The impact of interchange going toward 0 should be negligible for V/MA, perhaps even a positive as it provides opportunity for networks to expand their services
Visa Announces earnings today at 5pm, the big question institutional investors are asking me is about the Amazon – Visa discussions.
There is a payment cluster war going on right now and it is the subject in the C Suite in Banks and the Payment industry. The battle is happening at every level. I’ll be leading a panel at Money 2020 which addresses several of these items, with participation from V/MA… should be interesting. Here are a few updates.
if Google had challenges pulling off POS innovation (after ~$1B in investment), rest assured you will too. Banks are well positioned to throw sand in your gears … focus on delivering value within merchant –consumer relationship.
Banks don’t really want consumers to choose… not really… they will make their favored option seamless and ensure friction with everything else. This is normal business behavior, but payments are a networked business. Banks SHOULD be neutral here.. they DO NOT direct commerce but support it.
18 July (Updated from 17 June 2011
). Corrected significant error on scope of Visa Wallet. It is much more than an autofill (point 4 below)
Previous Blog: Visa’s mobile portfolio
I’ve been thinking about Visa’s wallet strategy this week. From my last blog (Visa Digital Wallet)
… a non-announcement, a rebranding of what CYBS and PlaySpan already have. Too many teams are angling to create the wallet (mobile, online, …), and not enough focusing on the value of what is in it. Google, Apple, and RIM will win the mobile wallet wars. I guess I can’t blame Visa for trying.. however it would have been nice if they could have been successful at eCommerce to start with.
Here are the questions I’m trying to answer:
- What is their investment thesis?
- What assets are they trying to leverage and what opportunity do they plan to attack?
- What is their strategy in attacking the opportunity?
- How will the banks react/support this strategy?
For those that haven’t read my blogs for 2 years.. let me restate a few points that I’ve made previously:
- Visa has a very big hole in their earnings with Durbin.. not only will they loose substantial debit revenue.. they could be loosing debit forever… as member banks assess whether signature debit makes sense to continue… and create a centralized bank switch for PIN debit (ala SVPCo or TCH). Merchants and consumers both prefer PIN today. I don’t believe Visa has adequately described this debit driven financial risk to the investment community.
- Visa is attempting to fill the debit void with new transaction types, services and “cash replacement”. The top 2 prospects are G2P payments (payments by a government to people.. from pensions to welfare) and “mobile payments”.
- There are 5 classes of mobile payments: 1) mobile initiated bank payments (ex. Monitise, , Cashedge, send your bank a message to transfer funds as in bill pay). 2) mobile commerce payments – digital (ex iTunes, PayPal, BilltoMobile, Boku, Bango, …), 3) mobile commerce payments – physical goods (ex Square, Amazon, Visa Wallet, PayPal, Bango, ..) 4) Mobile phone as a wallet – Physical device at point of sale (ex, NFC Google Wallet, 5) Mobile Money for Unbanked (MMU) (ex MPesa, GCash).
- Any initiative above is profitable for Visa only if: it replaces cash/other electronic (ex G2P), drives a transaction into higher margin product (Debit to Credit), increases number of transactions (customer use), or increases use of processing services (ex CYBS). Monitise obviously did none of these.
- The big issuers are not fans of Visa’s moves in mobile and innovation. Visa is beginning to walk on toes and create “universal services”, many of which overlap with the large issuers have competing plans (alerts, offers, mobile, P2P).
- Visa’s wallet value proposition (and solution) go something like this: Here is an API for your online banking.. consumer clicks on Visa Wallet and their card(s) get automatically stored in our digital wallet for use at any merchant site.. and a new Visa wallet account is created. Bank, you benefit by increased card transaction fees (use) and enable your customers to pay for digital goods with their Visa card in a one click service that delivers better consumer experience. Issues are that Visa has not signed up any of the top issuers and are also very dependent on PlaySpan’s existing consumer base. Most merchants don’t like the idea of helping out banks.. or Visa.. In order to change consumer behavior, and drive usage, a value proposition is needed. Are consumers doing digital goods payments today? Yes.. what does Visa do for merchants that BTM, Zynga, PayPal.. and others don’t? Options: 1) Use our CYBS processing, 2) use API only and “form fill” to leverage your existing processor, 3) Liability shift and reduced interchange for attempted VBV use. This last one has not be covered significantly .. may delve into with future blog.
