Are Visa and MasterCard Really Under Attack?

Visa (NYSE: V  ) and MasterCard (NYSE: MA  ) have two of the strongest moats in the world. The two share something close to a duopoly in the card-processing market, making competitors' ability to invade their territory chronically difficult.

At least that's what most of us think. On Monday, Bloomberg reported that Verizon (NYSE: VZ  ) and AT&T (NYSE: T  ) plan to launch a program with Discover Financial Services (NYSE: DFS  ) to compete with Visa and MasterCard by letting consumers pay for transactions by "swiping" their mobile phones rather than scanning a debit or credit card.  

How concerned should Visa and MasterCard shareholders be? Not very.

Developing a new product is one thing. Executing it in a meaningful way is quite another. Even if Verizon and AT&T develop an efficient mobile payment system, getting consumers and businesses to adopt it is the real battle.

The key there is consumers and businesses. For a product like this to succeed, both have to adapt simultaneously. If businesses don't accept a mobile payment system, it's useless for consumers to demand it. If consumers don't demand it, it's useless for businesses to accept it. That required symbiosis makes it unreasonably hard to shake up the current system -- a system that's dominated by Visa and MasterCard, which have managed to get consumers and businesses to agree on a transaction system.

But how did Visa and MasterCard manage to do this in the first place? And if they managed to do it, why can't Verizon and AT&T do it better?

I think the answer lies in a Federal Reserve Bank of Boston paper on the history of mobile payment systems. The paper explains why mobile payment systems have achieved success in some countries, but will likely struggle in the U.S.:

The United States has a well-established and widely adopted electronic payment system, with the majority of consumers carrying and using credit and debit cards. Cash -- the payment method that mobile payments typically replace in other countries -- is used much less frequently here than in the countries where mobile payments are significantly more successful (for example, Japan). Moreover, recent changes in the U.S. debit card regulation (Reg. E) eliminate the need for merchants to give receipts for small dollar purchases, thus speeding up debit transactions and reducing consumers' demand for faster payment method alternatives. Many merchants do not require signatures for low-value credit card transactions, either.

Countries that were able to successfully adopt mobile payment systems were those that were primarily cash-based economies to begin with. In these countries, the mobile payment systems replaced carrying around pocketfuls of cash with a single secure unit -- the cell phone. That made the new technology far superior to the status quo. It was safer. It was faster. It was completely different. The new technology wasn't just more convenient; it was a whole new way of doing things.

In the U.S., card-based transactions have already replaced most cash transactions (U.S. cash transactions are only about 14% of all transactions), so adopting a mobile payment system would not fundamentally change the existing system. It would simply convert our current non-cash system from a card to a cell phone. The major driving force that got other countries to adopt mobile payment systems -- the end of having to carry cash -- is not something the U.S. needs to conquer. We're already there! Put another way, the only reason mobile payment systems have been successful in other countries is because those countries were late in adopting the widespread card system we already enjoy in the U.S.

Like so many industries, the first-mover gets the long-term advantage. In the U.S., that first-mover is the duopoly of Visa and MasterCard.

Fool contributor Morgan Housel owns shares of Verizon and AT&T. Discover Financial Services is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 04, 2010, at 3:39 PM, lbcdpg wrote:

    I agree with most of this story, however, the reason I am not worried as a MA shareholder is because of the fees Discover will likely charge. If they can't really compete as a Credit card company, how are they going to be able to process transactions in a new way (Which includes a ton of expensive new hardware for each business that wants to accept cell phone payments) at a price that can compete with Visa or Mastercard. And who is to say that V and MA aren't currently working on a "Smart Phone payment system" of their own? I don't see the two kings of this industry just rolling over and accepting defeat here.

    -Marc

  • Report this Comment On August 05, 2010, at 12:25 PM, kantconcentr8 wrote:

    @lbcdpg check out this wsj article and www.payfone.com ... http://tinyurl.com/2elnmqu

  • Report this Comment On August 07, 2010, at 9:42 AM, HarryCaraysGhost wrote:

    As a Visa shareholder, I'm not really worried.

    as stated above, V and MA are most likely woking on a system of their own. It is an interesting conversation though, so I will be watching as events unfold.

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