still. Blockchain.com has partnered with Visa to launch a crypto card, as has Crypto.com. Visa also signed a partnership with FTX to offer debit cards in 40 countries, before ending the partnership in November amid the FTX meltdown.

For veterans of the payments space, these partnerships seem extremely out of the ordinary. Mastercard and Visa executives have shunned cryptocurrencies in the past, with Visa CEO Al Kelly characterizing cryptocurrencies as a solution to a problem.

So why are they now changing their stance and aiming towards cryptocurrencies instead?

Payments in cryptocurrencies pose a real threat to the payment duopoly

When consumers think of payment cards, Visa and Mastercard are probably among the most universally recognized. Resellers partner with them to offer convenience to customers.

For years, they’ve wielded tremendous power and enjoyed the benefits that power brings them: Visa and Mastercard reported net margins of 51 and 46 percent respectively last year.

Visa and Mastercard charge resellers a fee for using their network, which resellers use to collect payments.

But for retailers, there are a number of issues they face. Credit card payments, for example, can take a long time to reach merchants and card companies, and banks can take up to three percent of the transaction value in fees.

Three percent might seem like a little, but for retailers, these “small amounts” can add up quickly. By some estimates, it can become the second largest cost for retailers after wages.

This is not ideal for resellers. After all, transaction fees boil down to profits, and long settlement times mean your money is locked up until it reaches them.

However, without a better alternative, retailers accepted the terms and Visa and Mastercard remained at the top of the payments world.

The long-standing payment duopoly, however, is under threat. The rise of fintech, especially cryptocurrency payments, poses a real threat to the influence of Visa and Mastercard.

Cryptocurrencies can offer much faster settlement times and also lower transaction fees, both pain points that retailers face. A cryptocurrency like Ethereum can have settlement times of up to 16 seconds, and transaction fees for Bitcoin can go as high as USD 1.60.

Crypto payment companies are also building infrastructure to enable crypto payments for merchants and encourage the use of crypto payments. Therefore, payments in cryptocurrencies have increased over the past 10 years.

Increase in cryptocurrency payments in recent years
Increase in cryptocurrency payments in recent years / Image Credit: Visual Capitalist

These developments, of course, have not gone unnoticed by Visa and Mastercard. After all, they stand to lose their footing if crypto payments become mainstream. The golden goose of Visa and Mastercard is their network, which has so far connected consumers and retailers.

The threat of crypto payments is that they don’t use this network, and this would mean that the payment giants would be deprived of a significant portion of their revenue.

Of the nearly $40 billion in revenue Visa earned this year, $13.4 billion was earned as service revenue and $9.8 billion was earned as international transaction revenue. This makes up more than half of their revenue, and doesn’t even include other services like authorization, clearing, and settlement.

Visa revenues in 2022
Image and data credit: Visa

With cryptocurrency payment companies offering something that could bypass them as intermediaries, Visa and Mastercard would be foolish to simply sit back and allow their empires to crumble.

If you can’t beat them, join them

In his book Destined for warpolitical scientist Graham Allison has used the term “Thucydides Trap” to describe a situation in which a rising power threatens to displace an existing one.

The result is that the existing power fears displacement and war ensues as the existing power attempts to crush the threat to its position. After all, if he does nothing, the growing power will eventually eclipse him. Therefore, the best course of action is to act decisively now, while still having the upper hand.

Summary of the Thucydides trap
Thucydides Trap Summary / Image Credit: Vulcan Post

While the term is used to refer to countries and governments as to why war exists, its lessons apply to business as well.

With the rise of crypto payments threatening to supplant Visa and Mastercard, payment giants are facing such a situation. If they do nothing, they will eventually have to give up much of their power.

Given such a situation, the partnerships they are forging make much more sense. Instead of fighting the crypto payments space, they are expanding their reach and trying to become the middle man for crypto payments.