- Visa is attempting to evolve its debit network from “debit” to bi-directional (see my VMT blog) with the OCT transaction set. This would enable it to compete with ACH and deliver services like P2P with little bank involvement.
What is Visa’s investment Thesis?
My guess is this “ replace the debit hole by leveraging our existing customer footprint into new transaction types, expand card acceptance and create customer stickiness with new products and services that work in every channel”
Assets to Leverage?
- Consumer account holders. I don’t call them Visa customers because they are not.. they are customers of the issuing bank. If a bank wants to rebrand their portfolio (to Mastercard, Amex, or a new white label) they are no longer Visa card holders.. Visa holds no consumer agreements. … BUT they want to..
- Payment Network: Acceptance and services (Bank, merchant, consumer).
- VBV Agreement where liability shift and interchange reduction possible (for ecomm/mcom CNP transactions)
A rather short list. Note that prior to CYBS, Visa held very few merchant agreements… it was the acquiring bank and processor that held the merchant agreement.
Strategy to attack the G2P and Mobile Opportunities?
Visa probably sees the lack of NFC handsets and POS terminals as a deciding factor in delaying any push here. The $600M-$800M in NFC GDV is too small to impact more than 5% of the Durbin hole. I believe they have initiatives lined up against the following business drivers
1. Increase number of transactions (customer use)
- Increase merchant acceptance locations: Square, CYBS, Visa Wallet
- Increase Consumer Use: Visa Wallet, Visa Money Transfer, Marketing,
2. Replaces cash/other electronic (ex G2P)
- Fundamo, Playspan, Visa Wallet, ..
3. Drive transactions into higher margin products (Debit to Credit),
- ?NFC? It would seem this is a “stage 2” plan.. They first need to get consumer’s using the wallet in high volume/frequent transactions. After they get usage.. they can migrate.. It may even line up with another partner like Apple who isn’t quite ready for NFC anything. Visa actually doesn’t seem to like the idea of a card in the phone wallet.. a wallet they don’t control.. they want the card in a VISA Wallet.. a Visa Cloud wallet that they do control..
4. Increase use of processing services… I not going to touch on this now..
Visa’s wallet strategy is a two pronged approach. Consumers will have accounts “auto created” by their issuing bank (at least the ones that implement the wallet API) and
( Old Content 17 June) all by implementing a simple form fill API where Visa’s wallet pre-populates all of the consumer information and payment items on a merchant’s checkout page.
New Content (18 July)
Visa is looking to build a consumer footprint to compliment its CYBS online merchant footprint. To be clear, Visa is looking to grow its eCommerce processing business AND create additional lock in (stickiness) with Visa Issuing banks. Visa will first ATTEMPT to roll out this service first with all CYBS merchants… then get additional merchants to either convert to CYBS or at least Add Wallet as an additional payment type. Chase PaymentTech is expected to take a lead roll.
Value proposition to Merchant
– Merchants will be given a fairly attractive option to reduce CNP interchange with 2 Components: Attempted VBV verification (Visa can reduce merchants rates for attempted 3DS verification) and #2 reduced interchange in volume discounts with key partner banks like Chase.
– Processing Package (cost). Expect Visa/CYBS to aggressively price for non-CYBS merchants
– Single Wallet for online, mobile and perhaps even physical goods
Value Proposition for Banks
– Lock in to Visa (I can’t really think of another one)
This is not a bad strategy… IF the world were standing still.. and if Visa had a positive reputation with merchants. The value proposition here is all built around convenience. It is a good plan.. but merchants have many other options and they know that accepting a new Visa product has always proved to be a Faustian Bargain (aka deal with the Devil).
