Libertarians and crypto fanatics certainly believe that Bitcoin or other cryptocurrencies will dominate the mode of payments in the 21st century and beyond. It hasn’t directly translated into lost market value for Visa (V) or MasterCard (MA), but I have had multiple in-person interactions where people thought I was crazy for having a meaningful position in Visa.
“The blockchain is taking over! Bitcoin and Ethereum will replace the Fed driven currency manipulation that is ruining our country.”
Although there are many reasons that folks should be losing faith in the US government, I continue to see Bitcoin primarily as an investment instrument at this time. I believe the entrenched interests of central banks, global banking institutions, and the participants in the global payment infrastructure from Wal-Mart (WMT) to your local corner store will prevent an overhaul to the existing payments infrastructure in the near term, defined as the next ten years. Here are my top reasons why I think Visa and MasterCard shareholders can rest easy for the next several years.
Few think the system is broken and it’s actually beneficial for stakeholders
While merchants hate the fees charged by Visa and MasterCard for network usage, there’s little indication to me that the system is at all broken. Especially with the advent of tokenization, Visa and MasterCard operate among the world’s most secure technology infrastructure. In fact, I can’t think of an incident of hackers intercepting payment data or hacking the Visa or MasterCard servers.
Rather, any hacking that occurs comes from archived credit card information on retailers like Home Depot (HD) and Target’s (TGT) servers. This great security comes at a cost, but I believe it also considerably reduces employee theft and other sources of leakage that occur with physical currency.
In addition, businesses have spent significant investment dollars investing in the necessary physical infrastructure to process payments. From fully integrated POS systems that work with software to feed into SAP (SAP) accounting systems and tax planning software. All of this is dominated in local currencies – not in crypto. I am not sure how a blockchain currency could integrate itself into this sort of system in the next decade or even two decades.
For smaller merchants, Visa and MasterCard are also incredibly convenient, especially as technologies such as Square (SQ) have made the cost of accepting credit cheaper and easier at smaller and smaller merchants. In some cities, you even see “cashless” businesses that literally only accept credit and debit cards.
Similarly, QR code technologies are growing in emerging markets, allowing small merchants to leverage cheap smartphone apps to directly accept payments from consumers. Here’s an excellent quote from Visa CFO Vasant Prabhu on Square and QR codes from a recent report.
Square, we love Square they are a great partner of us. Square has thankfully made it possible for any smartphone to be an acceptance device with so called Model Point of Sale Model or MPOS as they say. Fundamentally what it did was you could now drive acceptance to smaller and smaller merchants because you no longer needed a dedicated device landlines etcetera. That was a phenomenal tool for a lot of developed markets where penetration of smartphones was quite high to begin with. So that's one way in which the cost of acceptance is coming down quite dramatically in developed markets and allowing us to go deeper and deeper into types of transactions that at one point believe to be out of the realm of cards, you can buy hot dogs using cards, you can pay for parking using cards, you can do all kinds of things now using cards that without these MPOS kinds of capabilities you couldn’t have done this earlier.
On the other hand, then you've got the QR code based technologies which are phenomenal in emerging markets. The biggest barrier to acceptance in emerging markets was first of all and most of these are very small merchants getting a dedicated device as landlines even if landlines are available was really hard and then getting out there and getting it installed took time. Today all a merchant has to do to be enabled on our mVisa services, QR code stick it on their counter they have to cheap smartphone, they download an app, consumer has an app from their bank, consumers scans a QR code the sale is done. Zero cost and you can set up them up immediately.”
From a consumer perspective, the transaction is incredibly easy. There are rarely any issues with outages or payments being declined. Credit cards and other mobile payments like ApplePay (AAPL) work well, and there is not much of a pain point. VisaNet and PayPal (PYPL) also make online payments even easier, and I really do not see consumers clamoring for changes. In fact, under the current system, consumers are most protected from theft. With issuers like JPMorgan Chase (JPM) taking on the credit risk, fraud is often easily detected or reversible. Good luck getting your stolen Bitcoin back.
Issuers also play a critical role here. Important financial institutions throughout the globe effectively front money for consumers for credit card transactions, allowing people to purchase products and services without putting cash at risk. This acts as a short-term credit mechanism, and I don’t see any way for cryptocurrencies to serve this function. This is a banking relationship specifically enabled by credit cards, and there is no way to disrupt this space unless the banking system moves to Bitcoin.
Speaking of the physical infrastructure, the current blockchain technology running Bitcoin allows for about 3-4 transactions per second due to block size issues. Ethereum allows for about 20 transactions per second. That’s pretty good, right? Maybe Ethereum has more potential than Bitcoin.
How does this compare to PayPal? PayPal processed 193 transactions per second in FY16, handling as high of a transactional load as 450 payments per second on Cyber Monday.
Visa is in another galaxy, processing 150 million transactions per day in 2016, which will be up significantly with the integration of Visa Europe. This works out to 1,667 transactions per second with upside to 56,000 transactions per second based on testing of the network’s capabilities. Visa has tremendous and underutilized scale, which even Bitcoin unlimited will be hard to threaten the payment network paradigm in the next several years.
What’s the value of currency if it isn’t used for transactions?
Frankly, I will be the first to admit that I have not speculated on cryptocurrencies, nor do I have any interest in doing so. I understand the business dynamics driving payment networks, but I don’t understand the real use value of Bitcoin, other than to process illicit transactions and attempt to launder money tax free from sovereign nations.
That said, I have no view on what the cryptocurrencies will do. They may triple from here. They may pullback 80%. I have no idea, and because I don’t fundamentally believe there’s an issue with our current central bank-driven system, I am probably the wrong person to ask about crypto valuation.
Overall, I think the strongest trend in the existing payments paradigm for the next 10 years will be the continued shift away from cash and the increased acceptance of mobile payments. Visa and MasterCard will remain the primary beneficiaries of these trends, and I think shareholders can sleep peacefully at night knowing that Bitcoin isn’t going to put them out of business.
Disclosure: I am/we are long V.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.