Note that my Views on Visa have changed substantially.. Charlie just joined 4 months prior.. and that Visa’s issues (described here) were driven by his predecessor.
Todays WSJ article
I’m working on a much more detailed assessment with an analyst team.. this one is short. I just can’t believe the market hasn’t reacted to what is going on.
1) EU banks setting up own network (per article above) .
4) EU banks selling Visa brand to Visa Inc … and may have no cards
I just can’t believe there is no market reaction, or how this could be positive for Visa.. and their 26x+ P/E trailing earnings
Their world is shattering into on us least cost routing. Visa is currently a “star” system and it is evolving to a multi switch “cluster” system where large hubs (Banks like JPM) act as a “star” network to their own cluster/community. From a pure network theory perspective this is much more efficient. (See multipath routing). My view is that MCX would take this a step further by allowing any node point to point access to consumer.
The financial groups that own the European business are exploring a plan to set up their own payments business that would compete against Visa and MasterCard to process credit- and debit-card transactions, according to people familiar with the matter
I believe banks are operating brilliantly here. Banks central execution challenge is to rework the acquiring relationships.. a much bigger challenge in US than in rest of world. In the US it was resolved by allowing JPM to “license” visa net (probably a very low fixed fee for optics). JPM will take every transaction off Visa it can (where Chase Paymentech owns the acquiring relationship). This may be only a 2-3% revenue hit.. but now that the other issuers are clamoring for same deal THIS WEEK, they will either get what they want or shift business to Mastercard. Giving the top US issuers “on us” capability akin to JPM may also only result in a 4% rev hit (cumulative).. but if on us starts to become ON WE then we are talking about 20% cumulative. On we means that the on us banks clear their own, and then also collaborate to clear between themselves in their own consortium. If you take away US Debit card we could see another 10-12% revenue hit..
Back in 2007 Visa prepared for IPO by mandating all transactions route (or report to) VisaNet (American Banker). This of course made sense, from AB in 2005
On Tuesday the association told members that it would require the use of Visanet for any transaction made with a card that bears its logo and is not authorized using a personal identification number. The primary effect of the rule is to remove an exception that Visa had extended for “on-us” transactions, in which the same bank is the card issuer and the merchant acquirer. Prior to the change, the association had permitted in-house processing….
“Processing every Visa transaction is important … to ensure that Visa is in a position to stand behind all Visa-brand transactions,” Mr. Steele said in an interview Tuesday.
…Some processors, most notably First Data Corp., have used the “on-us” construction to skip Visanet for card transactions in which it represented both the issuer and the merchant acquirer. When First Data announced in 2002 that it planned to conduct as many as 15% of its payment card transactions that way, Visa sued and called for a moratorium on the practice. The case is still unresolved.
Visa Inc. has fouled the well in managing bank relationships. You can’t exist as a star network by alienating all your nodes you must have an anchor (gravity). The golden goose that was Visa is now on the menu.
In Europe, the banks already have “on us” least cost routing.. Europe has also made many attempts at a EU plastic payment network. The dynamics there are very, very complex as the central governing bodies (EPC) have limited ability to make local law or enforce/influence local regulations. But the dynamics here are changing. My guess is that EU bank efforts have less to do about improving payment profitability and more about new product and local control. Europe would love to have what China has today in China Union Pay.. (SEPA Card)
See links below for more EU background
All this talk of stars, clusters and destruction makes me think of Black Holes… hope we are not close to that event horizon…