Since going public, Visa's expansion plans had to be well calibrated to not upset a lucrative business while trying to take advantage of upcoming trends. Visa's M&A considerations ere driven by the following factors:
Ecommerce segment is more lucrative: Prima facie it makes sense. The interchange rates charged for credit card payments is around 1.8%. However, ecommerce merchants pay around 2.5%+$0.30. This provides payment gateway providers, such as CyberSource revenues of around 70 bps. This kind of revenue is huge, considering that the financial risk as a payment gateway service provider is minimal. The percentage revenue to a payment gateway provider in only second to that of an issuer.
Mobile Payments are coming: They will change the dynamics of merchant acquiring, not in as far as displacing incumbents, but as they are expected to take a significant share of future growth. This holds true for both developed and emerging economies.
Brick-n-Mortar still rules: While ecommerce and mobile payments have folks gushing, transaction volumes from these sources account for less than 20%. The bulk of the revenues come from brick-n-mortar stores which Visa wouldn't want to impact.
Visa's decision to acquire CyberSource met these criteria. Having said that, it is not clear how much of the upside from ecommerce CyberSource can deliver to Visa. It is interesting to note that CyberSource's revenue per dollar processed is only 22 bps (Revenues of $265M from TPV of $120.4B). This is pretty small compared to expectations of over 50 bps. However, CyberSource's TPV per merchant is also a whopping $400K/merchant/year ($120.4B from 300K merchants). The high number is consistent with CyberSource's clientele of both high-volume retailers and SMB online merchants. Compare this against PayPal's TPV of over $10,000 per merchant per year ($20.1B/quarter from 8M merchants).
Consequently, the opportunity then for Visa is to increase both revenues per transaction, and revenues per dollar processed. Additionally, the mobile payments world will be dominated by lower value transactions and smaller/micro merchants which requires the payments service provider to have low acquisition, fixed and variable costs. Both Visa and CyberSource are both used to medium and large retailers. To effectively compete and take advantage of mobile payments, the new entity has to fill the above holes, either thru' internal capability or thru' yet another acquisition.
While the acquisition looks like a base hit, it will require a lot of chutzpah from Visa's management to convert it into a triple, which Visa really needs if it is going to be something more than a payment scheme (which its shareholders demand) and to take on PayPal in any meaningful manner.
Saturday, April 24, 2010
Tuesday, April 20, 2010
Electronic Cash in India: A conversation with S Fareedi
I spoke with Mr Seemab Fareedi, Senior Manager, Smart cards division, Sodexo India to understand the opportunity for electronic cash instruments for micro/small payments in urban India. India is a fast growing market holding promise for a lot of industries. I wanted to find out from Seemab whether the broad based optimism holds for electronic cash as well. Below are the excerpts of the conversation:
Manju: How much of a problem is cash handling for small merchants in quick serve restaurants (QSRs)?
Seemab: Merchants like to handle cash. This is as much cultural as it reflects the high interest rates that merchants have to pay for short-term loans for informal sources. Additionally, labor is cheap to both handle cash with customers as well as to process cash at the back end.
Manju: How practical / attractive is cash displacement (use electronic cash [payment cards] instead of physical cash) in QSRs?
Seemab: The cost of handling physical cash is not as high as it is in the west (primarily due to low labor costs). Additionally, the special place that cash holds in the culture of small merchants far outweighs the benefits of electronic cash
Manju: How attractive is the business of acquiring transactions from QSRs?
Seemab: The MSC is pretty low in India (1.25%-1.5%). When combined with low ticket values in QSRs of $1-$6, QSRs are not very attractive / viable to payment processors.
Editorial Note: While the interview was around QSRs, the points made are as applicable to other similar use cases, including paper/magazine stands, coffee shops...
Manju: Prepaid telecom service plans revolutionized the telecom industry in India with over 95% of all consumers using prepaid plans. Does this success usher in similar innovation trend in the payment industry?
Seemab: Indian regulators have been very proactive in regulating the prepaid industry. They are very specific in what a service provider can and cannot do based on the role they play in the payments value chain. Additionally, they expect sizable balance sheets from service providers. While this is good for consumers, it virtually eliminates startups from innovating in this space. It is debatable whether consumers would have been the beneficiaries if startups were allowed to bring innovative products to the market (though some of them would have failed). In addition to this, telecom operators in India are yet to gain that level of trust which a bank enjoys for handling money and subsequently payments. However there are few instances where telecom operators and banks have team-up and synergized to create very promising payment instruments like m-wallets or SMS-enabled payments. We need to wait and see whether it is really successful.
