Visa – Golden Goose is Now on the Menu

The golden goose that was Visa is now on the menu.

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.

March 2013

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) .

2)      US banks setting up own network

3)      JPM setting up own network

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.  tn_colliding_galaxies

From WSJ

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…

10 thoughts on “Visa – Golden Goose is Now on the Menu”

  1. Well first Visa’s P/E trailing is not 71x – that includes slew of charges around merchant litigation settlement that is both one-time and that Visa is not responsible for.So fair to use accurate P/E and P/FCF.

    Second – does setting up own network suffice to change consumer behavior, and JV between players in any industry (much less banks and much less European banks) have consistently been utter failures. It is not that surprising that the market is more sanguine on this possibility – V can lever up and buy Visa Europe (which is good for their capital structure), it will be accretive to earnings, and the combined business will be likely more rational competitor than Visa Europe has been. Some portion of incremental volume has to come in at nice incremental margins.

    Yes there are potential threats – though it makes no sense for banks to attack the source of their interchange pricing (and plausible deniability they have in where interchange is set), but banks rarely do anything particularly smart so let’s see.

  2. Great last line.. There are successful bank consortiums.. Visa, TCH, EWS, NACHA, Round Table, … but almost all are “internal”. Working with the exec teams at several banks, I believe it is safe to say that most are questioning if a 4 party network can innovate and compete. Previous attempts at payment were not meant to address FUNDAMENTAL business challenges.. but rather squeeze a little more profit from control. Banks locked into 4 party networks are now at risk of loosing market opportunities to 3 party models that can collaborate with retailers and at POS. Interchange/MDRs are no longer on an upward trajectory. How can banks change? JPM is currently the model.

    1. Are banks not the source / bottleneck in the innovation? This is a Gorilla game – and instead of leveraging an existing network and innovating around that, banks think that they can be most successful by not only innovating and become relevant for consumers/merchants but to then also recreate an entirely new network? Their probability of success even in current construct is questionable – but by the time they build out a network and then successfully convince consumers that JPM is actually a consumer brand, this game may be long over.

      Cardlytics is the best I have seen so far on leveraging the real power of the banks – the rich data – to drive very real value to consumers and merchants. Help us understand why having own network brand (vs within V/MA brand – maybe even customizable sub-networks, fine), suddenly changes the game and makes Banks have great merchant relationships and consumer interaction? Doesn’t this just open the Kimono on interchange and the only likely outcome is interchange is reduced?

      The major problem in the 4-party network are the Banks – they don’t seem to get it in the slightest – and are focused on rebuilding the wheel when they are competing with breakneck speed competitors. They have the Data – that is where the power lies. Just as telecoms should become the mobile authentication vehicle (and not a payments player) as back end to payments, banks should be the definitive data providers to dramatically increase ROIC of marketing and CRM.

      This create your own network stuff is telling of how little they get it in my view.

      1. Issuers, acquirers, processors, networks, ISOs are all working in their respective best interest to “innovate”. Each are inhibited by their internal issues, as well as those associated with the network in which they operate. Each seems to be more effective in throwing sand in the gears of someone else.. then they are in doing something themselves.

        Three party networks have fewer coordination points, they can set their rules and acquire both consumers and merchants. See blog .

        Don’t look at this as “create your own network” think of it as multiple switches on a network. Visa is currently a “star” system and it is evolving to a multi switch system where large nodes (Chase) can choose to route themselves. From a pure network theory perspective this is much more efficient. (See multipath routing)

        I agree on re-building the wheel.. perhaps back to the future. Before Visa and the 6 PIN debit networks there were isolated networks with no interoperability or universal acceptance. Visa was a bank controlled entity that acted as such.. now they must act in their own interest. But their business is completely dependent on banks. Banks rightfully look at a Visa exec team with individual net worths of $100M+ and ask themselves “how did we let this happen”? Payment services are a core business to us… Visa is a rather dumb service.. a directory and set of rules. The forces that resulted in US banks throwing away their acquiring businesses have reversed. Merchant relations and merchant services are core to delivering new services (like cardlytics). Now that universal acceptance is in place, why not create another brand? Sure it will likely fail.. but JPM’s brilliance is to try without dumping universal acceptance. They can take what they want (by the drink).

        Also, Cardlytics is far from a success. Spending your own venture capital to prime the pump on ads, and then sourcing the other 50% from commission junction leads to few real sales/ad dollars. See my CLO blog

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