The Green Sheet Online Edition

March 24, 2008 • Issue 08:03:02

Payments experts weigh in on Visa's IPO - Part I

The payments industry has once again made headlines in the mainstream media. The most recent splash was in response to Visa Inc.'s February 2008 filing with the U.S. Securities and Exchange Commission, which set forth Visa's plans to make an initial public offering (IPO) of 406 million shares of class A common stock.

Proposed at a maximum price per share of $42, San Francisco-based Visa could raise as much as $17 billion, making it the largest IPO in U.S. history.

The filing did not provide a date for the upcoming IPO, but there is already much speculation as to what this will mean to the flailing economy.

We wanted to get the input of our industry experts, so we asked them the following questions:

1. What impact do you see this event having on the economy?
2. Will this impact your own business? If not, why? If so, how?
3. Will this change the way the payments industry overall does business, or will it be status quo?

Following are roughly half of the responses sent in by our esteemed Advisory Board; the rest will appear in our next issue.

Clinton Baller
PayNet Merchant Services Inc.

1. None.

2. No.

3. Will not change the way the payments industry overall does business.

Steve Christianson
All Card Processing

I have given these questions a lot of thought. Here is a summary of my thoughts, some of which I solicited from experts in the area of public offerings:

1. Our economy is so large that a single IPO will have little effect overall. If it opens at $38 and closes at $60, then it has created some wealth somewhere. But usually that is more of a transfer of wealth from one entity to another. So overall the affect will be minimal. Some people will get richer, but those investment dollars had to come from somewhere; therefore, other investments may be affected negatively, but how much? If I knew that ...!

2. The immediate impact on an individual ISO company such as ours will be unnoticeable. However, the long term could be significant. Now that Visa is going public, it will be answering to the shareholders and expected to produce higher profit.

   The demand for profit will probably reflect an increase in interchange cost, which will be passed on to the ISO and then to the merchant.

   This increase in cost of accepting Visa could fuel the fire that is now gaining strength at business ownership levels. Merchants are tired of the annual cost increases that they have to absorb by increasing their prices. That may lead to inflation.

   Also, those increased costs could be the amount that will cause many marginally profitable merchants to close their business, leading to more unemployment and so on. This we will have to wait and see.

   Also, this move is one of independence of Visa from the banks' regulations/management; therefore, Visa will not be beholden to the banks that supervised Visa in the past, the effects of which are yet to be seen.

3. I do not see a change in our business as a registered ISO. We should be status quo in the near future.

Steve Eazell
Secure Payment Systems

1. This could affect the economy, but it is a difficult call. The IPO will create a public company with Visa as it did with Mastercard Worldwide last year.

   The price will probably not increase as quickly as MasterCard's did due to the fact that many people viewed MasterCard as being undervalued at the time of the IPO, and that created more interest in the stock.

   Plus, if you have noticed, the stock market is in flux, and very few stocks are flourishing, and Visa should be one of them overall. Prognosticators have predicted that the stock will be the largest IPO in the history of the stock market. However, since my belief is that the price will not increase that much, then overall there will be pressure put on Visa to first cut costs to increase margin.

   From there, Visa could possibly increase interchange more often to reflect the pressure from Wall Street, and we could have merchants paying closer to what they currently pay for American Express cards.

   And that would definitely affect the economy as it now becomes more expensive to take credit cards, a staple in the U.S. economy. We have not discussed, however, what could happen if the government gets involved, which it is looking to do since many believe that Visa and Mastercard are oligopolies and guilty of violating antitrust laws.

   If that happens, it will be an interesting battle, and prices could go down instead of up. That would result in positive results for the merchants, and the opposite effect could result. Either way, the economy could be affected. Let's hold on to our hats.

2. It could impact our business if the government pressures Visa and MasterCard to reduce their pricing because that could affect how prepaid open loop gift cards are priced to consumers, and that may or may not be good for our business.

   If prices come down, but the merchant is unaware, then ISOs would realize greater margins, and you may see them flourish for a short time.

   However, if the pricing model shifts, and consumers become aware, then margins could decrease. Then ISOs may have to look more closely at enhancing their product offerings by adding value added services to make up for the lost revenue. This will help us.

3. Possibly. As a public company, there will be more scrutiny placed on Visa as a company, its earnings, revenue and margin. That could result in more price increases more often due to the pressure from the stockholders. In that case, it could affect the payments industry as a whole.

   Will merchants stand still for it? The answer seems relatively obvious due to the current litigation regarding unfair pricing. If the government steps in and declares Visa and MasterCard as unfair in their pricing practices, life in the payments world could get very interesting.

   I am not one to support the government doing anything, but I will want a front row seat to see how the two behemoths of payments take on the government; it will definitely be a fight to the finish.

Pete Estep
National Bankcard Systems Inc.

1. For the banks that issue and hold stock in Visa this looks to be a $10 billion windfall. That's pretty good news for them considering most of these banks have been taking a beating in the mortgage market. The biggest winner will be JPMorgan Chase & Co., as well as Citigroup Inc. and Bank of America Corp.

   As far as the overall economy goes, I don't think it will have a lasting effect on it. There have already been over $140 billion in mortgage- and credit-related write downs for banks, and this isn't going to tip the scale one way or another. There will be a short term up-tick in the stock market, and if the timing is perfect, it could even be the beginning of a turn around for the stock market.

   Unfortunately, it looks like there still is a lot of unwinding to be done in the credit market bubble before we're out of the woods.

2. and 3. I see as much impact on the individual ISO as the MasterCard public offering did. Not much impact in the short term but certainly some industry changes in the long run.

   With its newfound cash reserves, Visa will have the war chest to fight current and future litigation. Visa is faced with several lawsuits from other card companies (AmEx, Discover Financial Services) as well as class action lawsuits from various merchant associations.

   The $3 billion that Visa plans on putting in a reserve will give it plenty of ammunition to fight these lawsuits. Hopefully, the biggest benefit will be to give Visa the means to lobby vigorously against some of the legislative changes being proposed, such as HR 5546.

   Interchange proposals like HR 5546 are a huge threat to our industry, especially to the ISOs on the acquiring side.

   I can't think of a more radical and profound change that this piece of legislation would do to our industry. It certainly flies in the face of what I thought our free enterprise country was all about.

   Additionally, interchange information and regulations will be a little more available to the merchants. Hopefully, some of the card Association rules can be relaxed a little bit and become a little friendlier toward the merchants who really are our customer.

   Time is going to tell what effect Visa's becoming a public company has on the processing industry. It is certain to have an effect on the processing industry in general, but I think it is too early, and there is not enough information about Visa's future plans to make a conclusion on how it will affect processing.

   The impending congressional hearings regarding credit card interchange are likely to have a more profound effect on the industry, especially if bills are passed to fix interchange rates.

   It is unclear how Visa is going to react to Congress once it becomes a public company, which is something that should be of concern to ISOs.

Jared Isaacman
United Bank Card Inc.

I don't see how this will have a major impact on the economy. However, I do believe the success of the IPO will show the public's confidence in the continued growth of credit cards as a form of payment. In general, I believe the industry will remain status quo for the immediate future.

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