The Reluctant Regulator of the Internet, Visa, is Under Threat
Visa has been the staple of western financial payments for many decades. Although the total proportion of transactions that it accounts for is waning somewhat, it facilitated twice as many transactions in 2021 ($112bn) than it did in 2014 ($226bn).
Visa’s dominance only grew as e-commerce sought out a way to facilitate safe and reliable transactions from around the world; so much so that it became relied upon. In conjunction with MasterCard, almost everyone from a developed nation has a spending card with one of these companies’ logos imprinted on the front.
How visa became the de facto regulator
Facilitators of payments have a responsibility for what they facilitate, of course. It’s an ethical given that Visa has some oversight of what they’re enabling, and a core rule in their guidelines to not knowingly submit a transaction that is illegal.
One of the most well-known examples of Visa's influence on the internet economy is its decision to block payments to WikiLeaks in 2010. After the politically controversial organisation published classified U.S. government documents, Visa, along with Mastercard and PayPal, suspended payments to WikiLeaks. This decision effectively crippled the organisation's ability to raise funds, demonstrating the power Visa holds over businesses and organisations operating online.
How Visa ended up writing the rulebook for adult entertainers
As the FT’s Hot Money podcast series revealed, it’s not just illegal activities that Visa has a say in. When it suspended MindGeek from using Visa payments - the parent company of the second most popular adult entertainment website - it unearthed a strange role that the financial company was playing. It was the leading regulator of internet pornography.
Visa never set out for this to be their mission, and they would rather it not be the case - after all, they’re not getting paid for it. They’re not even getting a thank you, but rather, a lot of backlash from workers in the industry.
But, given the vast amounts of unverified videos that were being uploaded each day, it was clear that many were illegal. After Nicholas Kristof’s hit piece in the New York Times went viral, Visa stepped up to do something about it.
The line of what is illegal and isn’t illegal is not clear, meaning Visa have a strange dilemma. They must take a neutral stance towards payments without taking political or moral positions, but ensure they do not inadvertently support criminal activities or unethical practices.
This has lead to a very specific and odd rule book on what performers can and cannot do, however. The people behind the rule book? Nobody really knows, but it’s been around long before the MindGeek fiasco
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MasterCard followed Visa’s decision, of course, perhaps out of PR and simplicity. Together, it’s clear they’re policing that corner of the internet. Except, it’s all corners of the internet, because all industries heavily rely upon these two payment processors for business. Without them, vendors risk losing business from customers who are reluctant to switch to PayPal or figure out how cryptocurrency works.
How things may have gone differently with blockchain payments
As the main player in the online payment space, Visa has the power to determine which businesses use its network.
If blockchain payments were normalised, none of the above would have happened. By their very decentralised nature, a blockchain wouldn’t cut off merchants because of the nature of their transactions - nor would it have the manpower to sit through online content and determine the ethics of individual vendors. In fact, they offer greater anonymity and freedom for the customer too, or so it is perceived, freeing concerned folk from their Visa card bank statements history.
And, when there are no formal regulators of the internet, this presents a problem. There is no governing body that could come close to effectively regulating its own internet (see China’s VPN usage), let alone globally.
It doesn’t mean there will not be future attempts at collaboration between governments - this is a common theme in our increasingly integrated world. Punishments already exist that incur prison sentences for viewing illegal material, such as the UK’s Counter-terrorism and Border Security bill.
Going after the website owners, hosts, and companies that supply illegal content is a difficult route, because it’s easy to relocate hosting or host locally. Although there is debate around net neutrality (the role Internet Service Providers should play), it’s clear that the real power is where the money is - and who can facilitate it.
Is it better to have an unelected for-profit financial service company as a regulator, or no regulator at all?
Apple’s closing in on a closed-loop payment system
Last month, Apple launched a high-yield savings account in partnership with Goldman Sachs. Unsurprisingly, Apple doesn’t just want a credit card, but they want the best one. Knowing that they have all the power in the situation, Apple pushed Goldman Sachs into agreeing to very appealing terms: $0 annual fees, rewards, and up to 3% cash back.
Apple have been steadily heading in the direction of becoming a bank. Whilst they likely would never want the headache of being labelled - thus regulated - as such, they now have a credit card, payment infrastructure, Buy Now Pay Later option, a 4.15% savings account, and also the ability to accept payments using an iPhone.
When you store, lend, and transfer money for your customers, at what point do you become a bank?
With its own payment terminal and current set-up, a closed-circuit payment system is now a possibility. With Apple Pay to Apple Pay, a shop could soon run its entire business without needing a bank (if its only customers happened to be iPhone users…).
The circuit isn’t yet closed, because the Apple Credit Card, for example, uses MasterCard in collaboration with Goldman Sachs.
This isn’t just a threat to both payment processors and banks, but it adds to the mounting alternatives to Visa. It’s not like Apple - a company reluctant to take on the responsibility of being a bank despite acting like one - would ever want to be involved in the internet regulating dynamics that exists.
Apple can now tie the merchant and buyer together, and the partnership with Goldman Sachs is expected to be binned once Apple doesn’t feel like it needs them any more.
We are a long way off yet. But, it brings into question the growing need for alternatives to the current responsibility that Visa bears, because the clock is ticking on merchants’ dependence on Visa - and thus their need to adhere to Visa’s rulebook.
High fees, growing alternatives, and a Credit Card Competition Act
America has some of the highest interchange fees in the world. Where there’s a duopoly, there’s inefficiency, and the Visa-MasterCard stranglehold over the payment processing industry is a prime example.
Visa and MasterCard are two of the most consistently profitable companies in America, no less. Despite technological developments that have seen FX, neo-banks, and other payment platforms drive fees down to all-time lows, Visa and MasterCard’s net margins remain strong. Their revenues, in fact, are growing as internet shopping becomes all-encompassing.
Processing fees are understandably unpopular among merchants, and the efforts to avoid them where possible are being stepped up. Efforts that are being matched by the US government.
The proposed Credit Card Competition Act seeks to prevent this Duopoly dominance by restricting their ability to charge interchange fees. Currently, these fees are unregulated. The Act aims to spur competition by breaking the links between card networks and banks, forcing banks to offer merchants a choice of at least two different card networks.
The Act is heavily criticised for creating a lose-lose situation, where the firms with the largest safety features and economies of scale would no longer make money through interchange fees.
Final Word
Visa and MasterCard’s strategy going forward will be interesting to see, with pressure coming from government, Apple, blockchain technology, and fintech alternatives. In the UK, the Bank of England recently hired a 30-strong team for its digital currency project - something that could further threaten the Visa-MasterCard dominance. Of course, this would resolve the issue of preventing illicit transactions on the web, as we would be trading our privacy for security.
If it isn’t centralised digital currency, it’s decentralised digital currency. And if it’s neither of those, it’s fintech firms like Klarna and Stripe. From any angle, things aren’t looking good for the Status Quo Duo.