Winner Of Payments War

The headlines paint a dire picture: "Stablecoins Surpass Visa and Mastercard with $27.6 Trillion in Volume" and "$60 Billion Wiped from Payment Giants as Amazon and Walmart Explore Stablecoins." With digital currencies processing more transactions than the legacy payment networks combined, investors are asking whether Visa (V) and Mastercard (MA) are facing an existential threat.

The answer is more nuanced—and more optimistic for shareholders—than the panic selling suggests. Rather than killing these payment giants, stablecoins may actually strengthen their competitive moats while creating new revenue opportunities. Here's why the "disruption narrative" misses the fundamental strategic advantages that make Visa and Mastercard nearly unassailable.

The Switzerland Strategy: Why Being Neutral Beats Being Competitive

The key to understanding Visa and Mastercard's resilience lies in a crucial distinction: they're Switzerland in a currency war, not combatants.

Payment Networks vs. Banks: Different Competitive Dynamics

When Goldman Sachs launches a stablecoin, it creates direct competitive pressure for JPMorgan Chase. Corporate clients might move their deposits, treasury operations, and cash management away from JPMorgan to Goldman's digital offering. This is zero-sum competition—JPMorgan's loss is Goldman's gain in deposits, fees, and client relationships.

Visa and Mastercard face no such threat. They don't issue currency or compete for deposits. Instead, they provide the essential infrastructure that enables money movement—regardless of whether that money is traditional dollars, USDC stablecoins, or any future central bank digital currency (CBDC).

The beauty of their position: Stablecoin issuers need Visa and Mastercard more than vice versa.

Consider the practical reality: For Amazon's hypothetical stablecoin to be useful for everyday purchases, it needs acceptance at the 80 million merchant locations worldwide that accept Visa. Without integration into existing payment infrastructure, even the most innovative stablecoin remains a niche product.

The Infrastructure Advantage

Visa and Mastercard aren't just sitting idle watching potential disruption. They're actively building the bridges between old and new payment systems:

• Visa's stablecoin-linked cards enable consumers to spend USDC at any Visa-accepting location

• Mastercard's partnership with MoonPay allows stablecoin-to-fiat conversion across 150 million merchant locations

• Both companies are developing CBDC infrastructure to support central bank digital currencies

As one Mastercard executive noted: "Money movement alone doesn't make a difference. You need the infrastructure on top of it." This infrastructure—built over decades and protected by massive network effects—becomes more valuable, not less, in a multi-currency digital world.

The Tollbooth Business Model: Built to Adapt

Mastercard's business characteristics reveal why the company is positioned to thrive regardless of payment evolution:

Multiple characteristics should draw investors' attention. First, despite ongoing evolution in the payment space, we think a wide moat surrounds the business and view Mastercard's position in the current global electronic payment infrastructure as essentially unassailable.

This "unassailable position" stems from what's essentially a tollbooth business model. Mastercard is relatively agnostic to smaller shifts within the electronic payment space, as it earns fees regardless of whether payment is credit, debit, or mobile—or, increasingly, stablecoin-based.

Revenue Model Resilience

The fee-based revenue model works regardless of the underlying currency:

• Traditional card transaction: Mastercard earns interchange fees

• Stablecoin-linked card transaction: Mastercard earns interchange fees plus potentially conversion fees

• CBDC transaction through Mastercard rails: New fee opportunities in government partnership

Rather than losing revenue to stablecoins, payment networks may actually capture additional value through:

• Conversion services between digital and traditional currencies

• Cross-border settlement for international stablecoin transactions

• Compliance and security infrastructure that regulators will increasingly require

Superior Capital Efficiency: Financial Fortress Enables Adaptation

Exceptional Profitability Creates Strategic Flexibility

Mastercard has translated its dominant competitive position into an enviable level of profitability. Operating margins (using net revenue) in 2024 were 58%, and margins have generally trended upward over time due to the scalability of the business.

This exceptional profitability stems from the relatively asset-light nature of the business, where returns on invested capital are multiple above any reasonable estimate of the cost of capital. These financial characteristics create enormous strategic advantages during industry transitions:

1. Investment Capacity: Exceptional margins mean both companies can fund technology initiatives, partnerships, and acquisitions without diluting shareholder returns.

2. Acquisition Power: They can acquire fintech companies, blockchain infrastructure providers, or stablecoin technology firms to accelerate adaptation. While Mastercard has completed some acquisitions, they have generally been small and sporadic. We think the company's competitive position argues against aggressive M&A, and we are pleased that management has shown discipline in this regard.

