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Disclaimer: I asked a connection of mine, who works at the Mastercard Foundation, to read over the article to verify the technical parts of it. However, he did not have any influence on the overall opinion I develop in the article.

Why I’m writing this article

Ever since I started writing about the global startup world, fintech has been one of my main areas of interest. Not only is the sector one of the most funded worldwide, but it is also the prerequisite for all other startups to sell any type of digital services/products. I’ve come across a wide range of different fintech startups when writing my articles: crypto startups in Argentina, neobanks in Brazil, fintech unicorn in Egypt… I also recently read a story about Bloom, the first Sudanese startup to join Y-Combinator, which also happens to operate in fintech. In other words: I’ve seen my fair share of fintech startups.

Many if not all of these startups market themselves as ‘disrupting’ the traditional financial status quo. And to some extent, they really do. Paystack is revolutionizing business payments in Africa. Nubank scared the Brazilian banking establishment. Bloom promises to help the Sudanese population protect themselves from local currency inflation.

And that’s exactly why the topic of this article is so interesting to me. How is it that these revolutionary fintech startups, vowing to disrupt the legacy financial establishment, are powered by two of the most “ancient” players in the market, namely Visa and Mastercard?

What Visa and Mastercard actually are

Visa and Mastercards’ brands are ubiquitous. We all have their names in mind. Visa has been sponsoring the Olympic Games since 1986, and Mastercard has been sponsoring the UEFA Champions League since 1994. But do you actually know what they do?

Essentially, Visa and Mastercard do the same thing: they run their own payment network. They both sit on top of the so-called 4-party model, comprised of the customers, the banks, the merchants, and themselves. Visa and Mastercard act as the middlemen verifying, validating, and carrying payment information between the first three parties. Think of them as a telecommunication network, but they carry payment information instead of voice and internet.

Their strength and absolute dominance today are due to their history: to keep it short, Visa and Mastercard were projects carried by banks themselves, before eventually spinning off into their own, stand-alone corporate entities. Essentially, Visa and Mastercard pioneered and built the very first digital payment rails, and their aggressive internationalization tactics insures their worldwide dominance to this day.

“It is important to realize that companies like MasterCard were formed by a union of American banks. Visa was owned by Bank of America before being spun off into a different entity. All the banks mentioned above constituted the entire American banking market. Hence every card issued in the American market was issued by either of the two entities. Since debit cards and credit cards were first issued in America, by default Visa and MasterCard had a head start over other companies.” - Source

The two companies’ involvement in almost every digital transaction carried out today makes diving into their financial reports a dizzying experience. Visa posted a $24.1B net revenue in 2021, processing 164.7B transactions throughout the year. Mastercard posted an $8.1B net revenue for the same year, processing 112B transactions.

Visa and Mastercard’s business models rely on three main revenue streams:

• Service revenue: what they charge to carry out customers’ transactions

• Data processing: what they charge for the clearing and verification of transactions

• International transfer: what they charge for cross-border transactions

‘Because a lot of confusion exists on this point, let's start with how Visa does not make money. As with Mastercard Inc (MA 1.05%), consumers don't actually borrow money from Visa when they use their credit cards to make purchases. Therefore, when consumers make credit card payments Visa does not profit from the interest rates charged by the card. The money being borrowed is from the card-issuing financial institution, such as JPMorgan Chase or Capital One, and thus all interest expenses paid on a Visa-branded credit card goes to the card issuer.’ - Motley Fool

To conclude on this segment: Visa and Mastercard are payment networks, carefully built, curated, and iterated upon ever since their founding more than 50 years ago. Their dominance today is explained by their longevity, as it is almost impossible for a competitor to rebuild the brand recognition, network efficiency, and integration to the quasi-totality of financial institutions that Visa and Mastercard offer.

Why fintech startups around the world still use Visa and Mastercard

Let’s start by defining what most fintech startups actually are: a new interface for handling your money. Indeed, most fintech startups aren’t actual banks, but rather ways to help you manage your money in a different way. Some provide intuitive digital wallets while others provide easy ways to pay your friends. However, becoming a regulated bank takes time and money, two resources new fintech startups generally have little of.

Instead, many fintech startups decide to partner with banks for their infrastructure and regulatory needs. As a potent example, one can cite Apple Pay partnering with a bank, Green Dot, to handle person-to-person payments and Apple Cash accounts. In an American context, this allows funds in Apple Pay accounts to be federally insured, due to the fact they are actually handled by a regulated bank.