As a side note, I saw Square’s COO today in a conference. His quote was something like “Square is much more than about swipe.. I wouldn’t have invested if that were the case”. None of us know what this grand plan is.. but obviously it must involve merchants.. and I would hope a better profit margin (from 20-30bps). After he spoke a CEO came up to me and said “the major processors love square (and Chase PaymentTech). Now there is a place for all of the sub prime merchants to migrate toward… Can Square monetize a base of merchants that were outside of the ISO focus and processor interest? They are not doing it today.. How could they possible morph their value proposition into something with higher margin? Keith certainly seemed to imply that Square had a merchant incentive/Groupon/foursquare model in mind. A deal of the day only redeemable at a square merchant? Hmm.. seems like a little bit of a stretch.
See related Visa Press Release here (RightCliq)
The banks knew it was coming, and don’t let anyone fool you that the idea of a flat fee of $0.05-$0.15 was a “suprise” . While Banks are morning tonight, the merchants are having a party..
The banks knew it was coming, so don’t let anyone fool you that it was a “suprise”. The idea of a flat fee of $0.05-$0.15 has been floated for some time. As you can see from graph on right, Visa lost 10% of its value after the announcement. While Banks and Issuers are returning their Christmas presents tonight, the merchants are having a party.. particularly large ones like Wal-Mart who in 2009 had interchange costs of $1B.
As a banker, we invited Wal-Mart to come in and talk to us in 2005. They certainly did not mince words then, I remember a few quotes explicitly “what service do you provide that justifies taking 2% of my sales”?. Another memorable quote “we want to find a model where you pay us to take your card”. Something we laughed off back then, after all who on earth in the bank wanted to design that model? Banks “had it coming”… The interchange rate creep bore too many signs of a
“network” run amok and NO ONE stopped the train. Banks launching campaigns like “skip the PIN and win” to incent consumers to pursue signature debit transactions (200bps+) vs PIN debit. We only need to look at the federal reserve chart on the right to see the lack of market forces here.
I believe this is a “tipping point” event in US cards. We will see merchants aggressively incent use of debit, and the Visa and MA logos will start to come off of our debit/ATM cards, as they do in Canada and Australia (Interac, and EFTPOS). What will the banks do about this revenue loss?
All are looking for new ways to drive other revenue streams into the payment services, particularly around marketing/advertising (see my Blog on Apple iAd). The Visa and MA relationships with the large banks was already showing signs of strain. The large banks will not wait for Visa and MA to develop an alternatives, most are assessing new networks and value channels which they can control (see Googlization of FS). I’m short on V/MA because of this dynamic.
The Federal Reserve’s proposal is open for comments, and there may be a change. But the starting point for the negotiations is quite a bit lower than what the banks were hoping for. My message to Bank CEOs: drop the fight here and find a new model for payments. Don’t let Apple and Google eat your future as well. What will it take? Well for one thing it will take a little collaboration, re-energize a few of your existing consortiums like NACHA, The Clearing House, Early-Warning to develop new models for payments and seed these team with top executives. You can’t take your eye off of this ball, retail payments is less than sexy.. but it is core to your daily interaction with customers.
The biggest story of the week has largely gone unreported. Bank of America (BAC) has taken a $10.3B goodwill impairment charge in 3Q. What does this mean for Visa? Not Good News.
27 October 2010
- Bank of America’s 3Q Earnings (19 Oct)
- Financial Times
- Merchant Payments Coalition Response to BAC Charge
- Visa Downgrade (Bloomberg)
The biggest story of the week has largely gone unreported. Bank of America (BAC) has taken a $10.3B goodwill impairment charge in 3Q.
The Merchant Payments Coalition responded to the impairment charge (reference above)
“With a Federal Reserve decision on debit interchange rates not expected until mid-2011, today’s claims by Bank of America dramatically overstate reality and represent a feeble attempt to divert attention from its mortgage foreclosure problems,” said Doug Kantor, counsel to the Merchants Payments Coalition.
In the 8-K, Bank of America said it plans to take (ref The Street)
“a number of actions that would mitigate some of the impact when the laws and regulations become effective,” but it didn’t provide details about what those actions might be.
Will write more later, but I can assure you BAC is looking for debit alternatives. Given their size, most anticipate a new product driven from both their retail and global card team (including merchant services). So in addition to AT&T/Discover, we will now have another major bank led team developing a new payment product with a multi billion dollar incentive.
What does this mean for MA and Visa? Not good news for US growth.