Visa Acquires CyberSource for $2B

22 April 2010

CYBS/Visa Presentation

CYBS 2009 10K

126x earnings? $3M/employee  Why? Did  Carl Pascarella (former Visa CEO added to  CyberSource Board of Directors on March 5, 2009) intend to drive this when he joined the CYBS BOD?

Part of the job of any payment network is to ensure a balance between network efficacy, profitability, risk and “value” received by each participant. (

CyberSource bills itself as the “The World’s First eCommerce Payment Management Company” and initially focused on enabling “bricks and mortar” retailers expansion into the online channel. CYBS has evolved to provide global turn key services to any retailer selling goods online… from payment to distribution (ex. Digital software).

CYBS 1009 10K

Our customers range in size from small sole proprietorships to some of the world’s largest corporations and institutions. Our customer base includes leading companies such as Air France, Borders Group, British Airways, Christian Dior, Eastman Kodak, Home Depot, Louis Vuitton, Massachusetts Institute of Technology, Microsoft, Nike, Starbucks, and Yahoo!, among thousands of others. To properly serve this diverse set of needs, we divide our potential market into two customer profiles, enterprise and small business merchants, which require different solutions.

Enterprise merchants have high sales volumes and generally demand the greatest range of payment options and the most sophisticated risk and management tools. These customers often sell in multiple countries and require support for local currencies and local payment options. Enterprise merchants also frequently need to integrate payment processing with one or more internal business systems. We serve enterprise customers by providing solutions that address and simplify the breadth of these requirements.

Small business merchants generally seek simplicity and ease of use. We serve small business merchants by providing bundled services and integrations into popular online shopping cart software, while bringing to the small business market some of the advantages of our enterprise-level services, including important new payment options such as electronic checks, as well as high-reliability and quality customer support.

Retailers face huge hurdles in building teams capable of navigating the complex rules and regulations associated with processing payments from PCI, Sepa, CARD, Reg E, Reg Z, … etc.  The very existence of CYBS (and competitors below) show the market for value added services as a precondition to Visa’s goal of: EXPANDING THE NETWORK.

We face competition from merchant acquirers, independent sales organizations, and payment processors such as Chase Paymentech, First Data Corporation, and Royal Bank of Scotland. We also face competition from transaction service providers such as PayPal and Retail Decisions, as well as eCommerce providers such as Accertify, Inc., Digital River and GSI Commerce Inc. Furthermore, other companies, including financial services and credit companies may enter the market and provide competing services. Another source of competition comes from businesses that develop their own internal, custom-made systems. Such businesses typically make large initial investments to develop custom-made systems and therefore, may be less likely to adopt outside services or vendor-developed online commerce transaction processing software.

Cybersource will provide Visa with an enhanced portfolio of services which could address merchant needs, particularly in risk, compliance, payment/fraud operations. However the expansion of Visa into these services poses a substantial risk to its business model as it runs the risk of alienating acquiring banks and other processors. Currently, I would view that risk as small because of the tremendous issues associated with online (eCommerce/mCommerce) payment system integrity and fraud.

This is a bold move by Visa to drive network expansion, in mCommerce and eCommerce, and expanding value added services which cover ownership of payment risk and operations. The price does seem high if we view integration without synergies (CYBS will have to run at a 45% CAGR to be accretive in a 10 yr horizon). Therefore, Visa’s business case must be driven by new services which can be offered in the short term to all merchants and acquirers (ex Fraud data sharing, digital goods distribution, …).

Can Visa grow this business more effectively under the Visa brand? Absolutely, but expect other network participants (issuers, acquirers, processors) to pressure Visa into managing CYBS as a separate entity. It is important to note that there is no love loss between most merchants and Visa. To address this, Visa should lead with a road show on how it will deliver value. Example.. it will take on fraud loss responsibility, improve marketing and take on compliance risk.

