V - Visa

[RuleNumberOne]

Regarding a pain point, I found out from a business owner that the credit card fee is 4%. This is quite a large business with each payment in the order of several thousand dollars.

 

That is quite painful. The fee must be even higher for smaller businesses or smaller payments. Could become a hot political issue anytime.

 

 

The main risk as others have pointed out is regulatory. Disruption risk is much lower compared to the regulatory risk.  For disruption you need to have a pain point for some segment of the users that is going to be reduced (like Uber) with a new solution or there must be something that is vastly superior in functionality or usability (like iPhone).

 

Vinod

[Liberty]

The enterprise value of V and MA is equal to the enterprise value of GOOG. Vast difference between tech capability and complexity of products.

 

What does that have to do with anything?

 

Manufacturing cars is more complex than rating bonds, yet Moody's is a better business than Ford.

[Jerry Capital]

It's not 4% (although it could be for high rewards cards + AMEX) it's 1 - 3% with average closer to 2%.

[peterHK]

Regarding a pain point, I found out from a business owner that the credit card fee is 4%. This is quite a large business with each payment in the order of several thousand dollars.

 

That is quite painful. The fee must be even higher for smaller businesses or smaller payments. Could become a hot political issue anytime.

 

 

The main risk as others have pointed out is regulatory. Disruption risk is much lower compared to the regulatory risk.  For disruption you need to have a pain point for some segment of the users that is going to be reduced (like Uber) with a new solution or there must be something that is vastly superior in functionality or usability (like iPhone).

 

Vinod

 

That is the decision of the lender etc. NOT V/MA. V/MA fees are like 50bps, and with that comes the immense benefit of being able to accept cards as a payment network. The alternative, say Apple Pay, still runs on V/MA rails. Venmo runs on Visa Direct.

 

People need to get over this "credit cards are expensive for merchants therefore V/MA at risk". V/MA are rails that go beyond the action POS method. Nobody wants to build new rails and V/MA have such massive cost advantages at scale that it makes no sense to rebuild them. The actual payment methods around those centralized rails will disrupt each other (e.g Venmo disrupting banks etc.), but my guess is that it will all rely on V/MA in the end to actually get the transaction done.

[Guest cherzeca]

Regarding a pain point, I found out from a business owner that the credit card fee is 4%. This is quite a large business with each payment in the order of several thousand dollars.

 

That is quite painful. The fee must be even higher for smaller businesses or smaller payments. Could become a hot political issue anytime.

 

 

The main risk as others have pointed out is regulatory. Disruption risk is much lower compared to the regulatory risk.  For disruption you need to have a pain point for some segment of the users that is going to be reduced (like Uber) with a new solution or there must be something that is vastly superior in functionality or usability (like iPhone).

 

Vinod

 

That is the decision of the lender etc. NOT V/MA. V/MA fees are like 50bps, and with that comes the immense benefit of being able to accept cards as a payment network. The alternative, say Apple Pay, still runs on V/MA rails. Venmo runs on Visa Direct.

 

People need to get over this "credit cards are expensive for merchants therefore V/MA at risk". V/MA are rails that go beyond the action POS method. Nobody wants to build new rails and V/MA have such massive cost advantages at scale that it makes no sense to rebuild them. The actual payment methods around those centralized rails will disrupt each other (e.g Venmo disrupting banks etc.), but my guess is that it will all rely on V/MA in the end to actually get the transaction done.

 

"V/MA fees are like 50bps"

 

recent Barrons piece said that their take was 15 bps.  who's right?

[RuleNumberOne]

Right now the fee is 4%. This is for payments in the range of $5000.

 

I think an international money transfer of $5000 can be done for a negligible fee. Why can't I avoid the 4% fee when paying someone in the same city?

 

This is what makes the 4% tollbooth ripe for disruption. Right now it is either 4% or "pay by cash or check." The disruption is bound to happen at some point.

[Liberty]

People need to get over this "credit cards are expensive for merchants therefore V/MA at risk". V/MA are rails that go beyond the action POS method. Nobody wants to build new rails and V/MA have such massive cost advantages at scale that it makes no sense to rebuild them. The actual payment methods around those centralized rails will disrupt each other (e.g Venmo disrupting banks etc.), but my guess is that it will all rely on V/MA in the end to actually get the transaction done.

 

These people tend to overlook what the cost of cash is for merchants. Higher security and transport cost, etc. Cash isn't free either.

