The power of card networks

The New York Times’ Nicholas Kristoff wrote a damning piece a couple of weeks ago about Pornhub and unauthorized videos of rape and underage victims of sexual abuse uploaded to the site. In his article, he suggested several improvements that could be made, such as improving moderation, limiting unverified uploads, and limiting downloads of videos. Critically, he also suggested that if Pornhub does not improve and no government takes action, Visa and Mastercard can stop accepting payments for Pornhub.

The best way to drive change for a business is to threaten its existence by cutting off its revenue.

Last week, the Times reported that Visa and Mastercard did block use.

Now Pornhub is changing its policies, having removed millions of unverified videos, disabling downloads, and more.

Payments are everywhere. They are the plumbing of commerce. Consumers want to acquire goods and services from merchants, and payments make it happen. In our digital-centric world, card payments are the number one way this happens. Card payments are easy, fast, and very accessible (whether through credit, debit, or prepaid means). While it is possible to transition to direct bank payments or alternative currencies like bitcoin, traditional Visa and Mastercard payments continue to rule.

In this world, where most discretionary consumer payments use a payment card, the networks are potent. They make commerce feasible in the age of the Internet. The networks are very brand-conscious and have spent billions of dollars generating goodwill. They invest in community-oriented areas, such as Mastercard’s StandUp2Cancer initiative, among many others. The networks market good deeds heavily to counteract inevitable negative experiences around payments, loans, and fraud, which is a part of the card system.

With the nation’s most influential newspaper highlighting how they can affect change, the payment networks had to act and make a real and immediate change in a way new government regulations would not. (It could take months, if not years, for politicians to do anything.)

While banks and networks attempt to limit illicit transactions over the networks, many transactions are unclear. Subscribing to adult content is not, by itself, illegal. Some may argue about its morality, but the numbers are clear: Americans are buying this content. IBISWorld estimates that the adult website market size at $774.7 million in 2020, growing at 6.3%.

It is clear that there is a moral, ethical, and ultimately legal problem with videos of unauthorized or minor participants or criminal activity.

I am glad to see Mastercard and Visa doing something meaningful that is having a positive impact. There is an argument that consumers can go around these systems and use bitcoin or the like. They can, but are unlikely to do so. Bitcoin remains volatile and a bit more complicated, so putting up a simple barrier by the card companies can drive new behavior by the companies providing these services. With changes, I expect payment services will be restored to these providers.

More Card Limits

Top US credit card issuer Capital One disclosed that it would no longer allow “transactions identified as point of sale loans charged on its credit cards, regardless of the point of sale lenders.” The growth of Buy Now/Pay Later has been a hot topic of late, and consumers shopping across the web are seeing the logos for Affirm, Klarna, AfterPay, and many other options to create a short-term low-or-zero interest loan for a purchase instead of using their credit cards’ revolving debt function.

While Capital One did not disclose why they are creating this restriction, there are two schools of thought:

1. Capital One is worried about the growth of BNPL and its effect on their income and is trying to limit the competition
2. Capital One is seeing higher issues of fraud, chargebacks, or payment issues from these payments and is trying to protect its capital

What is clear is that the line between Buy Now/Pay Later and credit cards is, and always has been, blurry. Consumers can pick transitions from many Chase, American Express, and store cards and choose to pay them as a fixed repayment (vs. the continuously compounding revolving credit line) or use a dedicated loan. In effect, you have a BNPL loan inside your card (or outside your card). People do prefer fixed bills, but in the end, the pool of available funds is still the same, and consumers will need to pay back whatever loans they have in whatever form.

Good Riddance to 2020

This edition is the last issue of CardsFTW for 2020. This year has been terrible in so many ways. I am looking forward to taking some time over the holidays to focus on family and recovery, and I hope you can do the same. The first half of 2021 will remain challenging, but I’m looking forward to more exciting card news.

CardsFTW

Thanks for reading CardsFTW, a weekly newsletter about all things debit and credit. CardsFTW is written and curated by Matthew Goldman, Founder, and CEO at Vertical Finance, a challenger credit card startup. If you’re looking for insights into everyday payments beyond deal blogs, please subscribe for free at cardsftw.substack.com. If you enjoyed this, please share it with a friend! Follow me on Twitter @magoldman.

Photo Credit: Maria Schriber/Wallaby Financial