Visa invests in crypto even as merchants balk

Visa recently included two nuggets of information in a cryptocurrency market report that spoke volumes about the state of how digital currency is used — and not used — for payments.

The card brand reports more than $1 billion was spent on crypto-linked Visa cards in the first half of 2021, while pointing out that Visa's programs "don't require coffee shops, dry cleaners, or grocery stores to directly accept cryptocurrencies at checkout." The cards instead convert crypto balances to traditional funds before spending.

"It's about being a bridge between the cryptocurrency ecosystem and the merchants, almost all of whom do not accept or manage crypto in any way," said Terry Angelos, senior vice president and global head of fintech at Visa. "A billion dollars is a small number in the face of total payments volume [$11.3 trillion], but as a category it didn't exist a year ago."

Visa's messaging suggest that merchants aren't lining up to accept cryptocurrency at the point of sale, with Visa's half-year report pointing out the card network's crypto payment service is similar to the "magic of tap and go" without the "complexity" of new acceptance points of cryptographic keys, referring to the work involved for merchants to accept cryptocurrency at checkout.

Merchant support for direct cryptocurrency payments has long been tepid to nonexistent, with most acceptance for direct payments coming for niche businesses such as fine art or higher-end wine purchases in which the users are largely investors or technology executives. The cost of upgrades — and the risk associated with bitcoin's volatility — are the main reasons most cryptocurrency payments simply convert digital assets to government-issued money before the merchant receives the transaction.

Elon Musk generated attention this year when he announced Tesla had invested in bitcoin in anticipation of accepting bitcoin from consumers as car payments, though Musk later retreated from that announcement. The office sharing company WeWork also said this year it would support cryptocurrency from clients to pay membership fees and for WeWork to pay its own rent to building owners.

These high-profile endorsements suggested momentum for mainstream cryptocurrency payments. But neither WeWork or Tesla's moves were similar to most retailers, since car payments are usually recurring bills tied to financing instead of full payment at the time of purchase. And WeWork's initial adopters for crypto payments included Coinbase, a cryptocurrency company.

While taking an agnostic view of whether consumers want to pay in cryptocurrency and merchants want to accept cryptocurrency, Visa's Angelos is positioning the card company as a technology and processing enabler for cryptocurrency transactions, including integrations with dozens of cryptocurrency wallets. In most cases, "cryptocurrency transactions" refers to transfers in and out of these wallets to support conversions to U.S. dollars or other currency, which is then used for a retail payment.

"I don't have a particularly strong view either way if there's a demand for direct cryptocurrency payments," Angelos said, adding that if demand for cryptocurrency payments at the point of sale increases, there will need to be adjustments to manage chargebacks and other issues that occur with the mass introduction of any new payment tender. "But we haven't seen that demand yet, mostly because it's hard to set up the ecosystem."

To build its digital asset business, Visa has formed partnerships with 70 cryptocurrency companies including FTX, Coinbase, Crypto.com and CoinZoom, to power conversions that cover an addressable market of more than 70 million merchants globally.

Visa also recently supported the launch of the BlockFi Rewards Credit card, which lets users spend traditional currency while earning cryptocurrency rewards. Cryptocurrency-linked incentives are picking up steam, with recent plays including Bakkt's partnership with Wyndham Rewards to allow hotel guests to convert loyalty currencies such as rewards to cash, gift cards or cryptocurrency.

"The rewards side is interesting. These are traditional currency-linked payment instruments, but consumers are earning bitcoin as a reward," Angelos said. "We think more of this is coming. It's a trend where consumers will value having bitcoin as an asset that can gain value as an investment."

Visa partnered with Bakkt in June to issue a debit card that allows consumers to use bitcoin and cash balances in stores, transit and across Apple Pay and Google Pay's networks.

Both Visa and Mastercard have signaled their interest in working with companies to support cryptocurrencies in the past year, with other major payment companies such as Square and PayPal also ramping up support.

Mastercard in February said it would directly process cryptocurrency payments in its network, adding 37 million potential merchants in 2010 countries. PayPal in late 2020 announced its users could buy, hold and sell cryptocurrencies, and in March said it would support cryptocurrency payments in its merchant network, though after a conversion. PayPal in April extended the support to its Venmo peer-to-peer payment app, which supports cryptocurrency transactions for a fee as low as $1, a move seen as extending PayPal's support to younger demographics. Revenue from bitcoin trading now accounts for more than 70% of Square's revenue. Mastercard did not return a request for comment, while PayPal said it does not break out cryptocurrency transaction volume in its earnings reports. Square referred questions to its earnings for the quarter ending March 31, during which it reported $3.5 billion in revenue from bitcoin transactions.

Visa earlier in 2021 put out a call for partnerships to support digital currencies, saying its technology, scale, merchant reach and security positioned the company to support other projects. The strategy fits with Visa's "value add" initiative to focus on services beyond payment processing to expand its business.

"For Visa, connecting the crypto economy is part of its ‘network-of-networks’ strategy, and they have a number of initiatives in place supporting different types of digital currencies," said Zil Bareisis, the head of Celent's retail banking practice.

As the interest in crypto grows and more people end up holding digital currencies, some might be tempted to spend their funds directly, but it’s important to distinguish between different types of digital currencies, Baresis said. "While bitcoin’s price volatility makes it unsuitable as a payment method, stablecoins and CBDCs can be more viable options," Bareisis said.

Much of Visa and Mastercard's public statements have leaned toward stablecoins instead of cryptocurrencies like bitcoin and ether, without making a firm commitment. Both card brands are also interested in supporting central bank digital currencies, mostly by enabling the private sector involvement in distribution that's expected to be part of most CBDC projects. Most of the CBDC projects in large countries are a year or more from launch, meaning stablecoins are likely the main direct-payments play for the card brands.

Stablecoins are backed by traditional currencies to avoid valuation swings, and are expanding rapidly. Circle recently announced its intent to go public through a combination agreement with Concord Acquisition Corp., a special purpose acquisition company. Circle's USDC stablecoin has expanded rapidly over the past year as the company pursues a financial services "super app" strategy. And Diem, the Facebook affiliated stablecoin, is expected to launch sometime in 2021.

"Where we will see direct crypto payments is in stablecoins," Angelos said, adding business payments would be a prime area for growth. "There's a chance to use stablecoins to move money outside of what today is a fairly slow and cumbersome banking system."