ACQ2 by Acquired: Visa Follow-Up and Today’s Payments Ecosystem (with Gaurav Ahuja)
Release Date: December 3, 2023
Hosts: Ben Gilbert and David Rosenthal
Guest: Gaurav Ahuja, Investor at Thrive and Founder of Imprint

1. Introduction and Guest Background

The episode kicks off with Ben Gilbert welcoming Gaurav Ahuja to ACQ2, highlighting his dual role as both an investor at Thrive and the founder of a Thrive-backed fintech startup, Imprint. Gaurav shares his appreciation for the show's meticulous exploration of Visa's history and his excitement to delve deeper into the current payments ecosystem.

Gaurav Ahuja [00:11]: “I was excited to give it a listen and you guys do such a good job just going through the history in the most meticulous way possible.”

2. Understanding the Payments Ecosystem: Interchange and MDR

Ben introduces the topic by explaining Thrive's evolution from a $40 million fund in 2011 to managing $15 billion with a focused team. The conversation quickly shifts to the mechanics of the payments ecosystem, particularly the Merchant Discount Rate (MDR) and interchange fees.

Gaurav clarifies the distinction between MDR and interchange:

Gaurav Ahuja [07:00]: “And most of it is going to interchange. So say, just to use hypothetical numbers, say Visa sets the merchant discount rate for a card scheme at 200 basis points. So 2% of a transaction is going as MDR, only 10bps...”

3. The Role of Rewards and Customer Acquisition for Banks

The hosts and Gaurav delve into how banks leverage credit cards not just for revenue but as a strategic customer acquisition tool. Rewards programs play a pivotal role in attracting and retaining customers, acting as a bridge to other banking products.

Gaurav Ahuja [10:14]: “They still rank in one of the more profitable categories. My only point is that they are willing to take transactors on because they can still cross sell all of these other products for decades to come.”

4. Gaurav's Perspective on Interchange Rates and Market Equilibrium

Gaurav challenges the common narrative that interchange fees are rapidly declining, arguing instead for a market equilibrium maintained over the past 13 years. He emphasizes the ongoing tug-of-war between banks wanting higher MDRs and merchants seeking lower fees.

Gaurav Ahuja [05:06]: “It's now 2 to 3%. But that's only true if you look across a very, very long time horizon. The reality is... we've found this market equilibrium.”

5. The Impact of the Credit Card Competition Act

A significant portion of the discussion centers on the Credit Card Competition Act, a proposed bill that could force banks to offer multiple payment networks on their cards, potentially lowering fees for merchants. Gaurav explains how this mirrors existing structures in debit cards but could introduce new dynamics for credit cards.

Gaurav Ahuja [73:44]: “It's probably the most active version of a proposed act that could threaten credit card merchant discount rate today.”

6. Fintech Innovations and the Emergence of Imprint

Gaurav transitions to discussing his startup, Imprint, which specializes in creating co-branded credit cards for large merchants. Imprint aims to shift part of the interchange revenue back to merchants, enhancing loyalty programs without additional costs.

Gaurav Ahuja [28:53]: “So if you have any Southern listeners tapping into this episode, we work with HEB, which is a top five grocery store in the country that does about $40 billion of revenue.”

7. Technology’s Role in the Evolution of Payment Networks

The conversation highlights how advancements in technology have enabled more sophisticated and tailored payment solutions. Gaurav praises Visa's Cloud Connect API, which allows startups like Imprint to integrate directly with Visa's network, fostering innovation without traditional gatekeepers.

Gaurav Ahuja [46:10]: “Visa has launched something called Cloud Connect... it gives us direct access into Visa Net.”

8. Competition and Potential Disruption in Payment Networks

Gaurav explores potential threats to Visa and MasterCard’s dominance, discussing how companies like PayPal, Shopify, and Square are inching into spaces traditionally held by the duopoly. He speculates on how new entrants could carve out niches by targeting specific user behaviors and vertical markets.

Gaurav Ahuja [71:41]: “The Diners Club was this vertical use case to start because nothing existed before then... Technologies actually made it easier to verticalize again.”

9. Regional Payment Networks vs. Visa/Mastercard in the US

The guest examines international payment networks like India’s UPI and Brazil’s Pix, assessing their applicability and threat level in the US market. Gaurav concludes that while these systems thrive in their local contexts due to different market dynamics, they pose limited threat to Visa in the US given the latter's entrenched position.

Gaurav Ahuja [80:06]: “I think pics and UPI were developed in a really different market environment... the problem is kind of solved.”

10. Thrive's Investment Philosophy and Approach

Towards the episode’s end, Gaurav provides insights into Thrive's unique investment strategy. Thrive focuses on category-creating companies, fostering deep partnerships with founders from the earliest stages, and leveraging a collaborative investment process to refine and validate ideas.

Gaurav Ahuja [84:15]: “We want to find category creating or category defining companies and we want to partner with them as early as possible.”

11. Closing Remarks and Personal Insights

The episode wraps up with personal anecdotes and reflections on the value of studying both historic and contemporary business models. Ben and David commend Gaurav for his contributions to the fintech landscape and Thrive’s innovative approach to venture investing.

Gaurav Ahuja [93:30]: “All of these things are... this 20% is both where the challenges are going to exist. It's also where the opportunities are for a bunch of startups out there.”

Ben Gilbert [94:18]: “The complicated story of payments today is you can get the general gist. But to really be successful in this ecosystem, understanding all the corner cases and all the dynamism in the industry right now is actually extremely important.”

Key Takeaways:

• Interchange and MDR Stability: Over the past decade, interchange fees and merchant discount rates have reached a market equilibrium, contrary to the belief that they're continuously declining.

• Rewards as Strategic Tools: Banks use credit cards and their associated rewards programs as effective tools for customer acquisition and retention, facilitating cross-selling of other financial products.

• Fintech’s Innovative Edge: Startups like Imprint are revolutionizing merchant rewards by enabling co-branded credit cards that redirect interchange revenue to enhance merchant loyalty programs.

• Regulatory Landscape: The proposed Credit Card Competition Act poses potential challenges to the existing payment network dynamics by introducing mandatory competition on credit cards.

• Technological Advancements: Modern APIs and direct integrations, exemplified by Visa’s Cloud Connect, are enabling fintech companies to offer more specialized and efficient payment solutions.

• Potential Disruptors: While Visa and MasterCard maintain a stronghold, companies like PayPal, Shopify, and Square are exploring niches that could gradually erode the duopoly’s dominance.

• Investment Insights: Thrive’s approach emphasizes deep partnerships and early-stage collaboration, aiming to back category-defining startups that can leverage evolving payment ecosystems.

This episode offers a comprehensive exploration of the current payments ecosystem, highlighting the interplay between traditional banking structures, fintech innovations, and regulatory shifts. Gaurav Ahuja’s expertise provides listeners with nuanced insights into the complexities and future trajectories of payment networks, making it an invaluable resource for investors, founders, and anyone interested in the evolving landscape of digital payments.