In a bold move that many think could be an absolute game-changer for the payments industry, Visa Inc. acquired e-commerce processor and fraud management firm CyberSource Corp. for $2 billion. CyberSource processes about 25 percent of all e-commerce dollars in the United States and is the owner of payment gateway Authorize.Net, which the company bought in 2007.
"Online commerce continues to grow rapidly, and this acquisition will enable Visa to offer new and enhanced services that will better meet the growing demand among merchants globally for robust, secure online payment processing capabilities which in turn will grow the entire e-commerce category," said Joseph W. Saunders, Chairman and Chief Executive Officer of Visa, in a press release from the company.
The takeover gives Visa access to about 295,0000 CyberSource merchants, including the owners of the Internet's two most heavily trafficked Web sites, Google Inc. and Facebook Inc. It also gives Visa control of CyberSource's vaunted global fraud prevention platform, used to combat e-commerce-based fraud through complex software analytics and vast repositories of e-merchant data.
"It's pretty obvious that Visa's taken the gloves off and isn't feeling restricted anymore and is going after a new market," said Linda Mahy, CEO of payments industry consulting firm Connective IQ Inc. "When they have new entrants like a PayPal in their backyard, they have to be innovative, and the acquisition of CyberSource is going to give them a reach into e-commerce to further expand their rails.
"The other biggest thing Visa's going to pick up is the domain knowledge on fraud, where CyberSource has been a clear market leader."
Quite a number of payment parties are threatened by this deal - which may portend a much bigger e-commerce market share takeover by the credit card giant, Mahy said.
Among them are online fraud prevention providers that compete directly with CyberSource; alternative payment providers like PayPal, whose growing influence appears to be at least part of what propelled Visa's decision; and online merchant service providers more generally, including processors, gateway providers and ISOs.
"I think it's going to immediately change the face of e-commerce," Mahy said. "This is huge, and anybody who doesn't see how huge it is doesn't get it. This is Visa demonstrating that they get it when it comes to technology. I think a lot of people felt the [card companies] were asleep at the wheel and letting the banks steer them, and this is Visa saying, 'we know what time it is.' ... With this they just picked up 25 percent of Internet market share and kept it from PayPal, and it's a brilliant move."
Yet it is possible the deal could face legal challenges over monopolistic concerns, Mahy added. "You think for one minute that First Data attorneys aren't having that conversation? I would assure you they are," she said. "I'm sure the announcement sent shockwaves through their e-commerce data division, among other places."
Payment attorney Jeffrey Shinder agreed, asserting that "CyberSource competitors have every reason to be concerned, and it would not surprise me at all if they attempt to do something about it." He said the deal "definitely merits scrutiny" for possibly infringing on antitrust laws and that he expects the United States Department of Justice will at least examine the case for legal conflicts.
The biggest legal issue surrounding the takeover, Shinder said, is the conflict between Visa's leading position on the PCI Security Standards Council and its control of a company whose domain - and that of its competitors - falls under the direct scrutiny of that governing body.
Visa's ownership of CyberSource could potentially afford the company access to the competitive secrets of other players in the fraud space, as well as give CyberSource undue control over the way Payment Card Industry (PCI) Data Security Standard (DSS) rules are formulated and enforced, Shinder noted.
"CyberSource's competitors have to make extensive disclosures of competitively sensitive information regarding how their systems operate to satisfy Visa and the rest of the Council that whatever services they're providing are compliant and will maintain the integrity of the data that travels through the system," he said. "And now you're in a situation where those competitors are providing information that could conceivably get to CyberSource.
"And the verticality between Visa and CyberSource could be used in various ways to favor CyberSource over competitors through its rule-making and could be used to undermine competition. I do think CyberSource competitors have every reason to be concerned."
Shinder contended that the deal held particular significance in the mobile commerce space, where a host of alternative payment sources (like the use of text messaging to bill a user's mobile account) are threatening the conventional paradigm of direct card payments in the electronic commerce sphere.
"Visa, I think, looks at mobile the same way it did PIN debit payments when they came out - as an alien force that needs to be contained," he said. "You go back 20 years ago, the fear was that PIN debit systems would undermine the existing paradigm, and mobile has that same capability, depending on how it grows, to disintermediate Visa. "Our kids are going to be paying with their cell phones, and Visa wants it to be on its platform, and I think this is a preemptive way to help maintain its position."
Shinder said the deal could hurt online merchants as well, who would face the prospect of increasingly high interchange and merchant service fees in the face of reduced competition in the merchant services sector.
Mahy, however, said the federal government, which has long had interchange on its radar, is unlikely to allow interchange fees to climb much higher, regardless of who levies them. (It has thus far failed to enact legislation to restrict interchange, despite intense lobbying by the Merchants Payments Coalition, National Retail Federation and other merchant advocates in recent years.)
Mahy further contended that Visa's ownership of CyberSource opens up so many potential sources of revenue that it is unlikely interchange will continue to rule the day as a profit stream and may even go down as a result.
"Visa's going to pick up more volume," she said. "But more importantly, with CyberSource's core competency in fraud, Visa should be able to shut down more fraud, which is costly to everybody in the value chain, so this is a big uptick for Visa. I think it's going to lower interchange, and I see this as a brilliant move to counter the attack on interchange generally."
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