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Winner of Digital Payment

Before the development of finance technology, there was just one traditional online payment method, which was typing all the information on the card number by number. Now, we have various forms of payment method from Apple Pay to QR code payment to cryptocurrency payment. The list, of course, does not stop there and will continue to increase as the technology progresses. In theory, some of these methods could rule out the credit card companies’ intervention of taking certain amount of fees off transactions, and this would benefit both consumer and merchants. If this is the case, is it reasonable to assume that those payment methods are going to mark a beginning of a downfall to the major credit card companies like Visa or Mastercard?

To start off with the answer to the previous question, the answer is no. A lot of payment companies come into the market every year with hopes to start a digital payment revolution, but it is almost impossible to break the thick wall of credit networks of giant credit card companies like Visa and Mastercard. When you purchase a product or service with your credit card, the merchant sends the card details to the acquirer. Then the acquiring bank forwards the information to the credit card network to verify the transaction information. After the verification is completed, the request is made to the issuing bank for the payment authorization. In this long but incredibly fast process, these giant card networks are protected by strict regulations, powerful security, and well-established fraud protections that no start-up company can possibly compete against.

Before it became available to the public, Apple Pay was predicted to be one of the biggest threats to the big card companies. The year before Apple Pay came out, Tim Cook, the CEO of Apple, announced that Apple Pay will create a new innovative payment market, and this announcement caused a major disruption in Wall Street. However, we found out not too long after that the Apple Pay made a partnership with Visa and Mastercard and how this payment method was just another way to pay with your previously existing card at the counter. This transition was a solid proof that Visa and Mastercard were the real power behind the digital payments.

Cryptocurrency also was anticipated to become a big competitor in the finance technology industry. The reason why cryptocurrency is not getting much traction in consumer payment yet is simple: relatively slow transaction speed and lack of regulation for fraud or stolen fund. The transaction speed of cryptocurrency is only about 7 transactions per second compare to 65,000 transactions per second for Visa or Mastercard. The security system is also very unstable due to frequent cyber-attacks and many transactions being related to criminal activity such as drug trafficking or worse.

Visa and Mastercard take up almost 90% of market share in global payment industry (excluding China). According to Goldman Sachs, Visa’s stock soared more than 800% since they went public in 2008, and Mastercard has rocketed more than 1,200% in the past decade. Visa is merging and absorbing growing fintech companies with potentials under a program called Visa’s Fintech Fast Track, and they are even developing a crypto-funded debit card which lenders legitimacy and secure protection to the coin-based account. The two giants in the industry seem to rather evolve with the progressing finance technology than be negatively affected by it. For at least a while, no matter which payment method you choose for any purchases, it seems like Visa and Mastercard will be an ultimate winner of the game.

Seongwook Ahn/Tax Advisors for Champaign Society (TACS)

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