“2015 has turned blockchain into something the industry has to live with. It is no longer a choice anymore. Recent news speculating about the identity of its creator and the formalization of virtual money as a commodity, just makes it more real than ever before” ~ Visa.
That quote summarizes the changing landscape of the global payments industry and reflects how the future of dominant players in the industry will be increasingly challenged by disruptive new innovations such as bitcoin and the technology which powers it, the blockchain.
The solution to the challenges that these companies face may lie in embracing the blockchain technology itself.
According to a RBR report, the worldwide card payments market in 2015 was dominated by UnionPay (37%), Visa (32%) and MasterCard (20%) in terms of value of payments. They together accounted for 89% of the $22 trillion spent worldwide. The report also highlighted that “UnionPay remains a predominantly domestic scheme with a share of less than 1% of expenditure outside China, whereas Visa and MasterCard maintain commanding shares of 50% and 31% respectively.”
Here is a look at how these market leaders are overhauling their conventional business by tapping into blockchain technology to equip themselves for what lies ahead.
China’s UnionPay and International Business Machines (IBM) completed a pilot project in September featuring loyalty points from multiple banks using blockchain technology. Customers are often lured by various banks to use specific cards by offering attractive schemes such as bonus points. However, since these rewards or points cannot be exchanged across banks, many go unused.
Now, “IBM's collaboration with China UnionPay will enable consumers worldwide to exchange bonus points from their various banks in less than a minute to select rewards they want” as per IBM. Such a mechanism can go a long way in binding customers to their specific cards, hence enhancing their brand loyalty towards banks, while improving their consumer satisfaction.
Visa (V) recently announced a preview of Visa B2B Connect in collaboration with Chain. Visa B2B Connect is a new platform that’s built upon Chain Core, an enterprise blockchain infrastructure, to offer financial institutions a cost-effective, fast, transparent, and secure way to process business-to-business payments globally.
The initiative, dubbed Visa B2B Connect, will be managed by Visa and will follow all of its standard practices. The project, which Visa is looking to pilot in 2017, will enable a new near-real-time transaction system designed for the exchange of high-value international payments between participating banks on behalf of their corporate clients.
Although this venture is new, Visa and Chain are familiar with each other. Back in September 2015, Visa made an investment in Chain during its equity fundraising, when it has raised $30 million from industry leaders including Nasdaq, Citi Ventures, Capital One, Fiserv and Orange.
This is not the only effort Visa is making. Earlier this year, Visa and blockchain specialist BLT Group partnered for a project to “use BTL's cross-border settlement platform Interbit to explore the ways in which blockchain-based settlements can reduce the friction of domestic and cross-border transfers between banks.” A small number of European banks were invited to connect to the network and explore how funds could be sent to one another across multiple currencies.
In 2015, Visa Europe Collab entered into another partnership with Epiphyte, a distributed ledger solutions provider for the mainstream financial market – to explore use cases of the blockchain technology, such as international remittances.
MasterCard (MA) isn’t far behind Visa with its own blockchain related initiatives, featuring blockchain APIs (Blockchain Core API and Smart Contracts API) for developers. “Our blockchain facilitates new commerce opportunities for the digital transfer of value by allowing businesses and financial institutions to transact on a distributed ledger” says MasterCard. It highlights safety and security, scalability, and smart contracts as its core features. It further claims to power multiple use cases and minimize the time, cost, and risk involved in financial flows.
This isn’t the first move by MasterCard towards blockchain. In October 2015, a post by Barry Silbert announced the formal launch of Digital Currency Group (DCG) and its fundraising revealed MasterCard as one of its investors. The subsidiaries of DCG include Genesis, Grayscale which manages the publicly traded Bitcoin Investment Trust (GBTC), and CoinDesk.
Garry Lyons, Chief Innovation Officer of MasterCard, told Business Insider at Davos, “Like the rest of the world, we’re interested in seeing where blockchain technology goes and that’s why we invested in DCG.”
With wider acceptance and adoption, bitcoin has the potential to challenge the entire credit and debit card industry, since its transactions are carried out at low, even almost negligible, costs and fees when compared to credit and debit cards.
The blockchain technology has the potential to substantially bring down back-office, information technology, and other transaction costs, making companies like UnionPay, Visa, and MasterCard more competitive as well as efficient by speeding up transactions. Overall, embracing blockchain isn’t a choice anymore as those three payment giants look to cement their market positions for the times ahead.