Why We Think Today’s Crypto is Not a Competitive Threat to Visa & MasterCard

Views on the cryptocurrency market’s potential to disrupt digital payments

The cryptocurrency market continues to grow in both size and acceptance. As it does, its potential to disrupt the existing global payments system continues to increase. As long-time shareholders of Visa and Mastercard, these are developments that we closely follow. We believe cryptocurrency’s ability to offer merchants, consumers, and intermediaries an alternative payment network that bypasses Visa or Mastercard’s payment rails could erode the wide moat enjoyed by both companies. But how close is this scenario to becoming a reality?

Visa and Mastercard have established a high bar regarding merchant acceptance, processing speeds, and transaction costs.

In our estimation, crypto has a long road to travel before it is truly on par with Visa and Mastercard’s scale and efficiency. We think this is particularly the case with U.S. consumer payments. Visa and Mastercard have established a high bar regarding merchant acceptance, processing speeds, and transaction costs. In our opinion, this makes it challenging for cryptocurrencies and other alternative payment networks to offer a superior value proposition to users.

Digging deeper, the chart in Figure 1 compares Visa’s network to Bitcoin, the largest cryptocurrency by market value. In terms of transaction volumes/second, merchant acceptance, and transaction fees, there is no comparison between Visa’s network and Bitcoin.

Figure 1:
Figure 1 compares Visa’s network to Bitcoin, the largest cryptocurrency by market value
In addition, we think that Bitcoin’s average processing time of seven minutes per transaction makes it a non-starter today in consumer retail, where credit/debit processing speeds are milliseconds. Imagine waiting several minutes in line at the supermarket for your Bitcoin payment to process. Even in online retail, where consumers may have more patience, we think waiting several minutes to purchase movie tickets or a product on Amazon will be a significant detractor for Bitcoin usage. Furthermore, this scenario does not account for Bitcoin’s price volatility, making its use as a payment mechanism seem even less reliable.

However, Bitcoin’s slower processing speeds could be less of a hurdle to acceptance in other areas of the payments value chain, in our view. Examples include security settlements, which typically take 1-3 days, and certain cross-border payments that remain inefficient and expensive.  Also, other cryptocurrencies such as Ethereum, Litecoin, and even stablecoins like Tether offer the prospect of faster processing speeds and less price volatility. Still, we believe all these solutions must overcome the hurdle of being widely accepted by both merchants and consumers to achieve anything close to the scale at which Visa and Mastercard currently operate.

In the meantime, Visa and Mastercard are playing offense by partnering with cryptocurrency wallets and exchanges to improve purchase capabilities and acceptance. Thus, we expect the card networks to play an integral role in the evolution of cryptocurrencies and the payments value chain in general.  We continue to monitor the developments in this fast-changing industry, but the competitive position and future growth opportunities for Visa and Mastercard remain attractive in our view.

Important Disclosures
The information provided in these materials should not be construed as a recommendation to purchase, hold or sell any particular security. There is no assurance that any securities discussed herein will remain in the portfolio at the time you receive these materials or that the securities sold have not been repurchased. The securities discussed do not represent the entire portfolio. It should not be assumed that any of the securities, transactions or holdings discussed were or will prove to be profitable or that any investment recommendations we make in the future will equal the investment performance of the securities discussed herein.

Past performance is not indicative of future results. The information provided in these materials is not intended as a guarantee of profitable outcomes. The opinions and estimates expressed herein constitute the judgment of Polen Capital and are subject to change without notice or update, including any forward-looking estimates or statements which are based on certain expectations and assumptions.