[Spekulatius]

People need to get over this "credit cards are expensive for merchants therefore V/MA at risk". V/MA are rails that go beyond the action POS method. Nobody wants to build new rails and V/MA have such massive cost advantages at scale that it makes no sense to rebuild them. The actual payment methods around those centralized rails will disrupt each other (e.g Venmo disrupting banks etc.), but my guess is that it will all rely on V/MA in the end to actually get the transaction done.

 

These people tend to overlook what the cost of cash is for merchants. Higher security and transport cost, etc. Cash isn't free either.

 

Cash is better for taxe avoidance. That’s why many like cash.

[DooDiligence]

Don't forget the consumer.

 

Consumers carry plastic & merchants need to accommodate this.

 

How are you going to change consumer behavior regarding payment methods?

 

https://www.pymnts.com/news/payments-innovation/2016/how-will-visa-paypal-shape-the-future-of-payments/

 

The link above is a few years old & may not present a valid discussion.

 

I'm super ignorant about all of this.

[RuleNumberOne]

The idea is to carry plastic, but pay with zero fees. Robinhood or someone else who wants deposits could make such an arrangement with merchants.

 

Youtube and Gmail have ever increasing storage costs, as the number and quality of videos increase, emails increase. They also have ever-increasing compensation for cutting-edge R&D.

 

But with payment processing, the costs are fixed. You get ever-increasing revenues without increasing expenses.

 

Tells me there is room for disruption. Enterpreneurs could get a foothold by facilitating business payments for a flat fee like the $5000 payment I was talking about.

 

 

Don't forget the consumer.

 

Consumers carry plastic & merchants need to accommodate this.

 

How are you going to change consumer behavior regarding payment methods?

[Liberty]

Cash is better for taxe avoidance. That’s why many like cash.

 

One more reason it's going to go away over time.

 

Cash doesn't give you cashback rewards or points either.

[Pondside47]

Right now the fee is 4%. This is for payments in the range of $5000.

 

I think an international money transfer of $5000 can be done for a negligible fee. Why can't I avoid the 4% fee when paying someone in the same city?

 

This is what makes the 4% tollbooth ripe for disruption. Right now it is either 4% or "pay by cash or check." The disruption is bound to happen at some point.

 

I think the banks take the majority of the 4% not Visa

[Castanza]

Cash is better for taxe avoidance. That’s why many like cash.

 

One more reason it's going to go away over time.

 

Cash doesn't give you cashback rewards or points either.

 

I don't think cash will go away. I think it would get voted down in the supreme court as unconstitutional. Louisiana tried to do something similar in 2011 which would prevent all 2nd hand cash transactions (yard sales and stuff like that). But it was almost immediately revised to only be for cash to precious metals as it was getting called unconstitutional.

[SlowAppreciation]

Right now the fee is 4%. This is for payments in the range of $5000.

 

I think an international money transfer of $5000 can be done for a negligible fee. Why can't I avoid the 4% fee when paying someone in the same city?

 

This is what makes the 4% tollbooth ripe for disruption. Right now it is either 4% or "pay by cash or check." The disruption is bound to happen at some point.

 

I think the banks take the majority of the 4% not Visa

 

Very very rough/high-level of a $100 transaction

- $2 to issuing bank

- $.25 to payment processor

- $.20 to merchant bank

- $.13 to Visa

- merchant keeps ~$97.50

 

[DTEJD1997]

Cash is better for taxe avoidance. That’s why many like cash.

 

One more reason it's going to go away over time.

 

Cash doesn't give you cashback rewards or points either.

 

Cash has many, Many, MANY valuable features that credit/debit cards will never have.

 

Years ago, I sometimes dealt with scrap equipment, buying & selling.  Unless you knew the buyer, VERY well, you would NEVER take a check or credit card.  The risk of a bouncing check or chargeback was simply too great.  With CASH a transaction is final.  There is a LOT to be said for that.

 

There is also not a fraud problem with cash (as long as you screen for counterfeit).  How much fraud is there with checks/credit cards?

 

Cash also has a different counter party risk than credit/debit cards.  You don't need anybodies approval/network working to spend/receive cash.  How many times have my credit/debit cards been denied because the fraud/back office systems of the issuer are not working properly?  What if the network decides they don't like you because of your conservative viewpoint?  OR liberal viewpoint?  Or some other belief?  Or what happens if the processor network decides they don't like the line of business you are in?  There have been reports of gun dealers/stores not being able to process credit card transactions as the bank/network decided they don't want to deal with them.

 

What happens if your card is bent/damaged?

 

I've carried cash all my adult life.  Never been robbed, never lost a significant amount. 

