Visa and Mastercard Have a New Competitor: the Fed
When it comes to the Federal Reserve, most investors care only about when the central bank plans to cut interest rates, and what Fed Chair Jerome Powell has to say about inflation. But the agency is working on another initiative that could have a big impact on two top financial stocks—and it has nothing to do with monetary-policy decisions.
The Fed launched a real-time payments service last July called FedNow. It allows for instant digital payments at a lower cost than using a bank debit card and is faster than getting payments via Automated Clearing House transactions. More than 800 financial-services firms have signed up to use FedNow so far, including megabanks JPMorgan Chase, Wells Fargo, and U.S. Bancorp. Mizuho Securities analysts Dan Dolev and Ryan Coyne think that this could be bad news for Visa and Mastercard.
Those two enormous payments-processing companies are the backbone for many debit-card transactions. And while both have their own real-time payment transfer services—Visa Direct and Mastercard Send—Dolev worries that FedNow will eat into that business.
“Pricing for FedNow is cheaper per transaction than debit,” Dolev told Barron’s. He added that it’s only a matter of time before more big banks join the FedNow network. Others agree.
“Given this was developed by the Fed, we believe it is inevitable that most financial institutions will ultimately integrate into the system,” TD Cowen analysts Moshe Orenbuch and Bryan Bergin wrote in a report about Visa and Mastercard in April. The analysts added that so far, though, “use cases of FedNow in practice are still quite limited.”
Are Visa and Mastercard investors nervous about more competition? Shares of both are up about 10% in the past year, which is hardly a disastrous performance. But it’s worth noting that both stocks are trailing behind the S&P 500 and the Financial Select Sector SPDR exchange-traded fund, which have each gained more than 20% in the past 12 months.
Of course, concerns about growing competition for the Visa-Mastercard duopoly have been growing for some time. The two already compete with the big banks in payments since several of them, including Bank of America, Capital One (which is planning to buy Visa and Mastercard rival Discover Financial Services for more than $35 billion) and JPMorgan Chase, are part of a network that owns the Zelle digital money-transfer service.
Visa and Mastercard also increasingly compete with fintechs, such as Venmo owner PayPal Holdings, and Block, which owns both CashApp, and Square, and buy now, pay later leader Affirm.
But there are other ways to play the potential growth of the FedNow service. Dolev said that tech companies Fiserv and Fidelity National Information Services are “the pipes connecting consumers to the banks” and stand to benefit from the growth of FedNow and other digital payment services.
The TD Cowen analysts also think investors shouldn’t rule out Visa and Mastercard. The two companies “have an inherent advantage over other instant payment infrastructures,” the analysts wrote in their report, adding that they are “focused exclusively on payments.”
“This has allowed them to make significant investment in their networks over time in areas such as technology and fraud detection,” the analysts wrote.
FedNow is still in the early stages of its rollout. So it is a threat that bears watching. But increased competition from fintechs is nothing new for Visa and Mastercard, even if their latest rival is a key player in the Washington, D.C. regulatory landscape as opposed to a Silicon Valley start-up or giant Wall Street bank.
Write to Paul R. La Monica at [email protected]