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Why Visa, MasterCard, and American Express Joined Forces

Perhaps more than any other industry, the payments and credit card landscape is poised for rapid change. Many have suggested Visa (NYSE: V  ) , MasterCard (NYSE: MA  ) , and American Express (NYSE: AXP  ) are quaking in their boots as a result.

But there is one little discussed reality that could ultimately mean big things -- in a positive way -- for these three giants.

The position of change
Many have opined on the future of the payments industry, and what the possible entrance of technology titans may mean to the three principal players, Visa, MasterCard and American Express. And much more has been said about the security that characterizes the payments network thanks to high-profile security breaches at major retailers.

But what often goes unsaid is the three companies' partnership to create a more secure system that will protect consumers as they make purchases in-store or online.

In October 2013, Visa, MasterCard, and American Express announced that they had joined forces to push for something known as "tokenization."

While it sounds complicated -- and undeniably the technology to create it is -- the concept is simple. Instead of having a customer's account information -- card number, expiration date, and the like -- traveling across the payments network when a card is swiped, a unique and individual "token" is generated. The data in turn is encrypted, and even if the token were to be intercepted and stolen, the information about the card itself wouldn't be accessible.

With that in mind, it's no wonder Jason Oxman, CEO of the Electronic Transactions Association, an industry group whose members process more than $4 trillion in payments, said tokenization is "one of the most exciting things the payments industry is working on now."

Cause for optimism
In March of this year we learned Visa and MasterCard had banded together again to ensure the security was enhanced even more quickly.

So it's clear the companies situated at the heart of the industry will collaborate for greater security, which will benefit consumers. The natural question becomes, then, what does this mean for investors?

They may benefit even more than consumers.

Speaking last month at the Credit Suisse Future of Payments & Commerce Conference, MasterCard Senior Vice President of Emerging Payments Mario Shiliashki said: "The great thing about tokenization and the effort we're driving right now is it's an industrywide effort. It's Visa, American Express, all of the players that are driving this ... this is, again, about optimizing the network and about getting better security and safety and the ability to then have a lot more transactions through the network."

Shiliashki added that the companies are working with their competitors because "utilizing the system that is approved and being promoted by the industry will drive benefits to everyone."

When discussing tokenization at another conference, Visa CEO Charlie Scharf stated, "we got together with MasterCard and American Express to put out a consistent set of standards because we wanted to make it easy on the people that do business with us."

The three major players in the industry are partnering together to provide an even more insurmountable "moat" -- as Warren Buffett likes to say -- to not only protect the information of consumers across the payments networks, but to protect themselves from competitors.

By enhancing security, they're furthering their grip on the industry and making it more unlikely that any of the speculated possible industry entrants can truly take down the colossal networks these companies cling to.

There is the old saying from Sun Tzu to "keep your friends close, your enemies closer."  In this instance, the partnership and collaborative efforts of rivals Visa, MasterCard and American Express are poised to be a major benefit to all three.

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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