Tangentially, I believe Visa will also likely add significant $$ to merchant marketing programs. Visa is investing heavily in a new mobile marketing/advertising engine... that will sit on the Visa switch. Their existing merchant agreements do not handle this kind of “marketing” services agreement so they needed a new contract vehicle. Given CYBS’s merchant footprint, they now have vehicle which can be leveraged to expand the advertising business in a turn key model which also tracks fraud and fulfillment.

Mobile Money: Emerging Markets/Emerging Models

Regulators need to allow closed systems (for mobile money)

18 April 2010

As I stated in my previous post (reference)

Regulators in Africa and India working actively to ensure consumers (and the global banking system) are protected in the exciting confluence of mobile and finance. Their involvement is completely appropriate given the opportunity to improve the lives of millions of unbanked people around the world. Defining responsibility and the commensurate controls associated with connecting non-traditional (unregulated) networks to highly regulated banks is a herculean effort which may lead emerging markets to remake a “payment system” that is more efficient then that which exists in today’s developed countries. This opportunity for “leap frog” improvements will be driven by the unique path toward evolution given existing infrastructure and consumer penetration of both financial services and telecommunications.

Bank Regulators in emerging markets face many challenges in expanding basic payment and (mobile money) services to the rural poor and unbanked. The MNOs have proven their ability to delivery services to these consumers, and are therefore the entities most capable of delivering services. Governments and regulators must continue to encourage investment and innovation by MNOs, and resist the temptation to apply “open network” standards to this quickly evolving area. Although there is substantial academic research on two sided networks which shows social benefit of network “compatibility”, mobile money is clearly an exception (to compatibility constraints) given the absence of profitability for any current provider. Until a sustainable business can be built to serve this function it must be either driven by an existing company prepared to make investment, or by the government in the form of a monopoly. (see Open and closed systems of two-sided networks . Schiff, A. 2003, Information Economics and Policy, 15)

Network business models are complex, whether they are: banks, railways, shipping, telecommunication, cards, electricity …etc. Historically new networked business started as a closed proprietary system which was coordinated by a single “channel master” (or state sanctioned monopoly) which defined standards, and made sustainable capital investments. Early business models seem amusing compared to current evolved uses (Telephone Wikipedia)

At first, the benefits of a telephone exchange were not exploited. Instead telephones were leased in pairs to a subscriber, who had to arrange for a telegraph contractor to construct a line between them, for example between a home and a shop. Users who wanted the ability to speak to several different locations would need to obtain and set up three or four pairs of telephones…. Signaling began in an appropriately primitive manner. The user alerted the other end, or the exchange operator, by whistling into the transmitter.

 Similarly in banking, early in the US there were over 7,000 varieties of paper money until 1861. During this chaos, early US banks each issued notes which were not universally accepted by other institutions (

During this same period (1793 – 1861), approximately 1,600 private banks were permitted to print and circulate their own paper currency under state charters. Eventually, 7,000 varieties of these “state bank notes” were put in circulation, each carrying a different design!.

To reach the worlds poor, the advantages to an “open” system with compatibility and interoperability are clear… in the long term. In the short term, the urgency is to get something started by an entity that is motivated to invest. Regulators should consider the history of successful networks in order to balance constraints, competition and incentives to invest. Regulatory and legislative actions focused on: consumer protections, competition and financial accountability may be the most effective short term focus areas…

Citi/Mastercard beats Visa/BAC to market

8 April 2009

Great Article

As a friend told me this week “if you put an NFC sticker on a bicycle.. is that mobile payment?” Sure a sticker on the back of a phone is not necessarily “Mobile payment” but NFC has taken so long.. who cares? Lets just get started!

Will Citi/MasterCard beat BAC/Visa to market with a US NFC sticker rollout?… Regardless of who is first out of the gate,  I think it will be a win/win for both institutions as significant marketing money is necessary to get this moving. Citi has the upper hand w/ numerous NFC pilots, established card marketing and 55M card accounts.


Although Citi is first out of the gate, Visa has put together a much more impressive array of services which will work for any card and any bank, with more thoughtful “integration” (See FirstData/Device Fidelity/Monitise).

