Every major economy is trying to ditch Visa & MasterCard

Many major economies globally are actively seeking to reduce their reliance on established payment systems like Visa and Mastercard, with several alternatives emerging and even expanding beyond national borders. Despite this push, Visa and Mastercard continue to report solid revenue growth and record profits. This video explores the progress of these alternative payment systems and how the two major players are responding. The trend of developing alternatives has a history, with China being an early adopter. During the 2014 Chinese New Year, WeChat launched digital red packets, a digital version of traditional cash gifts. This innovation was incredibly successful, leading to WeChat Pay becoming the default payment method in China by 2016, with over 420 million users sending 32 billion red envelopes. This success spurred Alibaba's founder, Jack Ma, to aggressively promote his firm's competitor, Alipay, on its e-commerce platforms. Within a few years, Chinese digital payments became a two-horse race, reaching over a billion users. China's traditional banking sector was slow to adapt, and most people didn't have credit cards, making mobile payments a better fit for a population largely living on their phones. While affluent customers and international travelers still use foreign cards, WeChat Pay and Alipay have captured most domestic day-to-day transactions. This allowed China to largely bypass reliance on American card systems, driven by nimble startups rather than state planning. However, the Chinese system's initial setup presented challenges. Both WeChat Pay and Alipay operated as "black box walled gardens" run by private companies, with limited interoperability between them. They were anti-competitive and not subject to traditional stringent financial regulations. This led to government crackdowns and reforms, forcing platforms to open up. The government also introduced the digital yuan, its own mobile wallet, though it hasn't seen widespread success. Nevertheless, China was one of the first countries to successfully transition to its own payment system, significantly reducing dependence on Visa and Mastercard. Other countries learned from China's experience, adopting its strengths while addressing its weaknesses. India's UPI (Universal Payment Interface), launched in 2016, was modeled after Chinese wallets, focusing on mobile payments and QR codes. Its key innovation is being a government-mandated standard built on top of India's existing banking system, rather than replacing it. Users get an easy-to-remember UPI ID, facilitating transfers between banks. UPI is not a specific app but integrated into various payment apps, using India's standard immediate payment service for instant bank-to-bank transfers. This standardized and regulated approach, with dozens of competing service providers, offers the ease of Chinese wallets with greater competition and regulation. UPI, which is free for most users, has become the dominant payment method in India, with even Google Pay in India largely functioning as a UPI app. Brazil's Pix, developed by the central bank and launched in 2020, is another successful example. Like UPI, Pix is a user-friendly interface built on top of regulated banks and financial institutions, facilitating instant bank-to-bank transfers. Unlike India, participation in Pix became mandatory for financial institutions with over 500,000 active accounts, likely due to its later rollout and the existing presence of other digital payment solutions in Brazil. Pix allows users to use aliases, offers instantaneous transactions, and is free for individuals, with a low 0.33% fee for businesses, significantly undercutting credit card fees. Pix has rapidly become the dominant payment method in Brazil. Europe's approach, while more complex and slower, is also noteworthy. Europe faces the challenges of well-established credit and debit card usage and a continent with multiple regulatory frameworks and existing national instant payment platforms (e.g., Idal in the Netherlands, VIPs in Nordic countries). Two competing projects are underway: the digital euro, a direct payment app controlled by the European Central Bank, and the European Payment Initiative (EPI), launched by a consortium of 16 private European banks. EPI uses Wero as its consumer-facing brand, functioning as an easy-to-use UI on top of the standard SEPA system (Europe's instant and free bank transfer standard). Wero allows users to send money via phone number, email, or QR code. Its main challenge is optional adoption, as there's no government mandate like in Brazil. Wero has started rolling out in Belgium, France, and Germany, with some traditional and neo banks integrating it into their apps. While currently a basic person-to-person service, plans include merchant services and offline payments. To accelerate adoption, EPI has acquired leading payment platforms in the Netherlands and Belgium and announced interoperability with existing national payment systems in 13 countries, aiming to reach an additional 130 million users. Despite the rise of these national and regional alternatives, Visa and Mastercard continue to thrive. Their finances show healthy year-on-year gains and incredible profits, with their non-US business growing consistently faster. This is attributed to four main reasons: 1. **Global Digital Payment Adoption:** While the US market is saturated, many other parts of the world are rapidly adopting digital payments, creating growth opportunities for all players. 2. **Cross-Border Payments:** Cross-border payments, especially online purchases, are growing significantly faster than the rest of the economy. Visa and Mastercard are exceptionally well-suited for these transactions due to their global acceptance. 3. **Increased Fees:** Both companies have continuously raised and introduced new fees over the years, extracting more per transaction. 4. **Beyond Card Services:** Visa and Mastercard offer a wide range of services beyond just cards, including anti-money laundering checks, fraud prevention, tokenization, and dispute resolution. Ironically, many institutions and companies within alternative networks like Pix, Wero, and UPI still utilize and pay for these services, meaning Visa and Mastercard often profit indirectly. These factors suggest that Visa and Mastercard are unlikely to be completely replaced soon, though the new competitors likely prevent them from controlling an even larger share of the payment ecosystem. The next major step for many local systems is internationalization. UPI is expanding to countries with a strong Indian diaspora, Pix plans interlinking with Latin American payment systems, and ASEAN countries are working on interoperability between their national wallets. This move towards international functionality could lead to a future where once-local systems work globally, similar to how a payment terminal in Berlin now accepts a wide array of payment systems.