Large and In Charge in the Payments Industry

Facebook (META -4.13%) recently started offering users the ability to transfer money to each other over their social media platform. Facebook is one of many companies joining in on the race for social commerce, although not all the players are seeing the same success.

In this clip from Industry Focus: Financials, Motley Fool analysts Dylan Lewis and Gaby Lapera talk about who's succeeding where in the payments space today.

A full transcript follows the video.

This podcast was recorded on March 13, 2017.

Dylan Lewis: I think one of the reasons I thought this conversation was so interesting is, when you think about big tech companies coming into a space like payments, this is something we also see in driverless cars, getting into what we think of as manufacturing, which is typically something that tech would stay away from. You think about them coming and disrupting and possibly unseating the industry incumbents. From this talk, it sounded to me like there's just so much in the way for them to do that, and they have almost zero interest in doing it. And a lot of the tone that I got was, "We're looking more for cooperative efforts, and a little bit less for competitive efforts."

Gaby Lapera: Which makes a lot of sense. It's really interesting, because Visa (V -0.59%) especially is trying to break into this electronic-wallet space. And they're having some success, but not as much as, say, Apple Pay has had, or Venmo, or any of those already-online wallets. So there are payment processors that are better looking to team up with tech companies like Apple. Apple doesn't actually do any of the payment processing. They are teamed up with Visa and MasterCard (MA 0.15%) in order to do the payments.

Lewis: Which really makes sense for them as a company. This is a point Kahina raised in the conversation; we think about what goes into payment processing. You have risk, you have compliance, you have all of this regulatory stuff that you have to navigate. If you're a tech company and this is kind of far afield from your core competency, why would you want to take on all those pressures? Why wouldn't you just leave it to someone who knows what they're doing, have them handle things like authentication, managing fraud, charge-backs, all of that, and just enjoy enabling purchases that might not happen otherwise on top of their systems.

Lapera: Yeah. And that's something that I think, listeners, just in case you don't know, credit card companies like Visa and MasterCard, they're not actually responsible for holding on to your money or anything; they're just the middleman. They're the people who contact your bank and are like, "Do they have enough money? What's their credit limit?" And then they help do the transfer between the merchant and the bank. But they're not actually holding on to your money for you.

Lewis: Which is something that I don't think I knew. I don't know the financials space all that well, and frankly, there were elements of this where I was like, "Huh, I didn't know that." But one of my big takeaways was, wow, the moat that these legacy financial companies have is massive, because no one wants to go into building out that type of infrastructure.

Lapera: Yeah. You want to hear some numbers?

Lewis: Absolutely.

Lapera: In 2015, which is the latest that I have data on in front of me, Visa had 50% of the U.S. credit card market share by network purchase volume, which is a lot. MasterCard is trailing, around 25%. The debit card market share by network purchase volume, Visa has had a little dip, and now it's only at 70%. But it used to be at 80%. MasterCard is hovering around 30%. Market share based on number of credit cards in circulation at the end of 2015, Visa had 328 million credit cards in the U.S. circulating. MasterCard had 192 million. Which is crazy. The monthly purchase/spending volume at the end of 2015 on a Visa card is $341. For a MasterCard, it's $283. That's a lot of money, especially if you annualize that.

Lewis: Wow. One of the things I noticed with a lot of those numbers that you cited were that they were U.S.-focused. With some of these social platforms, as you might imagine, the most valuable markets are the U.S. market, the European market, so, the North American markets and the European markets. And then, some of the developing parts of the world are less valuable on a revenue-per-user basis. It sounds to me like that's the same thing for financials.

Lapera: Yeah, absolutely. Visa has actually just taken a big leg up on its competition by integrating Visa Europe, which, oddly enough, not part of Visa before this last quarter. They did that pretty flawlessly, when all things are considered. The metrics, the financial side of it, the accounting side of it, looks really good. And that's going to grow their business by 25% in one fell swoop. Isn't that crazy?