What Do Distributed Ledger Technologies Offer To Visa and Mastercard?

July 1st, 2019 by Trefis Team
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Investor interest in cryptocurrencies has seen a series of highs and lows over recent years. While distributed ledger technologies (DLTs) can potentially disrupt several existing industries, cryptocurrencies remained largely out of favor with investors due to the regulatory crackdown against them globally. As Visa (NYSE: V), Mastercard (NYSE: MA), and other payment companies remain central targets of this disruptive system, they have proactively taken several steps to adapt themselves to this new environment. In this article, we analyze the benefits of distributed ledger technologies for Visa and Mastercard in strengthening their international payment processing capabilities.

The Trefis interactive dashboard, Will Visa Retain Its Leadership While Mastercard Remains A Bystander? compares Visa and Mastercard across different revenue streams and operational metrics. Additionally, you can find more of our financial services sector data here.

What is Distributed Ledger Technology?

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In transferring value/money utilizing distributed ledger technology, the transactions get validated by independent parties (nodes) on the network. This is opposed to a central authority validating the transactions and the participants trusting this central authority with full faith. The architecture of DLTs could be a blockchain or not a blockchain (such as DAG), and it could be public (such as Bitcoin) or permissioned (such as Ripple and Hyperledger). These configurations are integral to the growth prospects of a DLT, as it signifies the areas where it could be adopted.

For example, Ripple allows only Ripple partners such as banks and payment companies to become nodes and validate transactions. Therefore, such a structure develops trust among institutions, which is why Ripple targets institutional clients. A similar structure is adopted in the Hyperledger Fabric by the Linux Foundation.

What do Visa and Mastercard stand to gain from DLT?

The share of cross-border revenues for Visa has increased from 23% in 2008 to 28% in 2018 and a similar trend is observed for Mastercard. This is due to overall growth in cross-border transactions driven by increasing international trade, travel, and remittances over the last decade.

With cross-border transfer fees getting lowered by companies such as Earthport (acquired by Visa) and Transfast (acquired by Mastercard), and with strong growth expected in cross-border e-commerce (C2B) and SME trade (B2B) segments, innovative solutions such as DLT have the potential to change the entire payment industry landscape.

To put things in perspective, a standard transaction on the Ripple network costs 0.00001 XRP. This is much less than a cent (1 XRP = $0.41). While getting the necessary regulatory approvals and then realizing such low costs at an industry-wide level seems far-fetched for now, an early adoption of DLT could bring significant upside for Visa and Mastercard in the growing cross-border space by both increasing revenues and reducing costs.

You can view our interactive dashboards on Visa, Mastercard, American Express, and Discover Financial to modify key revenue drivers and observe the impact on their stock price.

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