Following the same logic, fintech startups also don’t have the time and resources to build their own payment network, hence their choice to partner with Visa or Mastercard. Furthermore, Visa and Mastercard’s international reach allows fintech startups to focus on customer acquisition while resting assured that their card will be accepted in almost every new market they go to.

Basically, Visa and Mastercard have spent the past decades building a payment network replete with jurisdictional approval and financial industry connections in almost all parts of the globe. Why would new, fintech startups try to build their own?

The Visa/Mastercard pitch

Visa and Mastercard have understood this, making their presence more than known in the fintech space through initiatives such as Visa Everywhere. Their sales pitch to fintech startups is a perfect encapsulation of what I’ve just explained above:

“Visa has worked to identify fintechs that can help banks and financial institutions (that are clients of Visa’s) as well as other fintechs “create digital-first experiences, without the cost and complexity of building the back-end technology in-house.” - Source

This has been a winning bet for the two behemoths: indeed, more transactional volume on their network means more revenue, and being involved in new ways of transacting money insures they keep dominating their market.

“Fintechs have also fuelled our growth. In the last year, nearly 30% more fintechs issued Visa credentials and have more than doubled their payments volume. Furthermore, fintechs are scaling. We’ve also grown acceptance to more than 80 million merchant locations, up 14% year over year” - Visa CEO Al Kelly

Being part of the Visa or Mastercard partner programs also provides fintech startups with access to a plethora of other financial technology that they can thus avoid building in-house. In essence, Visa and Mastercard are doing what they’ve always done: building the network before anyone else in order to make them indispensable actors in the ecosystem.

“The Visa Fintech Partner Connect program provides Visa customers with seamless access to 13 specially selected fintech service providers. Amongst these are credit scoring startup Aire, subscription manager Minna, ID verification service Onfido, risk analysis firm AccountScore, and CO2 footprint track Ecolytiq. The demand for online financial services that reduce the need for human interaction is growing rapidly, especially in light of the ongoing pandemic.” - Source

Threats to the duopoly

Visa and Mastercard have long been the target of anti-trust legal troubles, due to their lengthy dominance of the market. One of the main critics has come from the side of merchants, who resent the so-called “swipe fees” (often the reason why merchants will only accept card payments over a specific amount). The most recent high-profile case is the US government blocking Visa’s $5.3B planned acquisition of Plaid, an open-banking startup, citing Visa’s intent to buy Plaid as an “insurance policy” against up-and-coming fintech disruptors.

Visa and Mastercard face three main threats to their dominance in the industry, which all come in the form of alternative payment rails that don’t rely on the two giants’ payment networks to process transactions.

• A2A (Account to Account) payments: This system involves bypassing legacy payment rails by transferring money directly from one account to another without intermediaries, bypassing the need for cards.

• Government-designed payment networks: This system involves governments building their own payment network, which drastically reduces costs due to the government not having a profit imperative. A good example of this would be Rupay, an indigenous payment network built by the Indian government, aimed at reducing fees charged by Visa and Mastercard. Visa even expressed complaints to the US government about the Indian government’s promotion of Rupay.

• Cryptocurrencies: The blockchain networks through which cryptocurrency transactions flow are completely analog to the Visa/Mastercard payment networks. For example, the Lightning Network used for Bitcoin stands on its own.

The crypto angle is especially interesting, as our two behemoths have been extremely active in the space. They know that, for now, the crypto world is still reliant on the traditional banking system. Customers don’t pay with crypto cards and if they do, they are most likely powered by Visa or Mastercard. Visa and Mastercard have thus been busy trying to power the fiat-to-crypto and crypto-to-fiat corridor, which is still extremely prevalent today as crypto hasn't reached native, societal use.

Conclusion

I think this piece shines light on the true meaning of the word “disruption”. We often sacralize the term. In our minds, a startup that “disrupts” is completely re-inventing the wheels of a particular industry. As with everything, the reality is often more measured, pragmatic, reasonable. In the startup world, the true definition of “disrupting” is an incremental improvement on an already existing technology. Steve Jobs didn't invent the phone, he made a better one. Elon Musk didn’t invent rockets, he made them land. Fintech startups aren’t reinventing financial services, they’re making them more efficient.

That being said, the threats to the Visa and Mastercard duopoly are considerable. In particular, the construction of completely alternative payment networks such as various blockchains does endanger their network’s supremacy. In my personal opinion however, the seemingly limitless funds, industry connections, and desire to innovate Visa and Mastercard possess make their replacement highly unlikely, at least for the time being.

The Realistic Optimist provides weekly, in-depth analyses of some of the hottest stories in our now globalized startup world. Subscribe below to receive it directly to your inbox and don’t hesitate to share it with like-minded people :)