How Visa and Master Card Benefit from Collaboration with Square

Original author: Jason Laub
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Today we publish a translation of material about some features of the interaction of Square (the prototype of our Russian service 2can ) and payment systems. This article is also relevant in connection with the recent news that MasterCard is going to change the rules of the game.for services like Square. Many people, when they first saw a small device for a smartphone that allows you to read bank card data, most likely thought to themselves, “A funny thing, but it’s unlikely to take root.” However, as early as July 2011, it was announced that Square's daily transactions were $ 3 million. In November of that year, this figure increased to 10 million. Square has taken root! In support of this fact, we can say that in November 2012, Square made a large number of payment transactions totaling $ 27 million (annual transaction volume amounted to more than $ 10 billion, and this does not include Starbucks payments).

How does the service interact with such world-famous payment systems as Visa and MasterCard with such volumes of payments? It's no secret that many investors and analysts, discussing the future of these giants, agree that services like Square and Google Wallet will be a deterrent to them.

Consider an illustration showing the interaction scheme of partners. It is important to understand that many different entities are involved in Visa and MasterCard transactions, and their model is different from the models used in American Express and Discover.

Here's what the process looks like in the Master Card:

Square is just one link in the chain, nothing more. According to Jack Dorsey, Square is not trying to replace credit card companies - the company is simply not interested in this (full article) .

This is what Master Card experts think about the real problems of their own company: the
field will change dramatically in the near future due to competition, including the refusal of participants in transactions from intermediary services to reduce process costs.

Possible risk factors:
  • Transaction participants in some countries will try to exclude MasterCard as an unnecessary part of the process. For example, companies can begin to carry out transactions by directly interacting with the buyer or create large associations among themselves.
  • Upcoming significant technological changes will bring innovation to the payment process. These changes may reduce the use of MasterCard products.

Based on this report, two scenarios can be distinguished in which companies like MasterCard can start to have serious problems:
  1. If new companies can overcome numerous barriers and fully enter the market;
  2. If anyone invents a more user-friendly system.

I believe the first reason is very unlikely, while reason # 2 is more likely. Let's look at a situation in which various market players will unite in alliances to strengthen their own positions and oust more powerful competitors from the market. In fact, it is much more difficult to do than it seems. I practically don’t know people who would not have cards with Visa or Master Card logos. The table below contains interesting information about the performance of key market players.

CompanyVolume of payments (billion)Total volume (billion)Total number of transactions (billion)Cards (million)
Visa Inc.$ 3,768$ 6,02977.62011
Mastercard$ 2,430$ 3,24939.81059
American express$ 808$ 8225.397
Discover$ 114$ 1221.959
Jcb$ 160$ 1661.477
Diners club$ 28$ 290.26

Visa and MasterCard already control a significant share of transactions worldwide, and this share is increasing every day. Everyday use of cards extends to all areas of our lives so rapidly that cash begins to disappear. I know people who cannot pay if their card stops working, simply because they never carry cash with them.

Visa and Master Card jointly issued more than 3 billion active bank cards, and the total volume of transactions exceeds $ 100 billion per year. To compete with them, the new company (or alliance) needs to build a huge data processing system, as well as somehow convince people to switch to their system. It will also require a lot of capital with the expectation that the business will not be profitable for a long time. And finally, it is worth paying attention to the fact that the whole world is already technically adapted to the existing system, and in order to initiate changes, a new product should be an order of magnitude more profitable and more convenient for the user than all existing ones.

Now consider the threat from the existing "additional" services. If we talk about Square, then companies like this are interested not so much in the profit that can be obtained from transactions, but in the information that can be obtained in the course of their implementation.

Little threat comes from Google Wallet. I personally love to buy new wallets. The only thing that unites them all is that I can put credit cards in all the wallets and this is similar to the very essence of Google Wallet. I do not use this service, but I am potentially interested in starting to use it one day. For example, I use the Starbucks app to buy coffee for myself, but I still need to use my credit card every time I want to fund my account. Personally, I did not find anything new for myself that would completely displace Visa or MasterCard.

These companies have already experimented in the past with added value in the form of additional amenities, but it is unlikely that any of them have achieved significant success. What they do well is to build and maintain networks that authorize payments faster than you have time to blink. And, in my opinion, this is what they should focus on.

Looking at financial indicators, one can understand that Visa and MastedCard invest a large amount of funds in the development of their own networks. Both companies benefit greatly from companies such as Square and Google, adding value to their service to consumers and thereby encouraging them to make more payments.

To summarize, we can conclude that services like Square are more likely partners than competitors. Visa and Master Card will not experience market difficulties in the next few years. This situation became possible due to the huge volume of transactions carried out around the world, as well as additional services provided by other companies that motivate people to use cards. At the same time, the latest news shows that e-commerce giants are concerned about the loss of control over statistical data (see link ), which may lead to a change in the business model or interaction scheme between market participants.

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