Alexander Vityaz, Corezoid

Alexander Vityaz, Corezoid: Visa and MasterCard are genuine disruptors, not tech start-ups

Many will be surprised by where the biggest transformations in fintech actually come from in the next few years. A true disruption probably won’t stem from a tech start-up that gets hot and rides the wave to a new normal in banking. No, it’ll actually be those old card-issuing behemoths, Visa and MasterCard, which will lead the revolution and upend the traditional banking industry, argues Alexander Vityaz, CEO, Corezoid.

Banking is an ultra-fragmented market, with over 30,000 banks worldwide. However, there is a part of this industry that was defragmented a long time ago: the plastic cards in your wallet. All banks issue the same standard Visa and MasterCard cards.

But even as the technology was defragmented, the logistics remained splintered.

That’s why Visa and MasterCard are managing payment technology today, and banks are managing relations with clients. But the digitization of plastic is going to change that. Control over customer relationships will gravitate away from banks and toward Visa and MasterCard. Just as Visa and MasterCard have worked to defragment plastic, they are now on a path to defragment e-commerce and the rest of the banking industry.

Here’s how and why this will come to pass:

1) Visa and MasterCard have been able to become IT companies because they were born global. Banks never were. Already, Visa and MasterCard control the checkout and wallet solutions (Visa Checkout, MasterCard’s MasterPass) that make up the backbone of e-commerce. And both are making even bigger moves to become the financial technology providers of choice going forward. Visa recently made hundreds of open APIs available through its Visa Developer Centre and MasterCard previously made its Open API Declaration.

While many smaller innovations have distracted the attention of those trying to guess at fintech’s future, Visa and MasterCard have slowly – and not without mistakes along the way – been setting the stage for cloud banking on a global scale.

2) Banks can’t become major IT companies because of their local nature. Banks will lose their control over merchants. Today, merchants go to banks to get the set of e-commerce tools they need to conduct business. At those 30,000 global banks, each one is developing its own local product. Banks are paying developers a ton of money to create 30,000 P2P money transfer services, 30,000 online banking portals, 30,000 mobile banking apps, etc. It’s easy to see these are redundant parallel efforts that only serve to perpetuate the market’s fragmentation – and this has created an environment ripe for disruption.

Over the next few years, merchants will start getting their e-commerce tools from Visa and MasterCard, as those tools will be powerful, easy to integrate, and universal.

3) This will free banks of their IT obligations. With banks no longer needing to each deliver their own IT solutions, they will settle into a new role as pure service companies, handling the nuts and bolts of banking itself while ceding technical operations. In this way, banks will operate not unlike electricity or gas production companies do today, which have much less of a customer-facing side.

You likely don’t know which company produces the electricity that eventually gets delivered to your house – in the future, why should you know the name of your bank?

A company like Visa or MasterCard will simply suggest selecting an available banking service from a list, while delivering the entirety of the actual solutions that users and businesses are concerned with.

4) Banks will also lose control over relations with customers. While customers today receive their plastic cards through their banks, smartphone technology and virtual cards that are delivered “by air” will change all of this. These cards of the future, associated with smartphones and fully supported by cloud-based processing, will be generated as needed by Visa or MasterCard. Banks will still be around as credit brokers, but not as technology providers.

5) Banks will lose a huge part of their control over the back-end… and the front-end. Common banking services such as acquiring, issuing, and e-commerce can be standardised, and hence easily defragmented. The move to fully cloud-based processing will necessitate an almost total replacement of the functions that banks now perform. And banks will get these replacement services from Visa and MasterCard as a standard product.

However, there’s a contradiction in what Visa and MasterCard are doing today. On the one hand, they offer ready-made solutions: wallet and checkout. On the other hand, Visa and MasterCard present their APIs and encourage banks to code (which they can’t properly do). Sooner or later Visa and MasterCard will provide all of their products as a set of ready-made processes out of the box.

At the same time, banks will also see the front-end going to those entities responsible for the interfaces customers will prefer in the future. These will likely be smartphone manufacturers, businesses that provide popular messengers, etc. And again, these front-ends will utilize tools offered by Visa and MasterCard.

Standardisation and defragmentation will allow banks to focus on their core business while enjoying IT solutions that work globally. This revolution will upend the current fragmented e-commerce system, and will really turn Visa and MasterCard into global banking corporations, with banks continuing to exist only as their filial agencies.

  • Mot lizarb 14 May, 2016 at 0049

    Do you even work with banks? I can’t imagine that this has not been refuted to date.

    • Tanya Andreasyan 15 May, 2016 at 1656

      Your comments on refuting the article points above are welcome.

  • Shilpoo Agraw 15 May, 2016 at 1510

    Agree on how these networks will stay relevant for long time for transaction processing however banks have an advantage as they have access to funds / ability to extend credit (deposits, discounted fed money being dealer banks). Anyone with ability to extend credit will alway be king (crowdsourcing / private equity can only address a portion of this demand). Few points

    – Large companies deflect channels cost to market place by investing in security, APIs, data to be the first choice for fulfillment for startups addressing marketplace / communities experience needs. Leverage their effect of network to build more trust between parties ( like eBay, Amazon, Paypal does)
    – Focus on pricing, servicing, fraud and security, specialized transaction (high moat, less volume high margin) and leverage commodity services (card, deposits, loans processing) unless economies of scale makes a business sense
    – VISA/ MC is in great position with their investments in MDES and VDS to directly works with consumers and merchants across globe. completive pricing will always keep them relevant, These companies however need to watch out for closed loop / stored value transactions impacting volumes (ex: do not sell the private copy of their net)

  • rajansoma 18 May, 2016 at 1014

    there are no big success stories of a closed loop or stored value on large scale.
    stored /closed loop will have one problem, their main business model is not on usage or transaction. There main profit is how many members left with using full of the values ( left out money from account holders). Because most of the stored values/ closed loop can return left out amount by cash or by bank transfer with reference to regulations.

  • Jerry Rau 22 May, 2016 at 0212

    Let’s not confuse remaining relevant to driving change. They are positioned to ride the FinTech rails as a big passenger, but still a passenger.

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