Quick Take on WSJ – V/MA Near Deal w/ Merchants
Merchants have long expressed frustration over card costs, but it’s critical to separate signal from noise. Their issue isn’t with network fees—those average just 5 to 7 basis points and fund the global infrastructure that securely moves trillions. The real pressure point is interchange, often 250 basis points or more for premium rewards cards. That imbalance has shaped years of litigation, and now a potential reset is emerging.
Drivers, Current Efforts and My View of the Big Picture Opportunity. Do Stablecoins represent the greatest network expansion opportunity of the next decade? I think so…
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Everyone knows I’m a big fan of Visa and Mastercard. Why not? They are the most successful commercial networks in the history of man. The power of banking is unlocked within the networks that connect them (see Power of Bank Networks) and V/MA are the largest “connectors” in the world (banks, consumers, businesses). While many pundits see stablecoin as a threat to cards, I don’t see it that way at all. In fact, I think Stablecoin-based innovation will help drive a new phase of growth in the networks (as well as dollarization).
Today’s blog provides background on the current network efforts in stablecoin settlement. I’m also attempting to outline the “why” and business case for card networks expanding their role, the number of nodes on the network, and the political dynamics at work behind the scenes. Why read this? In my view this subject is the core of a bull case for network expansion. IMHO Investors should not look at stablecoins as a threat to V/MA, but rather as another network where V/MA can deliver value and grow the network at a massive scale.. A once-in-a-generation opportunity.
Today’s blog is focused on private companies, business models, and competitive dynamics shaping the stablecoin “industry”. Note Google Gemini was used in discerning company performance and focus.
No we are not going to drill into every company in Block’s DeFi market overview, Stablecoin Liquidity, or the 172 companies in CB Insights Stabllecoin industry map… but rather some highlights and how the market is likely to evolve in near term. Even though I”m focusing on just a few of the companies below, this is still a rather long 25 pages.
Part 1 – Programmable Settlement
The defining innovation of stablecoins is not the technology itself, but the trust architecture they enable. While today’s business architecture will NOT be turned upside down, the stablecoin frame does enable new models for managing legal contracts, systems interaction, operational governance, all within a new regulatory superstructure.
Continue readingBankers View: Stablecoins, Deposits, and the Future of Payments
Summarizing my 20 odd tweets yesterday. Note that I don’t necessarily agree with the banks’ strategy, but I do understand it. Given that most of the press is focused on how Stablecoins will destroy banking, I thought a banker’s view would be a useful counterbalance.
The buzz around stablecoins continues, often painting a picture of banks demise. As a former banker I thought I’d share my view on the topic and explain the bank strategy (as I see it). While stablecoins present novel tech, the notion that they will supplant established retail banking relationships is a bunch of “hooky”. Big banks aren’t just watching from the sidelines; they are best positioned to integrate this new rail, much like they’ve absorbed countless payment innovations before.
Continue readingUS Payment Infrastructure is in the midst of completing a major renovation.
Let me preempt the #1 question most of you are about to ask “are card volumes at risk”? Nope, why on earth would banks want to walk away from the most profitable retail banking product in the history of man (see Future of Retail Banking)!?
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Given that 80% of my payments thoughts over the last month have been on identity it is time to move on to settlement. Understanding the process of settlement is key to understanding both payments and banking.
Today’s blog hopes to address 4 questions
Nobel economists Coase/Williamson demonstrated how transaction costs shaped the Nature of the Firm. Settlement systems define the transaction costs of finance. Thus settlement system design shapes the organization of financial services. Settlement is in the midst of a revolution as many parties seek to remake settlement as the “base” platform capable of unbundling financial services.
Settlement provides the legal structures and operating rules required to clear $USD Trillions per day are 95% across multiple parties. Banking is a connected business, if the world was in a single account there would be no settlement issues as everyone would be on the same ledger.
As with all networks increasing scale results in increased network rigidity and existing participants consider how changes impact the value they receive and their unique competitive dynamics. For example, many of the proposed changes to settlement will impact correspondent banking. While some see opportunities to reduce the “cost” of correspondent banking, others providing the correspondent services see change as a reduction in revenue. While the tech of settlement is fascinating, at the end of the day one counterparty has to trust the netting process to permit funds to flow from their account.
While there is no near-term cliff, settlement innovations may result in a dramatic shift of payment volume. Today V, MA, SWIFT, EFT, … ALL run on the same settlement process. As most of you know, there is over $4T of market cap driven by networks residing on TOP OF settlement. For example, card networks do not move funds, but rather are messaging networks. While the legal and operational structure of settlement may not change, a change in technology can have significant implications for how messages operate between trusted parties and the DIRECT ACCESS of non-banks (ex PSPs, non-banks, …etc.).
This is a HIGHLY POLITICAL undertaking, with many change advocates working to reduce the power of US/EU banks and sanctions controls. Changes in settlement have the potential to unbundle banking, payments drive changes to central bank power and FCY reserves. Where open banking breaks open the FRONT END, settlement remakes the back end. For example, if risk in settlement can be managed by specialists commercial/retail banking (and payments) could move toward a model which resembles modern financial markets (clearing process is a commodity).
Continue readingShort blog today on an example BNPL opportunity and the differences between a consumer BNPL solution like Apple Pay Later and Merchant integrated solutions from providers such as Affirm (or SQ/Afterpay see Three Flavors of BNPL). Today Air Travel and Vacation packages are the focus.