After all, if crypto payments continue to use the Visa and Mastercard network, the crypto payments industry will become a much smaller threat. Instead of allowing crypto companies to outrun them, the payments duopoly is co-opting the fledgling industry to maintain their pre-eminent position within the payments industry.

The great strategist Sun Tzu would have applauded this move. In The Art of War, he advises against direct confrontation as a means of achieving victory, and instead emphasizes the need to achieve victory by other means. Victory through battle is costly and should be avoided. Instead, he advises generals to seek victory without a fight.

Quote from Sun Tzu
Image Credit: Reddit

Visa and Mastercard have taken this advice to heart and are avoiding a head-on collision with the growing crypto payments industry. Instead, they are partnering with crypto firms to ensure their position within the payments industry remains strong.

This may not be a bad deal in itself. Indeed, in many ways, this is beneficial to both the payments duopoly and the growing crypto payments industry.

Visa and Mastercard already have the necessary infrastructure to support crypto payments, and their network is very valuable to businesses. The value proposition of Visa and Mastercard hasn’t changed – they still offer businesses the ability to reach more customers and streamline the payment process.

For Visa and Mastercard, this cooperation can help keep them in the game. Instead of having to fight against a competitor, they can continue to enjoy the profits of gaining access to a new group of customers, namely cryptocurrency holders.

Are cryptocurrencies ready to welcome payment giants?

If the reaction from companies like Crypto.com and Paxos is anything to go by, cryptocurrency companies are more than happy to welcome Mastercard and Visa.

When Crypto.com announced their global partnership with Visa, they cited several benefits the partnership has brought them. The partnership would advance Crypto.com’s ambition to accelerate the adoption of cryptocurrency payment solutions worldwide and expand Crypto.com’s reach into new markets and new customer segments that Crypto.com has not yet served .

According to Visa, cryptocurrency companies are the ones lining up to knock on Visa’s door, not the other way around. After all, these partnerships make cryptocurrencies more visible and provide some legitimacy to the crypto companies that manage to secure such partnerships.

However, while companies are free to make their own decisions, they are not free from the consequences of those decisions.

To begin with, not all cryptocurrencies may be welcomed by payment giants.

As these payment giants derive revenue from the amount and size of payments, cryptocurrencies with large block sizes to facilitate large numbers of transactions will be favored for their ability to facilitate such payments.

For cryptocurrencies with such properties that aren’t endorsed by Visa or Mastercard, they may find it increasingly difficult to compete with the legitimacy and networks of these payment giants.

And for those who are endorsed by the payment giants, the risk is that they will become dependent on the networks provided by these payment giants and eventually stop providing some of the benefits that cryptocurrency payments promised in the beginning.

After all, if Visa and Mastercard continue to take their fees as a percentage of transaction values, retailers may simply find themselves with additional fees to factor in as they pay more intermediaries.

Representation of cryptographic transactions on the Visa network
Representation of Crypto Transactions on the Visa Network / Image Credit: Visa, Cointelegraph

Thus, the benefits of using blockchain technology and cryptocurrency for payment arrangements may simply accrue to payment companies like Visa and Mastercard, with consumers and retailers seeing only a fraction of the benefits that cryptocurrency payments can bring.

The payments duopoly, with its current network and utility, can indeed provide the nascent crypto payments industry with numerous benefits, accelerating mass adoption through legitimization and scalable solutions.

But at the same time, the arrival of these payment giants on the crypto payments scene could also mean that any victory of the crypto payments industry over the old Web 2.0 payments industry that gave birth to Visa and Mastercard may not be complete, especially if Visa and Mastercard continue to act as important intermediaries in the payments sector.

So will the payment duopoly be broken by cryptocurrency payments? Probably not, considering how Visa and Mastercard are already moving to partner with cryptocurrency payment companies.

Barring the rise of a Web 3 version of Visa or Mastercard, the crypto payments industry is heading towards reliance on the old payment giants, although that’s not exactly a bad thing in itself.

Featured Image Credit: PYMNTS.com

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