Visa’s Amazon blues will shape digital cash debate

After a long time, the balance of power in the world
of money is shifting. Amazon.com Inc’s decision to stop accepting purchases made with Visa Inc’s UK-issued credit cards from next year shows that Big Tech is flexing its muscles against established financial networks. Some policy makers must already be thinking, “This is why we need sovereign digital cash — to stop a bunch of unregulated players from calling the shots in payments.” But is it really that simple?
The immediate fallout of the fracas over Visa’s high fees may be to give a boost to rival Mastercard Inc, and not just in Amazon’s UK business. The long-term effects,
however, may run far deeper. E-commerce platforms are gaining an upper hand in negotiations with card networks.
In the not-so-distant future, they could use this market power to restrict customers to only using their in-house payment tokens, a
possibility raised by Princeton University economist Markus Brunnermeier and others. We won’t be
able to say no, because we simply can’t bear the thought of not being able to buy sneakers online, or at least an NFT version of them for our digital avatar.
E-commerce and social media giants could use this cash flowing into their tokens to offer credit to merchants, with repayments deducted on every sale at zero collection cost. Realising that banks’ conventional business models won’t stand a chance in this connected world of payment, lending and commerce, some countries might accelerate plans to provide digital cash as a public utility, which could be made illegal for any platform to refuse. But in doing so, policy makers may end up hurting sellers to protect buyers.
Small merchants want credit at cheaper rates than banks provide, and it’s beginning to look like they can get it from platforms by committing themselves to accept payments in tokens issued by Big Tech. However, if central banks push their digital currencies as mandatory legal tender, then the transactions would go dark: E-commerce sites won’t be able to automatically collect loan repayments via self-executing software code, or smart contracts, and small businesses may be denied their shot at really inexpensive credit.
This is just one tradeoff among several. Think of how banks’ card business might be impacted by the arrival of central bank digital currencies, or CBDCs. You decide to buy a book on Kindle, using your brand-new credit card. Before you’ve drawn down your credit line, the lender’s balance sheet — in the words of Stanford University economist Monika Piazzesi — is “empty” and free.
The game will change if the central bank signs up as a player.

—Bloomberg