It’s hard to believe regulators can learn faster than entrepreneurs, but they do. Back when Mark Zuckerberg testified before Congress in April 2018, Senator Orrin Hatch (a Republican from Utah) interrogated Facebook’s business model by asking him “why users don’t pay for your service,” to which a smiling Zuckerberg replied, “Senator, we run ads.” Eighteen months later, on October 23, 2019, Zuckerberg faced another congressional grilling, this time over his proposed digital currency, Libra.
If Congress is aiming to force Facebook to stay clearheaded about its original idea—deploying Libra in developing countries where financial infrastructure is weak, especially in places where the local population lacks easy access to credit money, before the digital currency is rolled out in rich economies—then it’s already achieved its aim.
A week before the hearing, Visa and Mastercard announced they were stepping away from Libra because of rising scrutiny.
The withdrawals will not necessarily doom Libra. But they do thwart its ambition to dominate the monetary system of the U.S. and Europe, about which central banks are most nervous. Without Visa and Mastercard, the project has no choice but to create products for the underserved markets, such as money transfers from politically unstable and high-inflation economies to more stable markets, payments for goods purchased abroad, and immigrant remittances to developing countries. And that outcome might well be the best for everyone.
To understand the impact of Visa’s and Mastercard’s withdrawal to Libra is to understand their enormous influence in fintech innovation in the Western world. At the International Institute for Management Development (IMD), we track how likely a firm is to successfully leap toward a new knowledge frontier in its effort to prepare for the future. We specifically measure how ready the industry incumbents in the financial sectors are for new areas such as robo-advisers, cryptocurrency and blockchain, artificial intelligence, mobile services and mobile payments, and application programming interfaces (APIs).
To achieve a balanced and robust measurement, we take note of the “health” of a company’s ongoing business through its cash flow, operating margins, and rising revenues. But for that healthy cash flow to be effectively deployed into new areas, executives need to see beyond their day-to-day operations and be capable of challenging the long-held assumptions of the industry. This process demands diversity in a company’s workforce, which is represented by gender and nationality as well as the specific backgrounds of the top leadership. We then measure the company’s growth prospects as gauged by investors’ expectations, investment in startups or new ventures, and, perhaps most importantly, its new product announcements.
The result is an index, which unsurprisingly includes a few household names among fintech developers. PayPal, a digital payments firm that turns 20 this year, and Square, which processes credit card payments everywhere from street stalls to coffee stands to fancy farmers’ markets, are both sitting at the top of the rankings. And yet, several incumbents have managed to grow just as fast. They are the legacy infrastructure builders: Visa and Mastercard.
Since the dawn of the smartphone era, countless new entrants providing payment methods—Apple Pay, Google Wallet, Square, PayPal, Vimeo, and Revolut, to name just a few—have all proven themselves powerful innovators that can design offerings that consumers crave. They have carved out segments of the market away from the credit cards that traditional retail banks issue.
In the face of these changes, the only proven strategy Visa and Mastercard can rely on in order to maintain the relevance of their legacy infrastructure is to bypass their own plastic, deemphasizing and destroying the very physical embodiment of their products, which was cherished for decades, and allowing these disrupters to connect to their toll road. If you can’t beat them, let them join you.
It should come as no surprise that when the Apple card was announced, commentators noticed that, in addition to promised breakthrough features, its logo shared space with Goldman Sachs—the underwriter—and Mastercard. Not even Apple can shake off the plastic network.
And it’s not just Apple. PayPal, Square, Samsung Pay, Google Pay, Facebook Credits, Stripe, and even cryptocurrency startup Coinbase, all work with Visa and Mastercard. In other words, no fintech company can disrupt anyone unless they pay a toll to the old boys’ network.
The reason is simple. An interface standard has emerged that has made Visa and Mastercard so simple and powerful to work with that their vast networks are irresistible for any fintech: APIs.
An API is an official set of rules and guidelines that facilitates the exchange of information between two pieces of software. These software routines, protocols, and tools can allow third parties to tap into Visa and Mastercard’s infrastructure. “While many legacy bank players have been hesitant to see Visa as primarily a technology company,” observed Gilles Ubaghs, senior analyst of financial services technology at Ovum, “the recent launch of Visa’s developer platform, . . . with a host of APIs offering a full mix of payment functionality, all built on Visa’s underlying core network, [shows that] Visa is opening up its full capabilities directly to the broader digital ecosystem.”
The major breakthrough here, then, is the realization that a product’s best feature will never be invented in-house. Visa and Mastercard realize that killer apps will be invented by third parties, who are closer to the customers than the credit card giants. Whenever a third-party application becomes significant enough, the system co-opts it in order to remain flexible, all the while setting new standards for the industry. There may come a day when credit cards themselves disappear, but Visa and Mastercard can still be ubiquitous, still making all the hard parts of sending and receiving money around the world look easy.
From this angle, we can see the impact of Visa and Mastercard pulling out from the Libra project. Facebook might have two billion users, but to deploy any digital currency to facilitate market transactions in Western economies, from paying the local bakery to buying emojis online, Zuckerberg would need to leverage the credit card network in order to scale fast. With that option gone, the most prudent approach is to target the unbanked in emerging market economies, where the local population has yet to acquire a credit card, a market segment outside of Visa and Mastercard’s current reach. And that strategy not only will let central bankers breathe a sigh of relief but could also potentially be life-changing for billions who have yet to find a feasible solution for international payment. Mark Zuckerberg might see less of an immediate payback, but it still fulfills Silicon Valley’s long-held ideology: to make a dent on the universe for the better.
Howard Yu is the author of Leap: How to Thrive in a World Where Everything Can Be Copied, the Lego professor of management and innovation at the IMD Business School in Switzerland, and the director of IMD’s signature Advanced Management Program (AMP). A native of Hong Kong, he earned his doctoral degree from Harvard Business School.
Jialu Shan is a research fellow at the Global Center for Digital Business Transformation, an IMD and Cisco Initiative.