Visa and Mastercard have embraced blockchain technology. It is a smart long-term strategy

Given the disruptive nature of blockchain technology, one could be forgiven for thinking that traditional payment players would be very apprehensive – and perhaps even combative – of the new payment method.

But rather, Visa (W -0.20%) and MasterCard (MA -0.09%)the two largest payment rails in the world, have embraced blockchain technology, implements it in several of their products and services. They have also promised to continue to innovate around the technology as well. Mastercard, for example, has at least 89 blockchain patents.

In many ways, blockchain technology increases the competition for these large, traditional payment players. But there is an important reason why embracing the technology is a smart long-term strategy for both Visa and Mastercard.

Blockchain makes it better

Put the competition aside for a moment. The executives at Visa and Mastercard are not only concerned about losing future market share to blockchain-based competitors. They are also worried about falling behind with technology, which is especially important to stay on top of the payments industry.

Image source: Getty Images.

Many people do not believe in the value of cryptocurrencies, but there is no doubt about the ingenuity of blockchain technology. At its core, the blockchain is a distributed ledger of information that is very difficult to change, which in turn makes it very secure. Therefore, the technology offers an alternative, highly secure, real-time payment method that enables parties to transfer money at any time of the day, as long as they have internet access.

In 2018, Visa then rolled out a business-to-business cross-payment tool called B2B Connect, which cuts out middlemen in cross-border payments and allows businesses to send payments directly to their partners’ banks in a seamless, transparent way. The service was developed with the help of a blockchain company called Chain. B2B Connect is now available in more than 100 countries and territories.

Visa and Mastercard’s various patents show that they are looking at ways to use blockchain technology to make the payment process more secure. For example, a patent filed by Mastercard is called “Method And System For Payment Card Verification Via Blockchain,” which would use the public blockchain to securely capture and verify a cardholder’s information. This will make it more difficult for fraudsters to steal people’s information.

Expand the network

Visa and Mastercard have been able to build incredibly strong moats that are difficult to replicate because they each have such massive networks that facilitate payments around the world. This effectively creates a network effect: As payment systems grow and acquire more users, they become increasingly attractive, eventually becoming so large that late-to-the-party merchants and banks seemingly have no choice but to join. Large networks are good for Visa and Mastercard, not only because they get more users, but also because the companies collect fees on each transaction they make. More users mean more transactions, and more transactions mean more fees.

With this in mind, Visa and Mastercard do not need to be trusted Bitcoin or pay attention to how much the token is currently worth. But they can make the reasonable assumption that people will continue to use cryptocurrencies and stablecoins to move money, and even to buy goods and services. So if these payment processors can bring a new flow of money onto their rails, it’s a big win for them.

Not long ago, Visa rolled out a crypto-linked debit card, allowing consumers to link their crypto accounts to a Visa card. Consumers can then use these cards at 80 million merchants worldwide. Mastercard also has crypto card programs.

Consumers do not actually send their cryptocurrencies directly to merchants with these cards. Rather, Visa and Mastercard help convert consumers’ crypto into fiat currencies that can then be used through the cards. Like all cards on any payment network, there are fees associated with each purchase or swipe.

This is a very smart way for Visa and Mastercard to capture the flow of money in the crypto ecosystem and bring it onto their rails. So far, it’s been a successful strategy: At the beginning of last year, Visa reported that transactions on its crypto-linked cards reached $2.5 billion.

Leaning into the blockchain makes sense

Payments experts at Visa and Mastercard probably saw the innovation of blockchain technology quite quickly. By incorporating the blockchain into their own systems, the payment giants have opportunities to make transactions faster, more seamless and more secure. Although it is still early days, I suspect that these giants have only scratched the surface of what blockchain technology is capable of.

Visa and Mastercard have previously used this strategy for other disturbances in the payment system. It is one of the reasons why both of these companies are as large and as successful as they are today.