Manju: How attractive are prepaid cards for consumers?
Seemab: While prepaid cards, like other payment cards, are attractive to consumers, the chore of loading funds into the prepaid wallet is inconvenient. As internet penetration is still not universal, consumers have to use physical kiosks to load value which significantly reduces the utility of prepaid instruments. Indian population is fairly under-banked and it can be a hindrance & could impede the prepaid proposition here. Sometime back India had around 403 million mobile users. About 46% of them, or 187 million, did not have bank accounts.
Manju: Mass Transit services are being deployed in a massive scale across large cities in India. Does this trend impact the perception of electronic cash?
Seemab: Mass transit has the capability to change behavior, both consumers and merchants. Innovations coupled with transit wallets is the silver lining in the cloud. Only time will tell how regulations will affect/impact this opportunity.
Manju: Seemab, thanks for your forthright comments and perspectives on the Indian market. I am sure that the readers will benefit from your experience.
Note: The views expressed here by Mr Seemab Fareedi are purely personal and does not reflect company's stand or viewpoint.
Look forward to your comments, questions and observations about the above perspective and insights.
Manju: How much of a problem is cash handling for small merchants in quick serve restaurants (QSRs)?
Seemab: Merchants like to handle cash. This is as much cultural as it reflects the high interest rates that merchants have to pay for short-term loans for informal sources. Additionally, labor is cheap to both handle cash with customers as well as to process cash at the back end.
Manju: How practical / attractive is cash displacement (use electronic cash [payment cards] instead of physical cash) in QSRs?
Seemab: The cost of handling physical cash is not as high as it is in the west (primarily due to low labor costs). Additionally, the special place that cash holds in the culture of small merchants far outweighs the benefits of electronic cash
Manju: How attractive is the business of acquiring transactions from QSRs?
Seemab: The MSC is pretty low in India (1.25%-1.5%). When combined with low ticket values in QSRs of $1-$6, QSRs are not very attractive / viable to payment processors.
Editorial Note: While the interview was around QSRs, the points made are as applicable to other similar use cases, including paper/magazine stands, coffee shops...
Manju: Prepaid telecom service plans revolutionized the telecom industry in India with over 95% of all consumers using prepaid plans. Does this success usher in similar innovation trend in the payment industry?
Seemab: Indian regulators have been very proactive in regulating the prepaid industry. They are very specific in what a service provider can and cannot do based on the role they play in the payments value chain. Additionally, they expect sizable balance sheets from service providers. While this is good for consumers, it virtually eliminates startups from innovating in this space. It is debatable whether consumers would have been the beneficiaries if startups were allowed to bring innovative products to the market (though some of them would have failed). In addition to this, telecom operators in India are yet to gain that level of trust which a bank enjoys for handling money and subsequently payments. However there are few instances where telecom operators and banks have team-up and synergized to create very promising payment instruments like m-wallets or SMS-enabled payments. We need to wait and see whether it is really successful.
Manju: How attractive are prepaid cards for consumers?
Seemab: While prepaid cards, like other payment cards, are attractive to consumers, the chore of loading funds into the prepaid wallet is inconvenient. As internet penetration is still not universal, consumers have to use physical kiosks to load value which significantly reduces the utility of prepaid instruments. Indian population is fairly under-banked and it can be a hindrance & could impede the prepaid proposition here. Sometime back India had around 403 million mobile users. About 46% of them, or 187 million, did not have bank accounts.
Manju: Mass Transit services are being deployed in a massive scale across large cities in India. Does this trend impact the perception of electronic cash?
Seemab: Mass transit has the capability to change behavior, both consumers and merchants. Innovations coupled with transit wallets is the silver lining in the cloud. Only time will tell how regulations will affect/impact this opportunity.
Manju: Seemab, thanks for your forthright comments and perspectives on the Indian market. I am sure that the readers will benefit from your experience.
Note: The views expressed here by Mr Seemab Fareedi are purely personal and does not reflect company's stand or viewpoint.
Look forward to your comments, questions and observations about the above perspective and insights.
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