What an exciting world we live in! Coinbase has now released an announcement saying that they have issued a card that integrates with Apple Pay and Google Pay. This means we now have a Coinbase Card that we can use to spend our cryptocurrencies. And this includes both common cryptocurrencies (Bitcoin, Ethereum, Stellar Lumens) and less common altcoins (Loopring, Ampleforth, Celo, NuCypher). So what is the impact of Coinbase Card on VISA and other credit card and payment companies?
Payment processing is lucrative as it is used en-mass. Money can be made by just taking a small cut off the transaction value, or upselling value-added services that provides higher margin. How would this impact financial services company such as VISA, Mastercard, Amex, Alipay and WeChat? Would Coinbase now be a new competitor and take a slice of the lucrative pie? Will the share price of VISA, Mastercard (MA), Alibaba (BABA) and AMEX (AXP) drop as a result of the announcement?
How lucrative is payment processing?
First of all, lets take a step back and look at the traditional profit that can be made for each transaction.
|Network||Margin on Merchant Fees|
|Visa||Around 2% – some of the margin goes back to Card-Issuing Banks|
|Mastercard||Around 2% – some of the margin goes back to Card-Issuing Banks|
|Amex||Around 3% (typically higher than VISA and Mastercard)|
|Alipay||Largely fee free. Additional charges for withdrawal over a pre-set limit. Alipay makes money by up-selling other value-added services.|
|WeChat Pay||Largely fee free. Additional charges for withdrawal over a pre-set limit. WeChat makes money by up-selling other value-added services.|
For reference, VISA is on of the largest company with a market capitalisation of nearly $500 billion. Mastercard is not far behind at close to $363 billion.
Is Coinbase competing with VISA now?
Actually, the answer is NO for now. What Coinbase seeks to offer, is to allow customers to spend their cryptocurrency with merchants. They are not looking to replace Visa for now. Hence, you can now buy a McDonald’s Big Mac using Polygon (MATIC). Coinbase will use the cryptocurrency you have on their platform, convert it to US Dollar and effectively then use the Visa network for payment. Meaning, their value add in this payment process chain is to convert your cryptocurrency to US Dollar, taking a cut of the transaction fee in this process.
Note also that the Coinbase card will be a Visa Debit card, not a Visa Credit Card. Debit card generally has lower fees and this probably make sense, since we also need to factor in the cryptocurrency to USD conversion as an additional fee now.
Will Coinbase compete with Visa in the future then?
This scenario is likely, and it will likely come when we see merchants accepting cryptocurrencies directly instead of Fiat. Tesla used to do that for Bitcoin before they pulled out spectacularly. If we have many more merchants accepting cryptocurrencies, Coinbase can do without Visa as sending cryptocurrency to different addresses is already innate to the blockchain technology. Hence, there is a longer term impact of Coinbase Card on VISA.
Until we start seeing more price catalogue listed against cryptocurrencies (can be alongside fiat money), Visa is safe for now. Do also see my separate write up on Coinbase here.