These 5 Startups Are Coming After Visa and Mastercard's Empire

For the past decade, I have been watching the evolution of fintech, and one thing is becoming glaringly evident: Visa and Mastercard's stranglehold for payments is finally getting serious competition.

The numbers tell an alarming story: American businesses forked out an unfathomable $61.6 billion in card fees in 2020-that's a mind-boggling 137% up from what they gave ten years earlier! Given the already razor-thin margins for many a merchant, these increasingly exorbitant fees have now become a riding pain in the neck.

But this is where it gets interesting. A new class of payment companies is gaining serious traction by offering something radical, unambiguously: ways to sidestep the card networks altogether. I have been tracking the most promising challengers, and these five stand out with innovative approaches that are gaining traction.

1. Ripple: Reinventing Cross-Border Payments

Remember the last time you sent money internationally? Probably took a few days and burnt a big hole in your pocket. Ripple is on a path to fixing this outdated system with its blockchain-based RippleNet platform.

Instead of routing payments through multiple correspondent banks (each taking their cut), Ripple allows financial institutions to transact directly. The result-a transfer that settles in seconds, not days, with costs cut by as much as 60%.

What's particularly interesting about Ripple is its strategy. Instead of building a consumer app, they are embedding themselves into the existing banking infrastructure. Over 100 financial institutions have already signed up.

"We're going to make moving money as easy as sending an email," an executive at Ripple said to me recently. That's quite an audacious claim, but they're one of the hottest Series C investments, raising almost $300 million to build their vision.

It has, however, been bumpy. Sensational as it may be, their fervently ongoing lawsuit against the SEC over whether XRP is a security has created a few headaches. But a court ruling this year gave some breathing space. Still, Ripple has been singled out by the U.S. Faster Payments Council as potentially a worthy competitor to Visa and Mastercard for cross-currency payments.

2. Strike: Bitcoin's Lightning Network Hits Main Street

Jack Mallers is truly one of those rare founders with a combination of technical brilliance and contagious passion. His company, Strike, has found a way to harness Bitcoin's Lightning Network for everyday payments in a manner that doesn't force consumers to comprehend crypto.

Now here's the kicker. When you use Strike's app, you're conducting currency transactions in dollars (or local currency), yet behind the scenes Strike makes the payment through Lightning Network. This creates an incredibly fast, almost fee-less payment rail that Visa has no jurisdiction to stop.

"Why should coffee shops lose 3% of each transaction to card networks?" In a conference Mallers posed this question. Strike's answer: they shouldn't.

In a combined effort, they have raised $80 million and haven't shied away from their ambitions. They've been integrated with Shopify and the point-of-sale giant NCR, with partnerships on the horizon with Wendy's and Starbucks.

Unlike most payment processors, Strike makes money through Bitcoin trading spreads rather than merchant fees. This fundamental difference allows them to provide rates that make Visa and Mastercard look downright greedy.

3. Clavaa: What If Processing Fees Really Were Zero?

Clavaa stopped me in my tracks with their pitch: 0% payment processing fees. Not 1%, not 0.5%--literally zero!

Clavaa has built a closed-loop payment system for small businesses that completely bypasses card networks. Drawing inspiration from Starbucks' wildly successful app, they provide local merchants their very own branded payment app doubling up as the best loyalty app around.

"We took what worked for Starbucks and democratized it for Main Street," the founder remarked to me in an interview last month.

The genius is in their model. Because there are no middlemen, Clavaa creates a win-win: merchants escape credit card fees, and customers get better rewards. A coffee shop owner told me in Portland she now gives back half of what she used to pay in card fees to customers in points-but still profits in doing so as they documented in their loyalty programs overview they really went to kill this industry.

The numbers from early adopters are telling:

• A boutique in Austin has seen 37% additional repeat visits following implementing Clavaa

• A restaurant in Chicago saved $27,000 every year in processing fees

• A salon in Miami upped customer retention by 41%

For a small business that operates on subtle margins, Clavaa is nothing short of revolutionary.

4. Flexa: Making Crypto Payments Actually Work

Although crypto payments have long been promising to take on Visa, the majority of the solutions have been, at best, clumsy. Flexa stands apart from the crowd.

Last month, I watched a demo where a person purchased groceries using Bitcoin through Flexa's system. The cashier didn't even know it was a crypto transaction-the register displayed a normal payment, instantly approved.

The trick is that Flexa's collateral system works with the Amp token. When you spend with crypto, some Amp tokens are temporarily locked against it. This allows Flexa to instantly guarantee the vendor payment in their required currency. Once the crypto transaction is fleshed out, the collateral is released.

This addresses the two biggest payment problems for crypto: volatility and confirmation times.

For the merchants, the benefits are huge:

• near-zero fraud risk (crypto payments can't be reversed as, for example, chargebacks)

• settlement within seconds, not days

• lower fees than for card networks

• absolutely no special hardware-works on existing point-of-sale systems

Nordstrom, Lowe's, and GameStop are just among the thousands of retailers that have enabled Flexa payments. Given the number of crypto payment startups that have failed before it, I was impressed by both the practicality and merchant-first approach Flexa appears to embody.

5. Trustly: Your Bank Account Is Now Your Credit Card

Born in Sweden, Trustly has been quietly creating something very powerful: a payment network that enables you to pay directly from your bank account with a simple authentication step.

You're always asked to authenticate through your bank app when you choose "Pay by Bank" at checkout, and the funds are sent directly to the merchant-no card network at all.

Thanks to open banking regulations such as Europe's PSD2, this approach gives compelling advantages to merchants:

• Transaction costs cut almost by half as compared to card fees

• Chargebacks almost totally eliminated

• Funds settle faster than with card payments

I spoke to an online purchasing director who shifted 30% of his firm's payments to Trustly. "It's like suddenly realizing that we haven't been paying the electricity bill to someone for the past twenty years," he told me, smiling. "Our cost goes right to the bottom line."

Trustly now processes over $100 billion in transactions a year across 30-plus countries. They were heading toward an IPO at multi-billion valuations prior to pulling it back over regulatory questions regarding customer verification.

Even Visa recognizes the threat-now they want to buy open-banking pioneer Plaid for $5.3 billion, only to have the deal quashed on antitrust grounds.

The Reckoning Is Coming

After my time with all five companies, I am convinced this is the beginning of the end for Visa and Mastercard. They will not go silently into that good night.

They're purchasing the very startups they would have sweated to extinguish and trying to develop their own blockchain solutions while lobbying heavily on Capitol Hill to protect their turf. Their network effects are still so strong-it's tough to stand against "accepted everywhere."

But finally, the merchants have real alternatives that address their biggest complaint: fees. As a result of the rise of these new networks, it is possible that the card-oriented payment system that has existed for decades will see a gradual decline.

This may, for the first time, subject the fees that have long cushioned the profits of Visa and Mastercard to the market discipline permitted by technology. This, of course, spells good news for everybody, except, of course, for the card networks.