In the world of the platform economy, the big get bigger. It’s the winner who takes all. That’s why investors were all turning their attention last Thursday as Visa announced its quarterly earnings. Processing some $3 trillion in transactions the last quarter, Visa has been the largest U.S. card network, vying with Mastercard for the top spot. So even though American Express announced that its fourth-quarter profit beat Wall Street’s expectations, with an optimistic earnings outlook for 2020, what truly matters remain on the two bigger rivals: Visa and Mastercard.
One strategy for a company to create growth is to improve its existing technology by extending product features. And Visa and Mastercard have a long history of doing just so. When they saw Mobil, now part of Exxon, introduce Speedpass, a little black tube for customers to attach to a keychain and wave in front of the pump at the gas station to charge their purchase—which is, in effect, a proprietary system that functions as a store card—Visa and Mastercard started working with third-party merchants on a host of smart chip technologies for “contactless payment,” “touch-and-go,” and “pay-with-a-wave” transactions. When they saw the proliferation of personal passwords, which made remembering an additional password for a new credit card impossible, Visa and Mastercard each unveiled a card with an embedded fingerprint scanner, a small square sitting at the top right-hand corner that acts as a biometric reader. All these innovations were meant to improve the performance of their existing offerings in order to forestall substitution by new solutions.
At the same time, since the dawn of the smartphone era, too many entrants providing new payment methods—Apple Pay, Google Wallet, Square, PayPal, Vimeo, and Revolut, just to name a few—have all proven themselves powerful innovators that can design offerings that consumers crave. Accordingly, they have carved segments of the market away from the credit cards that traditional retail banks issue. The only strategy Visa and Mastercard can rely on to maintain the relevance of their legacy infrastructure is to bypass their own plastic cards. They will de-emphasize them until they one day let go of the physical embodiment that’s been cherished for decades. They are to allow disruptors to connect directly to their toll roads. If you can’t beat them, let them join you.
It should therefore come as no surprise that at the Apple event in March 2019, when the Apple card was announced, commentators noticed not only the card’s “subtle off-white coloring” and “the tasteful thickness of it,” and the Apple logo emblazoned in all its minimalist glory. The card also promised breakthrough features such as no fees of any kind and an AI software that would actively encourage users to avoid debt and provide recommendations to pay it off quickly. But sharing space on the back of the card are the logos of Goldman Sachs, the underwriter, and Mastercard. Not even Apple could shake off the plastic network.
And it is not just Apple. PayPal, Square, Samsung Pay, Google Pay, Facebook Credits, Stripe, and even Coinbase, a cryptocurrency upstart, all work with Visa and Mastercard. The major breakthrough here, then, is the realization that a product’s best feature will never be invented in-house. Both Visa and Mastercard realize that killer apps must be invented by third parties, who are closer to their own customers. It would be too slow if they were to sign up end consumers one by one. For someone who runs a legacy infrastructure, the best strategy is to allow others to discover new uses for the existing system. More important is to co-opt whatever third-party application when it becomes significant enough.
Finance is an industry that is full of “frenemies,” said Al Kelly, Visa’s chief executive, when asked about their relationship with PayPal. It’s an oxymoron really, referring to someone with whom one is friendly despite a fundamental rivalry. But that’s how both Visa and Mastercard focus on expanding their application programming interfaces (APIs), interface standards that will make their networks simple and powerful to work with so they are even more irresistible to any fintech upstarts.
Both networks are launching “tokenization services,” which generate a unique token for each individual credit card, rather than using conventional credit numbers, in order to prevent hackers from accessing important information. Both networks are vying to become the standard-setting organization for the entire payment sector. They will publish a standard and disseminate it at low cost, or even for free. They would be fine with industry observers giving a lot of credit to Apple, Google, Facebook, and other startups for coming up with great mobile payment methods.
And there may even come a day when the plastic cards disappear entirely. But in that world, Visa and Mastercard will still be ubiquitous, still making all the hard parts of sending and receiving money around the world look easy.
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