Visa and Mastercard: Bridging the cryptocurrency divide for mass adoption

With the increased usage of cryptocurrencies and transfer of value from centralized finance systems to decentralized finance, the 2 big digital financial services firm, Visa and Mastercard have positioned themselves to take advantage of this first mover opportunity in 2022. Hitherto, using cryptocurrencies proved difficult because only few merchants directly accepted crypto as a means of payments for their products or services. This leaves most the value outside traditional payment channels

The market for global payment cards is dominated by China’s UnionPay, Visa, and Mastercard, according to research

The challenge, as he put it, was that few if any merchants were directly accepting crypto, leaving much of that value outside of traditional payments channels.

Visa and Mastercard, seek to introduce crypto payments on their network, by providing a range of debit and credit card solutions as well as offer convenience to their customers who have crypto investments and wish to exchange them to fiat or traditional currency for spending as well as merchants on their networks. But why the sudden shift and interest in crypto payments?

About Visa & Mastercard

They are both publicly traded companies, according to yahoo finance as at 14th January, 2022, Visa’s (V) market capitalization stood at about $ 467.369B and Mastercard (MA) $ 363.074B

Market capitalization (market cap) refers to how much publicly traded companies are valued or worth on the stock exchange based on the stock price and number of shares. It also serves as an indicator of how well they are performing.

They are both American multinational financial services network that facilitate digital payments across the world.

Mastercard partners with Hong Kong’s crypto finance firm Amber Group, Bitkub from Thailand, Gemini in the U.S to offer crypto linked credit, debit and prepaid payment card solutions

Visa partners with more than 60 crypto platforms like FTX, Blockfi, Crypto.com, Coinbase, USDC stable coin, Anchorage Digital, Binance amongst others to expand crypto services based on consumer crypto survey and clients seeking to integrate crypto offerings.

Opportunity to Capitalize on

Defi/crypto currency market, Coingecko projects the total value of cryptocurrency in circulation to be over $2.1 trillion as at January 2022. This offers a huge opportunity for the 2 payment processing companies to tap into the market and earn fees from the transactions thus boosting their bottom line. With fees ranging from about 1.2-3.5% of the value of transaction as processing fees.

Ultimately, for every investment ventured into, there should be a beneficial outcome by way of profit potential and these payment giants want a piece of the pie.

As it stands, traditional financial institutions (centralized finance institutions) and the crypto ecosystem exist on separate payment infrastructure platforms. For Visa and Mastercard consumers, who use credit and debit payments, transactions and net positions between financial institutions are cleared and settled.

All crypto currencies have their native blockchains on which they rely on to function, these blockchains are decentralized and run on nodes, thus a network of thousands of individual computers with its ledger to clear and settle transactions in real time.

The solutions will be to effectively bridge the gap between merchants, consumers and cryptocurrencies by integrating with multiple networks.

For example. Using a Visa or Mastercard will enable you either connect crypto wallets or transfer crypto value to your payment card thereby giving you access to fiat via a partnered exchange network for an accepted currency to use for payment.

Main uses of Cryptocurrencies

There are 2 notably use cases of cryptocurrencies (not blockchain technology), and these are:

• For Investment purposes (Capital appreciation, yield farming, Trading)
• As a medium of exchange

The Payments Ecosystem

The payments ecosystem is made up of a combination of players that interact with each other during the payment transaction process: issuers and acquirers, credit card networks, payment processors, payment gateways and others. The end effect of these integrated partnership is to offer settlement.

Most of these settlements are not real time, however, blockchain solutions can offer near instant settlements or at most an hour.

Some Players in the ecosystem

Issuers

Issuers can be banks or other financial institutions that issue credit and debit cards to consumers on behalf of the card networks. Specifically, these are the brands that appear on credit cards, such as Chase or Bank of America. They also issue payment to the merchant’s bank (the acquiring bank) on behalf of their customers, which means they assume risk in the event that the customer is unable to pay their credit card balance

Acquirers

An acquirer is a bank or financial institution that enables a merchant to accept credit and debit card payments from a customer’s card-issuing bank within the credit card network. Most acquiring banks provide payment processing services to merchants.

Credit Card Networks

Card networks such as Visa, Mastercard, American Express, and Discover facilitate transactions among consumers, merchants, processors, and banks. They oversee payment processing activity, monitor settlement of financial transactions and clearings, regulate and manage their card network’s compliance policies.

Payment Gateways

A payment gateway is a software application enabling merchants to accept payments made with credit and debit cards for in-store and online transactions. The payment gateway securely encrypts payment information and transfers that data between the merchant’s store or website for the bank that processes the payment, and the bank that issued the card used to make the purchase.

Future of payments and digital currencies

Blockchain operability

Financial payment services companies who want to use blockchain solutions, thus crypto to settle payments have two routes, either they develop their own private blockchain solutions or use the public blockchain solutions.

With volatility in the crypto space, high risk and unavailable customer due diligence procedures (CDD). Regulators are now discussing the extent to which they can regulate and protect the financial landscape concerning the use of crypto, more is yet to be seen if this profitable market opportunity will be acceptable to regulators as crypto linked cards can provide a level of customer identification.

Other governments like china, Japan, Sweden, Nigeria are experimenting with CBDC, thus central bank issued digital currency to solve the inefficiencies and vulnerabilities inherent in the current banking system such as counterfeiting, security, printing and settlements.