Visa India

Have you heard of Visa India?  I came across a news article today referring to such a company.  When you visit the Visa site and select India, you go to Visa South Asia section.

I am not trying to make a big deal of this innocuous article.  Given the background about NPCI, quite a few folks whom I interact with suggest that a Visa India (similar to Visa Europe) is a reasonable market response. 

Visa getting into acquiring business

SBI is teaming up with Visa International and Elavon (Source) to jump start SBI's acquiring business.  It is a critical win for Visa.  In light of SBI being the 800# gorilla in the India, their choice of Visa is intriguing.  Is this the beginnings of Visa's aspirations in the acquiring space?  When Visa decided to acquire CyberSource, Visa was expected to be measured in its interaction with the merchant community so as to not offend its partners, the acquiring banks and processors.  With Visa's intentions of taking CyberSource international, and its move into acquiring business in emerging markets, we might seeing elements of Visa's strategy for the coming decade (at least in emerging markets).  With SBI's interests in mobile payments (primarily driven by financial inclusion and branchless banking initiatives), Visa's JV with SBI becomes even more significant.

What does this mean for NPCI's aspirations and the IndiaPay initiative?

Look forward to your comments on the implications of the SBI-Visa JV.

Visa's acquisition of CyberSource: Potential for growth but not quite a home run

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.

Best Buy suspends NFC reader deployment

A recent issue of RFID Journal discussed contactless payment terminal deployments in North America. The article discussed Best Buy suspending its national deployment of contactless terminal over its disagreement with Visa on how debit cards were processed.

To help understand the issue, let me elaborate with an example. You buy a LCD TV for $500 at Best Buy and choose to pay with your debit card. If you used your magstripe debit card, you would swipe the card, enter your PIN and head home to enjoy your TV. Best Buy would pay about $1 as fees for accepting the card.

Let's look at the scenario where Best Buy has deployed a contactless reader and you whip out your fancy contactless debit card to pay for the LCD TV. You authorize $500 to be debited from your account by providing your PIN and you leave happy. Best Buy would pay about $11 as fees, an extra 1000% for the mistake of deploying contactless readers.

Now you know why Best Buy pulled out these readers. The question is, why did they not pull the readers out earlier. Last I heard, their losses were in 7 digits due to the way contactless PIN Debit transactions were processed by Visa Interlink.

It might be worthwhile to discuss another dimension of deployment of contactless readers here. Visa and MasterCard have positioned contactless payments as an option when speed and convenience are of the essence [for transactions less than $25]. You are at a Coffee Shop. You 'wave' your card to pay the $3 for your caffeine fix and run. No need to sign, no PIN necessary, no receipt. Makes sense. However, for users to get used to waving their cards at readers, these readers need to every where. Otherwise, its one more decision point (and aggravation) for the user to figure out whether they swipe, wave or insert their card. Consequently, Best Buy, Home Depot and other retailers deploying contactless readers are getting us to the critical mass where you can 'wave' whereever we pay. Interchange rules that are currently geared towards speed and convenience need to modified to accommodate ubiquity as well. One hopes that this change will come soon so that Best Buy can go back to having nationwide deployment of contactless readers. I have to say that I enjoyed waving my card at Best Buy readers. Sigh!

[Updated 07Jan2010]: Wanted to inform readers that Best Buys has stopped accepting Visa contactless cards (source).

What do you think?

Interchange fees, innovation & disintermediation

There has been a lot of debate on the level of interchange fees (aka merchant discount rates - the fees paid by the merchant for accepting an open loop network card), and the role it plays in fostering commerce.

Supporters, typically issuers, says it fosters innovation, increases sales at stores... Opponents, typically merchants, says that the fees paid by merchants are subsidizing issuers marketing programs. Interchange fees were not particularly controversial until the proliferation of reward cards. The interchange rates for reward cards are at least 20 basis points higher than for the basic card, and are therefore balked at by the merchants especially those that have slim margins.

In a world where intense competition is getting organizations to review every single expense, merchant's focus on interchange rates is not misplaced. In the 'old' days, merchants did not have much of a choice and came to terms with the world dictated by Visa/MasterCard.

However, new entrants are changing the landscape. Paypal, Amazon and Apple have tremendous market reach. They have the ability to be an alternative to the payment networks. This is already true for Paypal in the US ecommerce world. Amazon is well on its way as well.

It is not obvious to me that focus (or limits) on interchange rates implies reduced innovation. There is plenty of innovation taking place in the payments industry, outside of the realm of the traditional payment networks. This innovation is not being funded by interchange fees. Innovation will continue

Having said that, I agree that Congress must not try to mandate interchange rates and stifle the competitive nature of the payments industry.

Do you support limits on interchange rates? How does the disintermediation of payment networks in the online world extrapolate to the offline/retail world? Is iPhone providing a glimpse of what may be looming on the horizon?

Innovations, such as EMUE's card, can get us going again

Very rarely do you see so much buzz about a new payment technology as EMUE's display cards. This is indeed an exciting innovation. This card has the thickness of a traditional credit card, while it has a 8-digit display, 12 digit keyboard and a battery that last 3 years! Wow, this is truly amazing.

This product has the potential of being applicable in a variety of markets, including the US.

The ability to leverage the above product features to support MFA (multi-factor authentication) using a single device is what makes this product exciting. To appreciate this innovation, compare against the Gemalto CAP (Chip And PIN) reader being tailor-made for Barclays (PINsentry) to support MFA for online commerce. Who would want an add-on device if your payment card can do it all? The additional cost of the EMUE card (costs 5 times as much as an ordinary card to manufacture) looks inexpensive when compared to shipping CAP readers to customers.

I see an immediate opportunity to use this card for MOTO (Mail Order Telephone Order) transactions. Visa is piloting this card with bank(s) to complement VbV (Verified by Visa). I am not sure that the problems that merchants and consumers have with VbV will be addressed by using EMUE's card.

You get so excited when you read about such innovations that you forget that the economy is supposed to comatose.