3. Margin for Error: With 58% operating margins, even significant stablecoin-driven disruption would leave substantial profitability cushion for strategic pivots.

4. Speed of Adaptation: Unlike capital-intensive businesses, payment networks can rapidly deploy technology solutions and partnerships to address market changes.

Management Quality and Capital Allocation

Michael Miebach, who has been with the company for over 10 years and previously served as chief product officer, replaced [Ajay] Banga as CEO. We like that Miebach held leadership positions in the company across geographic regions, as we expect the company's growth to come increasingly from international markets over time.

Management historically has returned essentially all of Mastercard's profitability to shareholders and we appreciate the company's diligence on this front. Dividends per share have doubled over the past five years. This disciplined capital allocation approach provides flexibility to increase investment in stablecoin infrastructure while maintaining shareholder returns.

The Historical Track Record of Excellence

Decades of Benefiting from Payment Evolution

Mastercard's origin lies in the formation of the Interbank Card Association by a group of banks that acquired Master Charge in 1969 and adopted the company's current logo. In the decades since, Mastercard has been one of the largest beneficiaries of the ongoing shift toward using electronic payments.

This historical perspective reveals a crucial insight: Mastercard has successfully navigated multiple technology transitions over 55+ years. From paper checks to magnetic stripe cards, from dial-up terminals to internet processing, from in-person to mobile payments—the company has consistently adapted and thrived.

It is notable that Mastercard has generally outperformed Visa in terms of growth in recent years. This suggests management is effectively exploiting the growth opportunities the company has in front of it.

Wide Moat Recognition

The company's excess returns on capital and superb profitability, which could persist for decades or more, warrant a wide economic moat rating. This recognition from investment analysts confirms what the financial metrics demonstrate: Mastercard possesses sustainable competitive advantages that transcend individual technology cycles.

This wide moat doesn't disappear with stablecoins—it gets reinforced as the company becomes indispensable infrastructure for an increasingly complex digital currency ecosystem.

The Network Effect Fortress: Scale Creates Unassailable Advantages

The Virtuous Cycle of Network Dominance

Payment networks such as Mastercard benefit, unsurprisingly, from a network effect. The more consumers that are plugged into a payment network, the more attractive that payment network becomes for merchants, which, in turn, makes the network more convenient for consumers and so on.

This dynamic explains why only a handful of networks have come to dominate electronic payments globally. Mastercard has reached essentially universal acceptance in most developed markets, processing over $8 trillion in purchase transactions during 2024 alone.

While Visa processes roughly twice as many transactions and leads in market share across major regions, Mastercard has a similarly commanding lead over any other network and is the only other company with a truly global presence. The company's global market share for credit and debit cards has been estimated at 29% and 24%, respectively—a level that dwarfs competitors outside of Visa.

Cost Advantages Through Scale

The highly scalable nature of payment processing leads to sizable cost advantages for large payment networks, which further cements their competitive positions. This creates a double moat: network effects attract participants, while scale advantages make it economically impossible for smaller players to compete on cost.

For the dominant payment networks with global footprints, such as Mastercard, the network effect and resulting cost advantage is strong enough to lead to a wide moat.

Why Building Competing Infrastructure is Impossible

We don't believe that building a new network with a comparable size and reach is realistic over any foreseeable time line—even in the stablecoin era. The coordination problem becomes even more complex when considering:

• 80+ million merchant locations that would need to integrate new payment infrastructure

• Billions of consumers who would need new payment credentials

• Thousands of financial institutions that would need to rebuild issuing relationships

• Decades of regulatory compliance that would need to be replicated globally

Even Big Tech companies with infinite resources have struggled:

• Apple Pay still processes transactions through Visa/Mastercard rails

• Google Pay relies on existing card networks

• Amazon's payment efforts remain largely confined to their own ecosystem

Cross-Border Dominance: The Ultimate Differentiator

Mastercard may face some competition in processing domestic transactions, but we think the company's global presence is a relatively unique asset that allows the company to process cross-border transactions and charge materially higher fees in this area.

This cross-border advantage becomes even more valuable in the stablecoin era, as digital currencies excel at international transactions. Rather than disintermediating Mastercard's most profitable revenue stream, stablecoins may actually increase cross-border payment volumes that flow through traditional rails for final settlement and merchant acceptance.

Strategic Vision Under Proven Leadership

We like that management has been hesitant to commit to operating margin targets over the short term. We believe the company still has significant growth opportunities, and the nature of the business requires reinvestment through the income statement. We think focusing on near-term profitability targets could hamper long-term value creation.

