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Jan. 25, 2020, 2:04 p.m. EST

When blockchain arrives in fintech, old-line payment processors will feel the pain

Blockchain will dramatically lower transaction costs for retailers, which paid a collective $108 billion last year

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By Beth Kindig


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Finance is changing rapidly through mergers and acquisitions, but not rapidly enough. There will be tremendous pressure for traditional payment processors to get with the times and adopt blockchain, or else they will be left behind by lower-cost competitors.

Visa /zigman2/quotes/203660239/composite V -0.87%  on Jan. 13 said it plans to acquire Plaid, a back-end software company that helps applications connect to user accounts, for $5.3 billion. Plaid’s client list includes Venmo, Robinhood and cryptocurrency platforms such as Coinbase. Last year, Mastercard /zigman2/quotes/207581792/composite MA -0.03%  acquired Nets for $3.2 billion, to help its move into account-to-account payments, and Vocalink for almost $1 billion.

Those multibillion-dollar acquisitions will help both credit-card companies remain relevant, for now, as non-card payments erode market share.

See: Beth Kindig runs a forum on tech stocks where she recommends stocks and answers readers’ questions.

Those price tags barely scratch the surface of what the finance industry is capable of paying, as the industry consolidates to stay competitive. Last year, Fidelity National Information Services /zigman2/quotes/207166559/composite FIS -0.32%   acquired Worldpay for $43 billion in cash and stock, Fiserv /zigman2/quotes/204817680/composite FISV -1.38%  bought First Data for $22 billion, and Global Payments /zigman2/quotes/201234787/composite GPN +0.72%  purchased Total System Services for $21.5 billion.

No benefits to consumers, merchants

The real value to consumers and merchants has yet to be seen. Square /zigman2/quotes/205989440/composite SQ +0.54%  may have replaced cash registers, but the fees the company charges are as old-school as ever. Square charges 2.6% plus 10 cents per transaction.

Similarly, PayPal /zigman2/quotes/208054269/composite PYPL -1.19%  may have the lead in the U.S. as a fintech platform, though it does little to innovate in a way that lowers costs. In fact, PayPal charges merchants even if a customer is refunded . After acquiring Venmo, the peer-to-peer (P2P) payment app celebrated as a way to send free payments, PayPal continues to charge merchants 2.9% plus a 30-cent transaction fee when collecting from the Venmo app.

From that perspective, Venmo and P2P apps don’t really innovate at all, as retailers coughed up a whopping $108 billion in electronic-payment costs last year.

David Ritter, a financial analyst, summed it up well when he said: “Square merchants with low average tickets may fuss over higher costs, but per-transaction fees are typical of alternatives.” Meaning: Merchants have no other choice.

Defending market share

This is important because we have not yet seen the true disruption in finance, despite ongoing sprees of fintech deals. Although Visa, Mastercard, PayPal and Square are acquiring tech startups to help maintain their current positions, the purchases will not allow for the kind of growth that makes for meaningful gains.

In fact, Visa’s acquisition of Plaid is dilutive and won’t be accretive to earnings for an estimated three years.

Blockchain is the answer

According to a recent survey , 75% of consumers have used a fintech service. Of those, competitive fees and rates are their top priority. In addition, 68% of consumers are willing to try a financial proposition from a non-financial company, which is a risk to incumbents.

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