 

I used to work with younger workers who NEVER carried cash.  They would even buy $1.50 worth of snacks with a credit/debit card and would gladly pay a $.50/fee for a small transaction.  Many of them would do this EVERY day or many times a week.  I asked why they simply didn't get $50 out of every pay check.  They were petrified they "would get rolled" for that princely sum of cash.  They were also scared they might lose it or misplace it.

 

Over the course of a year, they probably lost AT LEAST 1 day's of work to fees for small transactions.

 

Finally, when I've got cash, I tend to be bit more cautious with my purchases.

 

So I hope cash will be around for quite a while longer, as it serves a very useful purpose that cards never will.

 

 

[dwy000]

I've stopped counting the number of transactions where the seller charges a "credit card transaction fee" of 2-2.5% on top of the selling price (usually it's for larger ticket items).  I love my cash back but when they tack it on as an add on I almost always go for the debit transaction.  But I'm assuming many people using the "credit" part of the credit card don't have much flexibility.

[Liberty]

Cash is better for taxe avoidance. That’s why many like cash.

 

One more reason it's going to go away over time.

 

Cash doesn't give you cashback rewards or points either.

 

I don't think cash will go away. I think it would get voted down in the supreme court as unconstitutional. Louisiana tried to do something similar in 2011 which would prevent all 2nd hand cash transactions (yard sales and stuff like that). But it was almost immediately revised to only be for cash to precious metals as it was getting called unconstitutional.

 

That's not what I meant. I meant it'll keep going away progressively in an organic way as it has for the past decades, not that it's suddenly going to be banned soon or that it won't remain for some (increasingly rare) uses.

[Spekulatius]

Interesting discussion. I still think there is risk of disrupt on in this sector. sure Visa and MA only take 0.2%, but the total take from banks or CC companies  is more 3%, which is actually quite significant when we talk about larger sums. That’s why car dealers don’t take a CC’s  to pay for your car , except a down payment. Same for very small sums. So there is opportunity for disruption, which could come via Visa and MA, but if Visa would allow an alternative source, they would piss off all their customers. So I think they might be tied to the mast. But if someone were to take totally new approach, then  quite likely  the total cost of payment could be reduced to a fraction of what’s out there. I think for large payment, actually a crypto solution might work, but I have no idea. perhaps this goes via Visa or MC, but I am not sure.

[RuleNumberOne]

If expenses are $95 out of the $100, half the $5 profit is gone.

 

Right now the fee is 4%. This is for payments in the range of $5000.

 

I think an international money transfer of $5000 can be done for a negligible fee. Why can't I avoid the 4% fee when paying someone in the same city?

 

This is what makes the 4% tollbooth ripe for disruption. Right now it is either 4% or "pay by cash or check." The disruption is bound to happen at some point.

 

I think the banks take the majority of the 4% not Visa

 

Very very rough/high-level of a $100 transaction

- $2 to issuing bank

- $.25 to payment processor

- $.20 to merchant bank

- $.13 to Visa

- merchant keeps ~$97.50

[abitofvalue]

Interesting discussion. I still think there is risk of disrupt on in this sector. sure Visa and MA only take 0.2%, but the total take from banks or CC companies  is more 3%, which is actually quite significant when we talk about larger sums. That’s why car dealers don’t take a CC’s  to pay for your car , except a down payment. Same for very small sums. So there is opportunity for disruption, which could come via Visa and MA, but if Visa would allow an alternative source, they would piss off all their customers. So I think they might be tied to the mast. But if someone were to take totally new approach, then  quite likely  the total cost of payment could be reduced to a fraction of what’s out there. I think for large payment, actually a crypto solution might work, but I have no idea. perhaps this goes via Visa or MC, but I am not sure.

 

But we saw a real-world experiment of interchange being capped for Debit cards in the US around 2009.. and guess what V / MA still dominate that business but now consumers dont get rewards and banks charge for low balance checking accounts.. fees on debit cards are already capped by regulation for 4-party systems like V, MA so it seems highly unlikely they will get disintermediated. Seems to me if credit gets an interchange cap in the US (ala EU), bye bye to the rewards cards...

 

btw - the merchant paying 4% in card fees is probably getting additional services from his acquiror. Highly highly unlikely that 4% is the actual clean MDR.. thats probably closer to 2-2.5%. Unless there is a ton of cross-border or something weird about this merchant which makes it atypical in the grand scheme. Even Amex which has the highest MDR doesnt get 3%.

