Feb 16, 2013

Is credit card tokenization a threat to Visa & MasterCard?!

+Bruce Upbin of Forbes highlights a thought-provoking article, "Tokenization And The Collapse Of The Credit Card Payment Model" written by Matt Harris of Bain Capital Ventures.

The article describes how the self-authenticating tokens of Braintree and Square can be used in a natively multi-merchant construct

It then argues that this approach can seriously disrupt the existing four-party payment model of cardholder-merchant-acquirer-issuer:
  • As the tokenized user base grows, acquirers will struggle to compete against Braintree online and Square offline
  • The issuers lose their ability to differentiate as their products are relegated to the "hidden back-end"
  • The payment networks become increasingly redundant as more customers are known (i.e., authenticated) through self-authenticating tokens

In my opinion, the above is a long-term scenario planning and therefore it may or may not come true. Even Matt agrees that the demise of the (payment) networks is harder to articulate

There are other, disruptive, companies like Dwolla that are trying to completely eliminate credit cards by replacing them with real-time bank transfer for transactions between the merchant and the customer. Even more disruptive is Bitcoin that is trying to eliminate even banks from the transaction!

However, all these approaches are currently dwarfed by the huge investments that have gone into spreading the existing credit cards payment model globally. Also, the incumbents are finding more ways to continue to be relevant in the new environment, for example, by creating / joining mobile payments consortia, etc.

It will be interesting to see how the wind blows in future...