Up until now, Visa and Mastercard could kind of fly under the radar while society went after more obvious Big Tech "villains" like Google and Facebook. Part of that is their age; they aren't new players that raise new problems, but rather decades-old businesses in what used to be a rather boring corner of tech known as "payments." And part of that was the lack of alternatives. You want to process card payments, you have to use their rails do to it.
But no longer. The explosion of new "payments" companies and the obvious potential of alternative payment networks like Bitcoin has suddenly shifted the balance of power away from this once-powerful duopoly. Visa and Mastercard were two of the best and easiest trades of the 2010s, loved by hedge funds and portfolio managers; Visa rose from roughly $20 to $200 during the decade, a 10x return. Mastercard was even better, growing from also around $20 to upwards of $350.
This year has been a much different story. Both are negative since January. And their list of headaches--especially for Visa, the laggard--is growing. Just yesterday, Amazon said it will stop accepting Visa credit cards in the U.K. in January, "due to the high fees Visa charges." This affects millions of U.K. cardholders, and Amazon is already offering Prime members 20 British pounds for them to switch to a Visa alternative.
Visa shares sank more than 6% after that news yesterday, weighing heavily on the Dow. Then came news that Amazon may drop Visa as its partner on its U.S. co-branded credit card, and the shares sank even further. And it all comes after Amazon has already hit Visa credit card users in Australia and Singapore with surcharges to cover Visa's "high fees"--Amazon didn't give details, but the fees often range between 1% and 3% per transaction.
There is a slight Brexit angle here--the European Union has capped fees since 2015, but the U.K. is no longer part of that. Both Visa and Mastercard have also recently raised "interchange" fees that U.K. customers will incur if they order from the E.U. But the headwinds to Visa and Mastercard's business are much bigger than that.
The entire payments space is now in such flux that when UBS initiated coverage on it this week, they titled their report "Darkest before the Dawn." While the S&P 500 is up about 25% this year, Visa and Mastercard ("the networks") are down on average 1%, fintech players like PayPal and Square are down around 6%, and old-school "merchant" processors like Fiserv and Global Payments are down roughly 20%.
There is, in a nutshell, now too much competition and too little clarity on how the space will evolve. The key disruptive technologies are (1) buy now pay later, (2) the rise of ACH and Europe's peer-to-peer payments, and (3) crypto.
Alex Rampell of Andreesen Horowitz tweeted in early September that buy-now-pay-later (BNPL) is "an early threat to trillions of dollars of market cap," specifically naming Visa, Mastercard, Fiserv, and Global Payments, among others. BNPL--offered by firms like Affirm and Square's AfterPay--is a "parallel network," Rampell explained, "that bypasses the issuing bank, card network, and merchant acquirer. It's just the consumer, the merchant, AND...the product manufacturer!"
The more that consumers use BNPL--like during this holiday season--the bigger threat that is to the old payments players, Rampell argues. Meanwhile, Europe is launching its own payments network that could also disintermediate the American financial giants. This actually stems in part from fear that U.S. sanctions on Iran during the Trump administration would affect European players who wanted to still do business with the country (vis-a-vis Visa and Mastercard) under the previously agreed to nuclear deal. Worries about future reliance on new Chinese or U.S. payments players (like Alipay or Facebook) also played a role in the launch.
Anyhow, the new network (which was originally called PEPSI until Pepsi is rumored to have protested and is now known as EPI), is first launching with peer-to-peer payments, which again shaves off demand for the likes of Visa and Mastercard at the margin even if the full system takes years to put in place.
And the third big threat to the traditional payments players is, obviously, crypto. I would argue specifically Bitcoin, and maybe Ethereum, which are closest to being the new "rails" on which payments--in any kind of currency--can now be processed. This is the whole point of Strike, if you recall our interviews with its founder Jack Mallers. Strike uses the Lightning network on top of Bitcoin to quickly process payments, including cross-border payments, without paying huge fees to the card companies or the likes of Western Union.
So it's obvious that payments are in the early days of massive disruption, and analysts are all over the place in trying to figure out what that means for the stocks. Some maintain buy ratings on Visa and Mastercard, especially noting they should have near-term benefit from the post-Covid rebound in cross-border payments. Others are more cautious and more bullish on the fintech disruptors.
David Togut of Evercore ISI leans towards the disruptors, warning the traditional players like Visa need to cut rates with their largest customers, like Amazon, much like American Express did when restaurants threw a fit several years back. At the very least, he says, they should refrain from price hikes at this delicate juncture. As for how to invest? "Our highest conviction payments ideas in a more disruptive environment are #1 Paypal; #2 Square; #3 Mastercard, and #4 FIS, which is more a bank technology than a payments company."
I will be happy to watch all this from the sidelines. It feels like there will be a lot more change--potentially including a lot more tie-ups or thwarted deals like Paypal's Pinterest talk--in the months ahead.
See you at 1 p.m!