Last week, Amazon.com (AMZN -1.65%) released a new product, Amazon Local Register. The product is a mobile credit card reader and accompanying app that allows merchants to accept credit and debit cards anywhere with a tablet or smartphone.
This product is by no means revolutionary -- Square, PayPal, and myriad others already offer the exact same functionality; but when Amazon.com enters the fray, competitors take notice.
Enter Visa and MasterCard
It seems that every time a tech company launches a new product or app in the mobile payments world, the conversation inevitably turns to Visa (V 0.05%) and MasterCard (MA -0.08%). These two behemoths are synonymous with payments, and dominate the electronic transfer of money literally all over the world.
Perhaps because of this worldwide dominance, there are also some major misconceptions about the companies and how they operate. Visa and MasterCard are not actually credit card companies. In fact, they are basically just middlemen who operate the back-end infrastructure that connects the merchant with your bank. The companies are just toll collectors: When you swipe your card, Visa and/or MasterCard facilitate the transaction, and they collect a small cut for their efforts.
Even when companies like Google or PayPal come out with "mobile wallet" products that allow you to purchase goods or services without swiping your card, Visa and MasterCard still get paid. It's not about how you choose to interact with the merchant, it's about the back-end network that connects all the different players, and makes the transaction successful.
Tech companies by and large have elected to partner with Visa and MasterCard instead of attempting to replace them. Google, PayPal, Square, and now Amazon.com build the front-end user interface, and then rely on the existing payment network to facilitate the transaction.
Amazon isn't challenging Visa or MasterCard today, but let's think longer term
Amazon is a unique case. The company has repeatedly ignored conventional wisdom as it grew from an upstart book retailer to the domineering e-commerce giant it is today. It has eschewed profits for growth, investing every penny of available cash flow to sell more products cheaper, deliver them faster, and pull consumers deeper and deeper into the company's all-inclusive ecosystem.
With the launch of Amazon Local Register, the company now has a toehold in the payments world. If past strategy holds true, we should expect to see Amazon find new ways to lower costs for the consumer, increase speed and convenience, and bring the customer experience deeper and more completely within the Amazon ecosystem.
Amazon may soon go head-to-head with Visa and MasterCard
Creating a replacement payment network that's capable of competing with Visa and MasterCard from scratch would be an incredibly challenging endeavor. It would be a true long shot. But if there is any company out there with the gumption, capital, and technical capabilities to do it, it's Amazon.
And there's some precedent for this kind of bold maneuvering. To keep consumers within the Amazon ecosystem of streaming TV, movies, and music, Amazon built its own tablet product, its own smartphone, and its own set-top media player. Instead of relying on Google or Apple to distribute its products, Amazon built out distribution for itself. Forget going around; Amazon has a history of running straight up the middle.
Building a global payments network would obviously be a much greater challenge than building, say, a smartphone; but conditions have never been more ripe for such a bold move. The technology that powers digital currencies like Bitcoin, called block-chain technology, seems a likely candidate for a faster, cheaper payment processing technology. This could be exactly the framework that Amazon needs to quickly build and scale its own payment network.
Five years ago, this technology didn't exist; it seems plausible, though far from certain, that five years in the future, it could be ready to upend the status quo in digital payments.
Should investors in Visa and MasterCard today be worried?
At present, this challenge from Amazon is purely hypothetical. The company has given no indication whatsoever that it intends to follow the path laid out here today. Investors today have nothing to worry about in the short and medium term.
In fact, the success of Amazon Local Register would also be a success for Visa and MasterCard. In the current industry structure, any new portal that accepts payments over the Visa or MasterCard network is a win-win situation.
However, if I were an executive at Visa or MasterCard, I'd be working very hard to get in front of this threat, and cover my flank, however low the probability. Time and again, established giants have been brought down by new technologies that seemingly come out of nowhere. It's always a long shot until it happens.
