How platformification hedges commoditization

Andreas Farge
Sam Chakraborty
April 12, 2024

A digital future

In the arena of financial transactions, a captivating game is unfolding between card networks and real-time payments. The players are formidable, the stakes are high, and the ultimate prize is the future of money itself. At the epicenter of this digital duel stand Visa and Mastercard, the world’s largest card networks. Their strategies are not just pivotal, but instrumental in steering the global economy away from cash and towards digital transactions, a shift that is reshaping the financial landscape as we know it.

Network strategy

Visa and Mastercard have long been the linchpins in digitizing cash economies. Their multifaceted approach can be boiled down to three simple focus points: expanding the number of cards issued, increasing the number of merchants accepting cards, and boosting the engagement levels of card usage. These networks are not just surviving but thriving, adapting, and evolving in a rapidly changing financial landscape.

Their strategy extends beyond mere expansion. Visa and Mastercard are streamlining the pathway for financial institutions to become issuers or to partner with issuers. This isn't just about casting a wider net but weaving a denser, more resilient web of financial transactions. The rise of embedded finance has proven that retailers are instrumental in digitizing the last mile. Card networks are paving the way for more entities to join, thereby bolstering the ecosystem of digital payments. By creating such infrastructure, the networks are instrumental in enabling financial services beyond payments, like card and non-traditional credit.

The networks are also intensifying their domestic processing capabilities in countries like Mexico and Colombia. This is not just about offering more cards or places to use them; it's about making those transactions more secure, reliable, and integrated into consumers' and businesses' daily lives and realities. The battle against fraud and network failures is relentless, and by fortifying their defenses, Visa and Mastercard are ensuring that they remain at the forefront of the digital payments revolution.

Ultimately, engagement is the most critical metric for their success. The industry thrives on volume. However, it's not just about the quantity of transactions or quantity of partners, but rather the quality of engagement from users and merchants. By embracing alternative networks and leveraging existing, locally preferred infrastructure, Visa and Mastercard are not just playing the game but changing it. They are positioning themselves not merely as card providers but as holistic digital payment solutions capable of instant, cross-border money movement and allowing innovative fintechs to offer creative financial services.

Adapting to local realities

Mexico remains Latin America’s largest cash-preferring economy. The perceived cost of card acceptance remains a barrier to merchant acceptance. Here, Visa has forged key alliances with dominant retailers-turned-card issuers Liverpool and Grupo Elektra and acquired one of the two leading local payment processors, Prosa. Mastercard has allied itself with regional fintech champions like Uala and Nu (Nubank) and has acquired Arcus, enabling the acceptance of bank transfers (SPEI). Pivoting their approaches from traditional issuers and payment rails highlights their commitment to their vision. These strategic moves are not just about expanding their footprint; they're about deepening their impact, enhancing their services, and ensuring they remain at the cutting edge of digital payments.

Embedding growth across industries

Regional leader Mercado Pago masterfully leverages both networks, offering a Visa credit card and a Mastercard debit card. In 2023, the fintech rolled out new credit programs and digital account services. The ecosystem leverages credit cards to attract higher socioeconomic levels and debit cards in combination with non-card credit to attract the rest of the population. According to the company's annual report, net revenues from its fintech segment in Mexico increased over 70% year over year. The transaction volume using its digital account enjoyed triple-digital growth in Q4 2023. The group’s marketplace reaped the benefits: Mercado Libre enjoyed a 30%+ quarter-over-quarter growth in gross merchandise volume in the last three quarters of 2023.

So what?

The fundamental service of payments has become a commodity. In the end, the game may not be about cards versus transfers but rather about how these tools can collectively usher in a new era of digital finance. The networks are shifting course and becoming platforms, offering solutions and scalability to both leading and up-and-coming financial service providers while embedding themselves at the foundation of the next generation of financial infrastructure. Will they move fast enough?

Andreas Farge
Sam Chakraborty
Managing Director
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