“Let the NFC games begin”.

Note to NFC times:

This US initiative did not originate in Citi’s growth ventures, but rather with US Cards (likely led by mobile guru Kurt Weiss).

Mobile Money – Navigating in the Fog

5 April 2010

Great recap of CTIA session:

Being an ex-Gartner guy I love to analyze the spin machine. What has been the return on the “mobile investment” made by established payment players (approx $500M in US/EU over last 2 years), or the $200M /yr that VCs (MobileMonday services estimate) have pumped in?

As an investor or P&L owner… a look at the hard numbers of teams focused in this space over last 2-3 years would not drive you to bet aggressively on mobile payments. For example, QCOM’s 2009 10-k shows a 4 year old Firethorn unit running at $34M expense generating $3M in revenue (page F-29). This is a “successful” team that had contracts w/ Wachovia, Citi, Chase, USBank, …

Obopay and Firethorn

Citi is out of Obopay

Mobile investment exceptions revolve around delivering short term value or supporting an existing value chain. Within the US, payment data would show that PayPal and the banks are the clear leaders here. Customer listening data shows that the average US consumer today does not view mobile as a separate channel, or a  separate product, but rather as a convenience which supports existing products and relationships. As my mobile head in HK said to me “what is so urgent that I must use my mobile and can’t wait to gain access to my computer”? There are times when all of us do have that urgency, but it is difficult to build a business case on irregular, sporadic use of mobile payment services. There are certainly “niche” needs, but few result in a profitable ‘stand alone’ business case (the banks are very adept at serving the market). It is far easier for banks (or existing players like paypal) to “extend” into the niche then for a new product to enter (the nature of network effects).

Bank of America, Wells, and Chase have solid plans for supporting “mobile payment”. Rather then creating a separate organization, they have treated it as an extension of the existing customer experience (online or on the phone). As the payment head of one of the majors told me 2 months ago “what payment problem can I not address today with one of my current products”? This same “extension” approach is taken by AT&T and PayPal as well, extending existing products and services into a mobile experience.

Within the US, as Obopay/MA, Firethorn, MPAYY and other mobile specialists struggle to keep 2,000 active users (I’m not missing any zeros) existing players are meeting their customers needs and making plans to expand services for a seamless “inter bank” experience.

Similarly, outside the US,  MNOs are extending their existing value chain by adding payment services. All of this seems to prove the axiom that “payments” is a challenging “stand alone” business (perhaps a separate blog on this?).

Beyond value chain extension, there are significant investment opportunities in infrastructure. Mastercard and Visa are very pragmatic here, investing in upgrading “rails”, rules, and “riders” which will drive increasing volume. An example of which we will see from Visa next month in a mobile marketing engine integrated with card use. “Payment innovation” history shows that adoption follows infrastructure 20 years after investment. Early adopters will be the consumers with the compelling need (or the trend setters).  For most US/EU businesses, being a “late follower” has limited downside as infrastructure is built and consumer behavior adapts, there is little risk in waiting.

Within emerging markets, common payment infrastructure is required in linking all nodes of the network: Bank, MNO, Agent, Consumer, Merchant… This is a much more exciting space as consumers evolve from a model where they must travel 2 hours to reach an agent to pay a bill in cash. It would seem that investment will be driven by MNOs as they have developed an economic model which has adapted to serve these markets. MNO efforts will be driven internally and by vendors that already serve them today (example Roamware/Macalla).

Comments appreciated.

Related Post

Bumping payments? Paypal Bump

26 March 2010 (updated April 13)

Excellent Video overview below (30 sec commercial)


I’m reading the CTIA press and see this come out, wondering how my iPhone communicates with another iPhone. The bump application listens to the iPhone accelerometer and when it reads a bump (when running) it sends time and event to the bump cloud. The bump cloud looks for 2 events and then requests that your bump user information be shared (from bump)

When you bump, if we find a match with a phone that felt the same bump, our servers ask each phone to send up the contact information each user chose to share, but nothing more. If and only if both users then confirm that the match is indeed correct will the contact information be sent down to the other person. None of your personal data is ever stored on our servers.

