Cryptocurrencies are a volatile investment today, but card companies, including Visa Inc.
and Mastercard Inc.
We bet that one day crypto will be regularly used for everyday purchases, from food to clothes to plane tickets, and they don’t want to be left behind when that happens.
Consumers can now make payments with cryptocurrencies linked to Visa and Mastercard cards mainly provided by fintech companies, but this is a niche market. And transactions usually rely on third parties who convert crypto into local currency. Visa and Mastercard, the largest card networks in the United States, say they are working on ways to handle the mechanics of crypto payments themselves. If successful, these efforts would mark a major turning point — the first time decades-old networks would allow payments in assets beyond what most would consider common currencies.
For now, the card networks largely view their efforts as targeting banks, fintechs and other companies they see as customers. But these changes could ultimately have a major impact on the way consumers and merchants transact.
This could spell a future where it will be common practice to pay for sandwiches, clothes and other everyday purchases by taking out a cryptocurrency-funded card, in the same way that debit cards are linked to checking accounts. It could also mean that more financial institutions will start issuing these cards to consumers and more merchants will start accepting stablecoins or other cryptos as payments. Some companies, including AT&T Inc., Overstock.com Inc. and Chipotle Mexican Grill Inc., already accept crypto payments from consumers.
Uncertainties remain. One question is whether merchants will find a way to completely bypass cards when accepting crypto payments, saving them the fees they pay when accepting debit and credit cards. Security challenges need to be addressed. Some payment officials say national regulations are needed to require financial institutions to have reserves to support the cryptocurrencies they hold.
But while the recent crypto crash has left some investors confused, payment companies have pushed through crypto payment plans during similar declines in the past and now say they will continue on the same path. “Regardless of the prices of any given crypto asset on any given day, we are seeing continued interest from our existing customers and new developers entering the space,” said Cuy Sheffield, Global Head of cryptography at Visa. “We want to… take a long-term perspective on how crypto can affect payments and focus on adding as much value to the ecosystem as possible.”
A push in crypto
Over the past five years, crypto has evolved from a largely isolated asset to wealthy investors and millennials embarking on the next big thing to one that could become a rival in everyday consumer payments. The largest US card networks fear that not allowing crypto payments could mean the foreclosure of a growing and possibly one day dominant payment method, according to people familiar with the matter.
They also think that consumers will want to pay in this way. “We don’t really see demand for it today, but it could come; and that’s one reason why we invest,” said Jorn Lambert, Mastercard’s Chief Digital Officer, at the company’s Investor Day last year.
Other major payment companies are expanding their crypto capabilities. PayPal Credits Inc.
started allowing US consumers to pay with crypto last year. Instead of paying merchants with a card loaded onto PayPal, consumers can choose the crypto they store in accounts on the platform. The crypto is being converted into local currency behind the scenes through a partnership with Paxos, a blockchain infrastructure platform. PayPal then sends the payment to the merchant. In June, PayPal said it would allow consumer customers with crypto on its platform to pay other PayPal users with it.
“We are on the side of the debate that thinks this is going to happen,” said Jose Fernandez da Ponte, senior vice president of blockchain, crypto and digital currencies at PayPal. “I don’t know if we’re three or five years away from mainstream adoption, but I think we’ll see it in a relatively short time.”
Banks and other card issuers were given a wake-up call, payment officials say, when customers asked if they could use their cards to buy NFTs, the digital tokens associated with collecting digital art and objects, songs and videos. Many suppliers of NFTs, or non-fungible tokens, only accept cryptocurrency as payment. Although the NFT markets have cooled, Visa and Mastercard still see them as an opportunity and have partnered with third parties to enter the market.
Among them, Miami-based fintech MoonPay has made it possible to use Visa and Mastercard cards to buy NFTs since last year. The feature was launched in test mode this year on OpenSea, one of the largest NFT marketplaces. When consumers with crypto wallets – or accounts – use their cards to purchase certain NFTs in them, MoonPay buys the NFT with crypto and then charges the equivalent amount in local currency to the consumer’s card plus a fee averaging about 3 %. MoonPay then transfers the NFT to the cardholder.
Try different models
Visa and Mastercard see fiat-backed stablecoins, with values pegged to traditional currencies such as the US dollar or other financial assets, as a testing ground for handling crypto payments, although stablecoins have also been shaken by recent market turmoil. Once consumers make a payment with a card linked to Stablecoin, networks want to be able to receive Stablecoin payments directly from the card issuer – a bank or other financial institution – and then send the Stablecoin to the merchant’s bank.
Visa also tests the conversion of the stablecoin into local currency itself and sends it to the merchant’s bank. The company aims to deploy this latest capability in select markets worldwide before the end of the year.
Many US banks do not allow customers to buy crypto with the credit cards they have issued due to price volatility. The concern is that cardholders are more likely to miss their accounts if the crypto drops soon after a purchase.
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Visa is in the early stages of trying to share more information with issuers about transactions that involve buying cryptocurrency so they can decide whether or not to approve it, according to people familiar with the matter. Banks are more willing to approve these transactions for consumers with high spending limits, they said. Banks are also considering placing separate, lower spending limits on such purchases, they said.
Some card companies are exploring different models for using cryptocurrency for day-to-day transactions. In April, London-based crypto services firm Nexo partnered with Mastercard to launch a credit card backed by cardholder cryptocurrencies. Available in Europe, the card allows consumers to pledge their crypto in exchange for a spending limit of up to 90% of the crypto’s value. Mastercard clears and settles payments in local currency.
If the market price of collateral falls too low, Nexo can ask cardholders to pay off some of their outstanding balance or increase their collateral – or risk Nexo selling some of their collateral to lower their loan ratio.
Nexo says it plans to roll out the map in the US, though it hasn’t revealed a timeline.
Countering Security Threats
Payment companies say security concerns are a concern when it comes to crypto card payments. Many people store crypto in wallets located on exchanges or other third-party services that are prone to hacking, meaning people’s crypto can get lost. Over the past year, hacks have taken place on major crypto exchanges and platforms.
CompoSecure based in Somerset, NJ Inc.,
a company that sells publishers such as JPMorgan Chase & Co. and American Express Co. to develop their metal cards (a feature that started on high-end rewards cards and spread to other credit cards), filed a patent last year for a security app for storing and paying with crypto.
Last year, CompoSecure released “Arculus”, a smart card that stores people’s private cryptographic keys. Consumers open the app with their fingerprint or face, enter a PIN and tap the card on their phone to complete the transaction. For the time being, security measures apply to selling crypto and paying others with it.
CompoSecure says it is in talks with major card issuers and others who are considering adding the company’s security feature to chips on standard credit and debit cards. He declined to name the companies. People would then be able to use their cards on their phones and, through a biometric or other secure login process, make crypto payments for NFTs and more.
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