Visa's Uneasy Dance with Crypto: Trapped In the "Innovator's Dilemma"?
How one of the world's greatest brands will face its greatest challenge in crypto blockchains
Visa has built one of the world’s most successful global brands - recognized by billions of consumers and merchants globally. For decades, there’s really been no critical threat to Visa/MC/Amex dominance.
New cryptocurrencies and stablecoins have a real shot at challenging the status quo.
Visa is making a big push in the crypto space. They have announced a flurry of deals and new products over the last months.
Visa announced last week that it is testing the settlement of digital currencies on its network. This is big news.
TLDR; Cryptocurrencies have the potential to disrupt the Visa/MC/Amex payments networks. Visa has to “lean in” to crypto to maintain relevance and capture share of a rapidly growing new market, but risks undermining the primacy of its core network.
I’ll unpack the idea below while introducing various crypto concepts below.
First, what is Visa’s crypto strategy?
Visa is “Everywhere You Want to Be”. Visa’s goal is to be the primary payment network for any transaction globally. In a nutshell, this includes i) powering the network that enables transactions, and ii) having branded and “controlled” relationships with customer endpoints - consumers and merchants. (More could be said about this at another time).
Visa CEO Al Kelly refers to BitCoin as “digital gold”. Crypto assets now represent $2 Tn. Crypto stablecoins are increasingly utilized as a form of payment in lieu of pesky wires, ACH, or merchant interchange fees.
What exactly did Visa announce?
Visa announced they are supporting transaction settlement with USD stablecoin. The sub-header on the press release reads: “…a major industry first in bridging the worlds of digital and traditional fiat currencies.”
The deal references a pilot with Crypto.com. The pilot enables Crypto.com to send USDC (a crypto stablecoin backed 1:1 with USD) to Visa to settle a portion of its obligations for the Crypto.com Visa card program.
Visa’s usual settlement process requires network participants to settle in a traditional fiat currency. For the first time Visa will settle transactions on a digital currency. Note the digital currency is not Bitcoin or Ethereum (despite Bitcoin 6% pop on the news). The settlement currency is a stablecoin called USDC.
The ability to settle in USDC is a step forward by substantially reducing the transactions costs and headache in serving crypto native businesses.
What is a stablecoin?
A stablecoin is a digital currency that is fully reserved by a “stable” source of value (Gold, Yen, etc.). In this case, the reserve asset is USD. The stablecoin is issued by Circle a US-regulated money services business founded by Jeremy Allaire in 2013.
There is about ~$10 Bn in USDC stablecoin minted and outstanding.
USDC is minted when customers park equivalent dollars at Circle (or its distribution partner Coinbase) and request USDC.
Circle is required by regulators to maintain a 1:1 reserve of USD-equivalent to back the USDC digital currency. Circle is regulated as a Money Services Business.
What is missing from the announcement - but potentially in store?
Customers cannot pay for purchases by automatically debiting their crypto wallets. Also, Visa is not funding payments with Bitcoin or Ethereum holdings.
Visa is working with its card issuing customer Crypto.com to settle digital dollars denominated in USDC instead of, umm, actual dollars. Baby steps (for now).
There is no sudden “unlock” of the $2 Tn in crypto assets ouststanding into the real economy.
You can think of USDC as representing a new currency type now supported by Visa. The new currency type would be the smallest currency pair (USDC:USD) on the Visa platform.
The bigger story is Visa is settling on the Ethereum blockchain
Wait, what is Ethereum?
Ethereum is a “programmable” blockchain that in some ways was designed to address the deficiencies of the “digital gold” that is Bitcoin.
You can think of ethereum as “programmable money”. Unlike Bitcoin, it is more than a decentralized ledger of payments and balance.
Ethereum can run “smart contracts” or applications that run on code (arguably, until the sun explodes) and without people overhead.
Finance apps involving lending and market making (“DeFi”) have grown tremendously.
[There are many types of apps on Ethereum: derivatives, NFTs, lotteries, token exchanges. You can even find decentralized peer-to-peer file storage apps straight out of HBO’s hit Silicon Valley.]
The real threat to Visa is that payments move from private networks to blockchain networks such as Ethereum, Diem, and Central Bank Digital Currencies
Visa settling on Ethereum is one of those “strange bedfellows” moments.
In one corner, you have Visa’s core business - the world’s most successful centralized payments network.
Visa processes a mind-boggling tens of millions of transactions per day. Instantly. It’s analagous to a private blockchain.
In the other corner, you have Ethereum - the largest decentralized payments network.
The risk for Visa is that is that merchants start accepting cryptocurrencies natively or in stablecoin formats. There’s no need to touch Visa rails.
Here is the crux of the Innovator’s Dilemma.
On the one hand, the strategy is to span every transaction, globally, wherever consumers and merchants meet. On the other hand, new technologies and stores of value require Visa to engage with crypto protocols that undermine the primacy of the Visa network.
Smartphones, QR Codes, 2FA and FaceID technology is making that an increasing possibility. Phone are already acting like mobile fiat wallets. They are well on their way to transforming into crypto currency wallets as well.
So here’s Visa’s gameplan:
1) Consumer Focus. Ensure the customer crypto experience is seamless and user-friendly as fiat transactions are. In fact, the experience is indistinguishable. Consumers don’t need to think about “gas fees”, exchange rates, or the mechanics.
2) Extend Payments Network.
Visa is building out a set of APIs (a la Stripe) to help banks buy, sell and transact crypto assets. Also a smart move - Visa can still insert itself into the transaction flow
Visa is attempting to control the “endpoints” - how consumers transact and how merchants accept. The settlement layer might be a blockchain. But if Visa controls the endpoints, Visa still gets paid.
3) Strategic investments. Visa is investing in payments companies and crypto infrastructure companies to help shape the evolution of the category. The tens of millions Visa invested in Anchorage, an OCC bank, is a good example. (The deal is also notable in that, to my knowledge, Visa has never invested in a bank to avoid channel conflicts.)
These are all the right moves.
Visa still has several years, nothing to worry about just yet…
Today, Ethereum can’t process even 100,000 transactions per second. So Visa has some breathing room.
Ethereum is suffering from high-quality growing pain problems - scaling issues on the “mainnet”.
Still, it is expected that various upgrades (so-called Layer-1 and Layer-2 enhancements: EIP-1559, optimistic rollups, ZK roll-ups, etc.) will improve volumes 100x.
Markets are looking forward. Ethereum’s marketcap is $250 Bn.
Up about 15X in 12 months and quickly closing distance on Visa…
Who are the winners from competition? Consumer, merchants, the underbanked, crypto enthusiasts, and FinTechies.
In the future, I plan on writing about the other threats to Visa/MC/Amex and the emerging payment wars:
Diem (What no one is talking about, but is a big deal)
Central Bank Digital Currencies
How digital wallets will hasten the demise of plastic cards and traditional payment networks
DeFi - What’s missing? What’s next? What’s exciting? What are the risks?
I appreciate your readership! Please let me know if this is helpful or if there are topics of special interest.
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Leave comments and your thoughts below. Do you agree? Disagree?