Issue No. 26: Two Payment Rails to Rule Them All
A Look at Economic Value across the Payments Space
Recently we’ve seen a number of digital payments companies report somewhat decent numbers, and had their stock prices crushed. Like moths to a flame, investors have been rediscovering their fascination in the space. In a fashion not unlike Pavlov’s dog, many have found the sell off to be an enticing opportunity to pick up shares for ‘attractive prices’. For myself, I find the businesses outside of the payment networks to be largely uninteresting. While they might (and we’re still yet to find out) be fine businesses, they certainly don’t exhibit the kinds of economic behaviour that one would hope for in a long term investment.
Outside of those companies that continually make investments or loans, long term economic out-performance is likely to be achieved in a familiar way: some combination of strong organic volume and pricing growth set over a relatively fixed asset and cost bases. An additional observation would be that for the above to translate into adequate shareholder returns, the excess capital, that will inevitably be generated, must be allocated rationally. This can take many different forms.
Intermediating money has been a racket for as long as people have used it. Jesus knew as much when he banished the money-changers from Herod’s Temple:
Jesus went into the temple of God, and cast out all them that sold and bought in the temple, and overthrew the tables of the money changers, and the seats of them that sold doves, And said unto them, It is written, My house shall be called the house of prayer; but ye have made it a den of thieves.
Matthew 21:12–13
Various European Families found amazing commercial success in their control of money and banking (The Medici’s, the Rothschild’s), firms like American Express built enormous franchises on the back of their Travelers Cheque, and more recently Visa and Mastercard have built two of the world’s largest businesses by taking a small slice of every credit card transaction across their networks. Principles like trust, acceptance, and network effects underpin each of these successively prosperous firms - and the nimbus of their success paints new entrants to the space.
Crypto and BNPL
While both of these are worthy of their own essay, I couple them together as nearly concurrent failures in attempting to re-network transactions. Both seemed to have peaked as a charismatic form of payment during the Covid-Bubble, best encapsulated by Man-in-the-Arena Chamath Palihapitiya in 2021:
"Be short these companies [Visa and Mastercard] and anybody that basically lives off of this 2 or 3% (transaction) tax, and be long well-thought-out, Web3 crypto projects that are rebuilding payments infrastructure in a completely decentralized way,"
Cryptocurrency, while very alluring to a certain subset of risk agnostic young men, did not in fact turn out to be a currency. The manifest frauds, links to illegal commerce, and its eventual disintermediation by Sovereigns saw to that. Some select cryptocurrencies may turn out to be a store of value in the same way that gold or trading cards are. However, in lieu of it acting as real money, the applications being built on platforms like Solana or Erthereum are largely moot as ongoing commercial concerns.
The idea of decentralised payments is also something of a misnomer. The whole idea of money is to solve the double-coincidence of wants. It must be a common form of exchange. Money works because it is centralised, and the modes of transacting money works at scale because it is centralised.
For a short, glorious moment in time BNPL did appear to be a brand new payments method that could sidestep large parts of the exiting payments infrastructure. Unfortunately, it had a fatal law: the merchants and customers who found it attractive were deeply suspect. Naturally, the de facto borrowers who utilised BNPLs did so because they couldn’t find credit anywhere else. Many of the merchants who were interested in utilising BNPLS at the point of sale had been rejected by the traditional merchant acquirers. The result was an ecosystem of subprime credits and borderline criminal merchants (pornographers, shady supplement manufacturers, etc etc). Not exactly doing God’s work, if you know what I mean.
Adyen, and Stripe
Most exciting to the investment community in terms of digital payments have been the powerhouses Adyen and Stripe. Both enjoy regional dominance in Europe and North America respectively.
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