Very ingenious…. What I’m most impressed with is Paypal’s ability to extend itself in niches like this. Their open APIs, ability to manage risk and extend “payment rails” beyond internet merchants is 5-10 years ahead of what any other payment network can do. Beyond the technology side, it certainly helps that  Paypal’s user penetration within the iPhone’s customer base is “rather high”.

This application also highlights the opportunity for NFC in Apple’s platform. For those that aren’t familiar with my previous posts, industry G2 indicates that Visa and AT&T are going without Apple. Obviously a good strategy for AT&T as Apple already has significant leverage in the “relationship”. Of course, NFC P2P will require an intermediary to own “risk” of card acceptance and work through (payment network related) merchant and third party payment aggregator (TPPA)  issues.

From a regulatory perspective, it is fortunate that PayPal has already gone through the “heavy lifting” in obtaining money service licenses in the 50 states (see related post).

What other vendors/payment networks could compete here? A: CashEdge and Money Bookers. In the UK I could almost envision the video clip for a money bookers “Bump Bet”. In the US CashEdge is a 3rd party service provider with 60-70% of US retail deposit accounts in their footprint (BAC, Wachovia, Citi, …). CE has  a much more efficient (low cost) ACH network and is one of the few US companies with proven operational risk management in “remote” payments. CE should look into riding PayPal’s marketing wave and leverage bump technology to allow me to do everything PayPal does,  only directly from my bank account (at no cost). On the regulatory side, Cashedge runs as a bank service provider… in essence you are dealing with your bank to “push” funds (ACH debit) when you use POPMONEY.

Great job Paypal.

First Data

Michael Capellas is gone on the day that earnings are announced. 4Q09 (EBITDA) was down to $530 million compared to $645 million prior year.  As a friend told me yesterday, it is quite telling that they put Joe Forehand (former chairman and CEO of Accenture) as the interim CEO. Accenture has a huge project going on right now to consolidate the 100s of disparate back end systems within First Data.


19March 2010

Previous Posts


What is this? In a nutshell it seems to be a software app that provides for consolidation and creation of pre-paid gift cards. Allowing gift card bar code to be displayed on a cell phone screen so it can be scanned by merchants.

From the SWAGG website we see:

Plastic is lame. You’re not.
SWAGG lets you create a personal digital gift and send it to your friend’s mobile device.

Get hooked up. Way up.
SWAGG stays on tops of your favorite brands so you’ll always be the first to know what’s fresh.

Your wallet is full. Of crap.
SWAGG files all your membership and loyalty points neatly under one button.

QCOM CEO, Paul Jacobs comments at CES “”It lets us conduct all sort of transactions on the go…So we can purchase and personalize gift cards, share them with our friends, exchange them with stores we like better. We can use them to buy stuff wherever we are. We can receive personalized offers, We can get loyalty points, manage our rewards programs.”


SWAG stands for “stuff we all get.” … sounds much more interesting than Firethorn’s initial mobile balance checking application. I’m a little disappointed this isn’t more NFC focused given QCOM’s tremendous IP portfolio. In this “bar code” model, I can’t help but wonder about conflict w/ Apple’s broad payment patent here

Citi “learns lessons” on Obopay

18 March 2010

American Banker 18 March 2010

Good article.. just a little “too kind”. Citi learned that 2,000 customers found Obopay to be a neat way to give kids their allowance. Of course Citi had higher hopes.. but a sender pays model has rather poor incentives in kick starting a “new network” and consumer behavior (See Citi is out of Obopay).  For those in the industry looking for lessons here, Paybox learned them the hard way in the EU. Obopay’s failure is nothing new.. changing consumer payment behavior is hard. Obopay added a few extra challenges as it attempted to execute a payments business plan with an inexperienced team.

