Considering the disruptive nature of blockchain technology, one could be forgiven for thinking that traditional payment players would be very worried -- and perhaps even combative towards -- the new payment method.
But rather, Visa (V -0.23%) and Mastercard (MA 0.07%), the two largest payment rails in the world, have embraced blockchain technology, implementing it into several of their products and services. They've also vowed to keep innovating around the technology as well. Mastercard, for instance, has at least 89 blockchain patents.
In many ways, blockchain technology heightens the competition for these large, traditional payment players. But that's a key reason why embracing the technology is a smart long-term strategy for both Visa and Mastercard.
Blockchain does it better
Put competition aside for a moment. The executives at Visa and Mastercard aren't just worried about losing future market share to blockchain-based competitors. They're also worried about falling behind on technology, which is especially critical to stay on top of in the payments business.
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Plenty of people don't believe in the value of cryptocurrencies, but there's no denying the ingenuity of blockchain technology. At its core, the blockchain is a distributed ledger of information that is very difficult to alter, which in turn makes it very secure. Therefore, the technology offers an alternative, highly secure, real-time payment method that enables parties to transfer money at any time of the day or night, so long as they have internet access.
In 2018, Visa ago rolled out a business-to-business cross-payment tool called B2B Connect, which cuts out the middlemen in cross-border payments and allows businesses to send payments directly to partners' banks in a seamless, transparent manner. The service was developed with the help of a blockchain company called Chain. B2B Connect is now available in more than 100 countries and territories.
Visa and Mastercard's various patents demonstrate that they are looking at ways to use blockchain technology to make the payments process more secure. For instance, one patent filed by Mastercard is called the "Method And System For Payment Card Verification Via Blockchain," which would use the public blockchain to securely capture and verify a cardholder's information. This would make it more difficult for scammers to steal people's information.
Growing the network
Visa and Mastercard have been able to build incredibly strong moats that are difficult to replicate because they each have such massive networks facilitating payments all over the world. This effectively creates a network effect: As payment systems grow and gain more users, they become increasingly attractive, eventually becoming so big that late-to-the-party merchants and banks have seemingly no choice but to join. Large networks are great for Visa and Mastercard not just because they gain more users, but also because the companies collect fees on every transaction they facilitate. More users mean more transactions, and more transactions mean more fees.
With this in mind, Visa and Mastercard don't have to believe in Bitcoin or pay much mind to how much the token is currently worth. But they can make the reasonable assumption that people will continue to use cryptocurrencies and stablecoins to move money, and even to buy goods and services. So, if these payment processors can bring a new flow of money onto their rails, that's a big win for them.
Not long ago, Visa rolled out a crypto-linked debit card, allowing consumers to link their crypto accounts to a Visa card. Consumers can then use these cards at 80 million merchants across the globe. Mastercard has crypto card programs as well.
Consumers are not actually sending their cryptocurrencies directly to merchants with these cards. Rather, Visa and Mastercard are helping to convert consumers' crypto into fiat currencies that can then be spent through the cards. Like all cards on any payment network, there are associated fees with each purchase or swipe.
This is a really smart way for Visa and Mastercard to capture the flow of money within the crypto ecosystem and bring it onto their rails. So far, it's been a successful strategy: At the beginning of last year, Visa reported that transactions on its crypto-linked cards hit $2.5 billion.
Leaning into the blockchain makes sense
Payment experts at Visa and Mastercard likely saw the innovation of blockchain technology pretty quickly. By incorporating the blockchain into their own systems, the payment giants have opportunities to make transactions faster, more seamless, and more secure. While it's still early days, I suspect these behemoths have only just scratched the surface of what blockchain technology is capable of.
Visa and Mastercard have employed this strategy in the past for other disruptions in the payments system. It's one of the reasons both of these companies are as big and as successful as they are today.
