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 make 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.. though 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 control and what opportunity do they plot 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 huge 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 make 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 Check, Amazon, Visa Wallet, PayPal, Bango, ..) 4) Mobile phone as a wallet – Physical device at top 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 dispensation services (ex CYBS). Monitise obviously did none of these.
- The huge issuers are not fans of Visa’s moves in mobile and innovation. Visa is beginning to walk on toes and make “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 made. 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 encounter. 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 thought 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 dispensation, 2) use API only and “form fill” to control 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 small 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 make customer gumminess with new products and services that work in every channel”
Assets to Control?
- 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 mark) 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 everywhere liability shift and interchange reduction possible (for ecomm/mcom CNP transactions)
A rather small 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: Check, 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 “the boards 2″ plot.. 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 really doesn’t seem to like the thought 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 dispensation services… I not going to touch on this now..
Visa’s wallet strategy is a two pronged approach. Consumers will have accounts “auto made” by their issuing bank (at least the ones that implement the wallet API) and merchants will be given a honestly attractive selection to reduce CNP interchange while keeping their existing processor relationships.. all by implementing a simple form fill API everywhere Visa’s wallet pre-populates all of the consumer in rank and payment bits and pieces on a merchant’s checkout page. This is not a terrible 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 excellent plot.. but merchants have many other options and they know that long-suffering a new Visa product has always proved to be a Faustian Bargain (aka deal with the Devil).
As a side note, I saw Check’s COO today in a conference. His quote was something like “Check is much more than about swipe.. I wouldn’t have invested if that were the case”. None of us know what this grand plot 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 like check (and trail PaymentTech). Now there is a place for all of the sub prime merchants to migrate toward… Can Check 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 Check had a merchant incentive/Groupon/foursquare model in mind. A deal of the day only usable at a check merchant? Hmm.. seems like a small bit of a stretch.
International Retail Bank – Internet Head for Citigroup. $500MM P&L, Employees in 40 countries. Responsible for driving Citi’s international consumer business outside the US, online and on the phone. Prior business owner of #1 Online Bank in the U.S.: Wachovia.com. #1 Online Bank Brand, #1 in Customer Acquisition, #1 Customer Satisfaction, #1 Customer Loyalty (2005 Keynote, 2005 ACSI).. $170M P&L. 2M+ Customer interactions per day, $30B+ payments per year. Global Product/Sales/Consulting efforts world wide. Chartered to ensure success of international justice investments and joint ventures. Encounter with global rollout and early adopter programs in U.S., Europe and Asia. Direct encounter in over 32 countries. “C” level interface with over 30 global 100 companies (some listed below). Identify, make and manage alliances with global partners.