Mobile P2P payments is firmly in the Gartner “hype cycle” stage within developed countries..  The short term future for NFC (at the POS) is quite exciting, particularly with AT&T/Visa’s pending pre-paid card. Within emerging markets, Mobile payment is a game changer for MNOs and the unbanked. The ability of any US tech companies to compete within this emerging market opportunity is TBD as NGOs and MNOs throw substantial resources at the problem.

Interesting to see Obopay start positioning as check (i.e. cash) replacement service. So would you pay $0.25+1.5% of your transaction so that you could provide convenience to a merchant? Me? I think I’ll tell the merchant to take my check.

Hey if the first business strategy doesn’t work… move on.. Jack Dorsey’s square model is focused in a good space (not too keen on his solution though). Obopay.. back to the drawing board.

Related posts

ATT-Discover Prepaid

15 March 2010

Previous Post NFC Break Out – VISA/FirstData/AT&T

My updated prediction is now first week of April. This is real.. and it is imminent.

Q: What will it mean when every AT&T subscriber receives a pre-paid Discover card with an NFC sticker? (Note back in March I did incorrectly guess it was Visa instead of Discover)


  1. Tipping point for mobile commerce, ushering in a new era where the mobile phone can transact with a wallet that spans the virtual and physical world, aggregating every other account type and payment instrument.
  2. A new business for AT&T which could drive 30-60% growth in LT revenue
  3. Software REVOLUION. The “Next wave” for iPhone AND the entire mobile commerce ecosystem (see googlization)
  4. New mainstream marketing channel as couponing integrates with payment, location awareness and detailed knowledge consumer behavior/preferences
  5. Card business killer for Bank/Issuer revenue as MNO Pre-paid encroaches on the consumer relationship AND issuer debit/credit products (Decoupled Debit)
  6. Cash replacement for small value payments as merchants of all types adapt POS to accept NFC, and small merchants take out POS terminals in favor of making their phone a cash register
  7. .. would love to hear from you on the next 100…

Business Model

Retention or revenue play? AT&T Universal card changed the credit card landscape in 1990. ATT demonstrated it could both create a card business AND leverage  distribution muscle as it attracted over 10M card holders in under 2 years. Citi acquired the AT&T Universal card for $3.5B+ in 1997 and it remains the largest affiliate card in Citibanks’s portfolio.

The biggest variable with anything “consumer facing” is the marketing investment needed to push it into critical mass. Example, will AT&T develop some program to incent “pay by phone” use like a $50 credit with $200 of spend? Discounted airtime rates? Rewards program? AT&T has proven it can deliver new technology and ecosystems (iPhone and Universal card)… and subsequently has many options.

AT&Ts pre-paid revenue model will likely see MUCH lower margins than their 90s card business, perhaps something of a split between a pre-paid card and a “decoupled debit” (which the US banks have long feared). How will customers “load the funds”? How will they encourage bank funding? Will Citibank get its act together and partner to extend credit (existing universal card holders)?

Given that there are many unknowns, here is my high level estimate on year one financials. Assumptions:

  • 85M subscribers (7M iPhone)
  • Year one penetration of 5% (4.25M or 60% of iPhone base),
  • Average purchase amount $40
  • Annual TPV = 50%(85M*0.05*$40*5*12) = $5B  (note: 50% for linear ramp up)
  • Take rate 120bps (Note there are current issues w/ NFC interchange, see BestBuy)
  • Revenue $60M
  • Processing expense (30% of Rev, 100% ACH funding) – $18M
  • Marketing spend – $50M
  • G&A – $3M
  • 12 mo EBITDA – $(11M)

$11M loss obviously doesn’t take into account many unique one time expenses, but it does provide some insight into the dynamics. It seems as though AT&T is spreading out the other “investment costs” through a consortium of First Data, Visa and a number of smaller companies. I would also expect to see a number of new revenue streams (marketing) as merchants experiment with other new Visa sponsored services like mobile coupons. The tech industry needs an initiative like this to expand the “mobile app” world consumer base beyond its current iPhone demographic.

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