Credit card giants don’t wait to be disrupted when it comes to crypto

Visa and Mastercard have spent the past few years rolling out new products to embed cryptocurrencies more deeply into their operations.

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In 2019, credit card giant Visa first launched a full-time crypto product team after noticing that a new generation of fintech was capturing customers’ imaginations with digital wallets and exchanges based on the crypto.

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“They were growing up really fast. Millions of customers signed up… and they had billions of dollars in assets on their (platforms), ”Cuy Sheffield, vice president and head of crypto at Visa Inc., told the Financial Post in a report. recent interview.

The challenge, as he said, was that few to no traders were directly accepting crypto, leaving much of that value outside of traditional payment channels.

Like its biggest competitor, Mastercard Inc., Visa has spent most of the past few years rolling out new products to address this disconnect with the goal of integrating cryptocurrencies more deeply into their operations.

While the disruption of incumbents is a recurring theme with the emergence of new technologies, the world’s largest credit card companies, which operate payment networks that span across the globe and connect millions of companies, and billions of consumers, seem to be fighting fiercely to avoid such a fate.

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Recent announcements include Mastercard’s decision in October to allow all banks and merchants in its network to offer crypto services and Visa’s launch of a crypto advisory service to help customers promote crypto. adoption.

As it stands, traditional financial firms and the crypto space exist on separate payment rails, the industry speaks for the platforms and networks that move money from payer to recipient. For those like Visa and Mastercard, which use credit and debit payments, transactions and net positions between financial institutions are cleared and settled. The blockchains on which cryptocurrencies trade, by contrast, are decentralized, operating on a network of thousands of personal computers with a common ledger to clear and settle transactions in real time.

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For Visa, Sheffield says the challenge of effectively bridging the divide between traders and cryptocurrencies is not just connecting them to a monolithic blockchain network, but to multiple networks.

One of the use cases that Sheffield described with Visa’s products was prepaid debit cards where users could store crypto and once they tap to spend it the crypto wallet converts the cryptocurrency to fiat. . In other words, the payments themselves are made with traditional currencies.

To bring crypto to its own payment rail, Shefield said Visa would experiment with stablecoins, something that would allow customers to settle transactions in real time. Visa has announced that it is conducting a first test with Crypto.com around stablecoins backed by the US dollar.

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Mastercard has also made a big leap in cryptocurrency. This decision was confirmed in a blog post in February where the company explained how it viewed they played an important role in the future of payments.

“Whatever your opinions on cryptocurrencies – from a dyed wool fanatic to a total skeptic – the fact remains that these digital assets are becoming a more important part of the world of payments,” wrote Raj Dhamodaran, vice president. Executive of Mastercard Digital Assets. .

“Mastercard will begin to support certain cryptocurrencies directly on our network,” he added.

Dhamodaran told the Financial Post that the conversation about exploring and integrating blockchain technology started at least five years ago. As bitcoin was enjoying its big rally in 2021, the company was seeing this growth taking place on its own network as people used their credit cards to purchase crypto assets.

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Cards loaded with cryptocurrency have been one of their main elements.

“The way the basic crypto card works is that you have a wallet with a number of currencies, and it’s a card attached to that store of value,” Dhamodharan told the Financial Post. “Almost like a multi-currency card of the world and the consumer with the help of the card issuer. In this case, that wallet provider or a bank that issued the card can choose the currency at any given time that it wishes to stamp and it is accepted wherever Mastercard is accepted.

To process the transaction, Dhamodharan used the example of buying a cup of coffee. During the transaction, the card issuer would convert the crypto to fiat on the fly. In this way, Mastercard would only transport fiat directly over the network.

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“It’s an approach and some of our partners have chosen to ask the consumer to explicitly sell the currency and switch to Fiat before spending,” he said.

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Andreas Park, professor of finance and Rotman School of Management at the University of Toronto, told the Financial Post that there are big efficiencies for traditional financial institutions to introduce a crypto model on their payment rail. , especially via stable coins.

However, there was also hesitation from a regulatory, expertise and compliance perspective. He also recognized that these companies may not be in a rush to sacrifice transaction costs for the sake of efficiency.

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He added that businesses ignore the space at their peril.

“I think what a smart financial institution would do is at least create their own parallel universe and say, ‘Okay, what kind of apps can we come up with? How can we be relevant in space? ‘… ”Said Park. “They see a lot of these functions, basic functions, and the banking world can be replaced and can be improved. Functions can be best performed on the blockchain.

“If you don’t, at some point you might know people might find that this decentralized structure works better,” he said.

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