This strategic flexibility proves crucial during technological transitions. Given that the company turned to a company veteran for the CEO role, we didn't expect any major strategic pivots as a result of this change, and think this view has largely played out. We view staying the course as the right move for Mastercard.

The steady leadership approach allows Mastercard to methodically integrate stablecoin capabilities without disrupting core operations or compromising profitability.

Risk Factors: What Could Go Wrong

What If People Pay Directly Peer-To-Peer?

The full disruption via Blockchain needs also evaluated:

"What percentage of economic activity will remain in the traditional payment system versus move to direct blockchain transactions?"

If consumers and merchants increasingly transact directly wallet-to-wallet:

• Grocery stores accepting USDC directly via QR codes

• Peer-to-peer payments without any intermediary

• B2B transactions settling instantly on blockchain

Then Visa's transaction volume could indeed face significant long-term erosion.

The Market Share Battle

This makes the competitive dynamic more like:

• Traditional payment rails (Visa/Mastercard) vs.

• Direct blockchain payments (pure disintermediation)

Rather than Visa simply adding stablecoins as another currency option.

Bull Case: Merchant adoption of direct stablecoin payments remains limited due to volatility concerns, regulatory requirements, and consumer preference for traditional rails.

Bear Case: Widespread merchant adoption of direct stablecoin payments could fundamentally shrink Visa's addressable market over 10-20 years.

The "Switzerland strategy" only works if significant transaction volume still needs to flow through traditional infrastructure - which is not guaranteed. But from the flows we can measure right now, very unlikely.

Margin Compression Risk

If stablecoins enable more direct peer-to-peer transactions, traditional interchange fee structures might face pressure. However, the companies' exceptional profitability provides significant room for margin compression while maintaining attractive returns.

Regulatory Risk

Aggressive government intervention in payment markets could theoretically threaten the duopoly. However, the complexity of global payment infrastructure makes government-run alternatives impractical, and regulators generally prefer working with established, compliant networks.

Investment Implications: Evolution, Not Revolution

The Bull Case Strengthens

We don't see any secular industry trends that will impede Mastercard's ability to maintain double-digit growth in the coming years, and stablecoin integration may actually accelerate this growth through:

1. New revenue streams from digital currency infrastructure

2. Expanded addressable market in previously cash-based economies

3. Higher-value transactions as B2B stablecoin payments increase

4. Cross-border growth as stablecoins facilitate international commerce

Current Valuation Considerations

While investment analysis reveals mixed signals on valuation, the underlying business quality remains exceptional. The stock currently trades at a premium, but this reflects the market's recognition of the company's wide moat and growth prospects.

The company's EBITDA/interest coverage ratio of 36.3 ranks in the top 30% globally, indicating exceptionally strong financial health. While some analysts suggest the company may have too conservative of a balance sheet, this financial conservatism actually provides strategic flexibility during technology transitions like the stablecoin evolution.

The recent market panic over stablecoin threats has created potential buying opportunities for investors who understand the fundamental competitive advantages that make displacement nearly impossible.

The Secular Growth Tailwind Accelerates

Mastercard benefits from the ongoing shift toward electronic payments, which should provide plenty of opportunities to utilize its wide moat to create value over the long term. Digital payments, on a global basis, surpassed cash payments just a few years ago, suggesting that this trend still has a lot of room to run.

Emerging markets could offer a further leg of growth as stablecoins provide financial services to previously unbanked populations—who will ultimately need connection to the global payment system that Visa and Mastercard dominate.

Rather than threatening this growth trajectory, stablecoins accelerate digitization. The $27.6 trillion in stablecoin transaction volume represents new digital payment flows that wouldn't exist without blockchain technology. As these transactions increasingly need real-world merchant acceptance, they funnel into existing payment infrastructure.

Conclusion: The Tollbooth Endures

The stablecoin "threat" to Visa and Mastercard reflects a misunderstanding of their business models and competitive positioning. Rather than currency issuers vulnerable to substitution, they're infrastructure providers positioned to benefit from payment innovation regardless of its form.

The companies' Switzerland-like neutrality, exceptional capital efficiency, and unassailable network effects create a defensive moat that grows stronger, not weaker, as the payment landscape becomes more complex.

For long-term investors, the current market panic represents an opportunity to acquire shares in businesses that are likely to emerge stronger from the digital currency transition. The tollbooth may accept different currencies, but the road still runs through Visa and Mastercard.

As the payment evolution continues, smart money bets on the infrastructure, not just the innovation. Mastercard is one of my core holdings, Visa is on my watchlist. Access my complete watchlist in our community.

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