For better or for worse, centralized control of value (and values 😉 is eroding. It takes less than an hour to launch a crypto currency. For example, there are a million Adam Atlas Coin in existence. (They have no value and are not for sale.) As a defensive measure, the established players are circling the wagons (or should I say, building centralized ledgers) into various controlling portions of the market. Taken together, the market looks like it’s admitting defeat to decentralized exchanges of value (i.e. virtual currency) and attempting to extract one last round of return before a more complete paradigm shift.
Single Suppler for Credit Card Processing?
There now exists a single predominant payment processor in the US and, perhaps, the world following the recent mergers of WorldPay, Vantiv,First Data, BluePay, CardConnect into FIS. A small band of outliers are still going it alone, including TSYS, Elavon, Paysafe and Sage. The anti-trust implications of these mergers are substantial and we are already witnessing decreased competition for ISO relationship opportunities. None of the merged entities have an interest in competing with the others as they are all part of a predominant supplier of payment processing in the US. The competitive impacts should be monitored by merchants, ISOs, but also issuing banks that would probably prefer greater competition in transaction processing.
Libra payment processing: Facebook and sharing economy eating from bank deposit balances
Libra is not just a way for Facebook, and its partners Visa, MasterCard, Uber, Lyft, Booking.com etc… to get an equity bump from claiming association with #crypto. Instead, it is a way to shift payment processing floats from issuing and acquiring banks to the token hodlers of the new interest-bearing Libra securities token. Assuming substantial success for Libra, there will be a transfer of some billions of dollars of processing float from issuing and acquiring banks to the Libra Association. This indicates a win for Libra and a loss for traditional banks for payment processing. In the long-run, interest on processing floats is not a winning business model.
Libra Money Transmission: Crypto’s promise of free transmission of funds?
If money transmission were free, no one would be in the business of money transmission. The promise of Bitcoin and other virtual currencies has been to allow more or less free P2P and B2B payment transactions on a secure and fast blockchain. Perhaps because most crypto users today are wealthy western or eastern speculators and gamblers, that promise has not yet come true. Libra drives past the worldwide smorgasbord of crypto to create what its visionaries believe will marry the best of crypto technology together with their omnichannel ability to tip the scales into their network of users.
It won’t be long before exchanges will pair Libra with USD and Bitcoin, making Libra just another stablecoin – but more complicated than those pegged to the USD. The irony of Libra and all crypto-based money transmission models is that, logically, they should become ever more efficient and therefore ever less profitable per unit transacted. In money transmission, Libra is a race to the bottom of fees. The bottom, of course, is crypto itself where fees are negligible (on some chains).
Facebook and the other partners in the Libra Association might generate more value by simply enabling existing crypto on their networks and focusing on the value they add – i.e. sharing of data, sharing of cars, sharing of rooms.
If we look at the FIS consolidation of payment processing, we see a defensive strategy by processors to fend-off technology-driven upstarts like Stripe, Square and Paypal. Relying on legacy culture and technology, the FIS conglomerate is drawing its last bit of value from the market before capitulating to the long-term leaders in business in the form of big tech, Amazon, Apple, Google and Microsoft. Similarly, Libra is a circle-the-wagons closed-loop crypto vision that can take the currency only so far, until faster cheaper chains displace it. In summary, the value of payment processing and money transmission is one of diminishing returns. Payments entrepreneurs of our time are stuck on replacing old toll booths (i.e. payment processing fees) with new ones (Libra float interest and fees), which has been the guiding light of payments since the invention of the credit card in 1950. Now is the best time for a new generation of payments entrepreneurs to think past the toll-booth model. Maybe Ripple and Moneygram are on to something?