EDITOR NOTE: This article explores a simple question: in the emerging world of fintech, how will the “tech” aspect of the term disrupt the legacy “fin” part of it? How will e-payment companies and crypto business segments disrupt legacy loans? More importantly, how might the Fed’s Central Bank digital currency disrupt all electronic money transactions, from cash to private cryptos? The difference between the winners and losers will hinge on the potential partnerships and products on the horizon. And the author below outlines several possible scenarios that might play out as companies wager what money might look like and how it might circulate in the years to come.
- Recently in Notable Calls, CFRA weighed in on the effects of a more bullish bitcoin (BTC-USD) trade on payment processors - and along the way concluded that the impact was different depending on how the companies approached cryptocurrencies.
- For example, Square is affected by volume as it allows users to buy and sell bitcoin. Meanwhile, CFRA noted that PayPal isn't really purchasing bitcoin itself so much as positioning itself for partnership for if/when a central bank digital currency (CBDC) arrives.
- A new note from Evercore ISI takes on the prospects for CBDC, and looks at opportunities/risks for card networks, two-sided payment networks, merchant acquirers and card-issuing banks.
- CBDCs represent digital currency tied to respective central banks, and a digital dollar would be the U.S. version. The Digital Dollar Project is exploring a model for CBDC which would be "tokenized and distributed through a two-tiered architecture of commercial banks and regulated intermediaries," Evercore notes.
- So the impact will depend largely on the ultimate infrastructure of the system, combined with rate of adoption by consumers and merchants.
- For the merchant side, while the largest merchants see electronic payments as intrinsic to their business, they push Visa (NYSE:V) and Mastercard (NYSE:MA) to reduce the cost of card acceptance, Evercore notes. And that's why merchants should welcome what would likely be a lower cost of acceptance with CBDC than cards' 2-3% of purchase price. And ultimately, consumer acceptance will be driven by the mix of rewards package (cash, points, miles).
- It's not clear what role the card networks would play in rolling out a digital dollar - but transactions running along a competing network would pose a threat, Evercore says. Mastercard and Visa benefit in the drive toward such a currency from competitive advantages in tokenization, fraud reduction and dispute resolution.
- "If successful, MA & V could generate a new revenue stream, much like they are doing with real-time payments," Evercore says. "That said, CBDC unit economics for MA & V may be lower than on credit and debit card transactions." Merchant acquirers face the same issue on unit economics.
- But CBDCs likely offer the biggest opportunity for PayPal (NASDAQ:PYPL) and Square (NYSE:SQ), the firm says, given the potential to enable CBDCs as a funding source in digital wallets. Using Venmo and Cash App respectively, the companies could find ways to facilitate acceptance while creating a rewards program around it.
- "PayPal will almost certainly benefit from the low cost of funding CBDC in the PayPal and Venmo wallets, similar to cryptocurrency payments, combined with increasing customer engagement and reducing attrition," the firm says.
- That leaves card issuing banks facing the greatest disruption risk, via lost interchange fees and foregone net interest margin on revolving card balances, assuming the digital dollar design enables transaction exchange directly on the Federal Reserve system.
Originally posted on Seeking Alpha