 

The problem an upstart has is balancing the interests of consumers, issuers and merchants. Merchants think payments should be zero margin / cost and they should get to keep all the fees. Issuers think fees should be higher and they are providing a valuable service through cards. Consumers just want ubiquitous acceptance and rewards. V/MA have shown an ability to balance these interests and manage it well enough.. plus they are ingrained, global in scale, and reliable. This is a classic 2-sided market with major network effects..  An upstart can probably appeal to one constituency - say merchants by offering really low MDRs.. but what issuer is going to sign up to issue cards for this upstart? Why would they switch unless they could get something out of it? Without issuers - how do consumers use this network? PayPal tried to do this - they had millions of online merchants and consumer payment credentials and yet found it tough going competing with V / MA in an offline world and pretty much gave up in switching to their current 'choice' initiative.

 

One final point - V has 60%+ operating margins. Thats because it charges for value provided not costs. Payments is a scale business. It is highly likely that V will have the lowest cost of processing transactions.. It can put pricing in response to competition.. still make money but drive a sub-scale upstart to loose money. 

 

The anti-trust / regulation fears are much more of a concern to me than some upstart disintermediating the incumbents.

[RuleNumberOne]

Imagine a Facebook debit card. Consumers and merchants provide their bank account, login and password information to Facebook.

 

Facebook subtracts from the payer, and adds to the payee's accounts. Zero fees, zero rewards.

 

Merchant can advertise a 3% discount with a Facebook card, or an extra 3% with V/MA. Consumers are not going to pay an extra 3% with V/MA for rewards of 1-2%.

 

Facebook gets valuable data. Once Facebook or someone else offers something like this, many tech companies will jump in.

[Liberty]

[Liberty]

Imagine a Facebook debit card. Consumers and merchants provide their bank account, login and password information to Facebook.

 

Facebook subtracts from the payer, and adds to the payee's accounts. Zero fees, zero rewards.

 

Merchant can advertise a 3% discount with a Facebook card, or an extra 3% with V/MA. Consumers are not going to pay an extra 3% with V/MA for rewards of 1-2%.

 

Facebook gets valuable data. Once Facebook or someone else offers something like this, many tech companies will jump in.

 

I'm sure people will flock to giving Facebook direct access to their bank accounts.

[Spekulatius]

Imagine a Facebook debit card. Consumers and merchants provide their bank account, login and password information to Facebook.

 

Facebook subtracts from the payer, and adds to the payee's accounts. Zero fees, zero rewards.

 

Merchant can advertise a 3% discount with a Facebook card, or an extra 3% with V/MA. Consumers are not going to pay an extra 3% with V/MA for rewards of 1-2%.

 

Facebook gets valuable data. Once Facebook or someone else offers something like this, many tech companies will jump in.

 

Amazon would be the most likely company to start this. Paying 2% on all their revenues for debit/CC processing is huge. They know a lot about their customers, have cloud capacity, scale and a history of going after someone else’s margin. Maybe they even would use Visa or MC infrastructure, but would they allow it? It would a significant conflict of interest with their customers.

[peterHK]

Imagine a Facebook debit card. Consumers and merchants provide their bank account, login and password information to Facebook.

 

Facebook subtracts from the payer, and adds to the payee's accounts. Zero fees, zero rewards.

 

Merchant can advertise a 3% discount with a Facebook card, or an extra 3% with V/MA. Consumers are not going to pay an extra 3% with V/MA for rewards of 1-2%.

 

Facebook gets valuable data. Once Facebook or someone else offers something like this, many tech companies will jump in.

 

Amazon would be the most likely company to start this. Paying 2% on all their revenues for debit/CC processing is huge. They know a lot about their customers, have cloud capacity, scale and a history of going after someone else’s margin. Maybe they even would use Visa or MC infrastructure, but would they allow it? It would a significant conflict of interest with their customers.

 

The thing this sort of logic misses is why would Amazon, as an open network, create a closed loop payment system. Same with Facebook. It works for Facebook to Facebook transactions, but what if I have a Visa card and want to do a transaction on Facebook using credit? Is Facebook going to lend me that money? Do I have to sign up for ANOTHER card?

 

I mean look at PayPal: uses Visa/MA rails for huge parts of their business.

 

Look at Apple: uses V/MA rails AND cards (Apple Card is digital only, runs using MasterCard).

 

Google Pay: uses MasterCard.

 

All these open platforms #1 want access to V/MA's hundreds of millions of users, #2, don't want to get into being rails because it's so hard; and #3, would be at a huge cost disadvantage to V/MA.

 

This is also why I'm not worried about the fee issue. If banks are disintermediated by Google/Apple/PayPal etc. they're already locked into using V/MA. The front end of the payment space is high speed, and evolves quickly but we've seen over and over again, the easiest way to get scale and acceptance on that front end is to use the back end that V/MA have already built.