The Green Sheet Online Edition
April 14, 2008 • Issue 08:04:01
Payments experts weigh in on Visa's IPO - Part II
San Francisco-based Visa Inc. debuted March 19, 2008, on the New York Stock Exchange, offering an initial 406 million shares at $59.50 each. It was the largest IPO in U.S. history. We wanted input from industry experts on this event, so we asked our Advisory Board the following questions just before the IPO occurred:
- What impact do you see this event having on the economy?
- Will this impact your own business? If not, why? If so, how?
- Will this change the way the payments industry overall does business, or will it be status quo?
We divided this story into two parts. Part one appeared in The Green Sheet March 24, 2008, issue 08:03:02. Here is the second set of responses:
Jerry M. Julien
Equity Commerce LP
- The actual Visa member banks, which have been impacted by the subprime credit crunch, will be the biggest beneficiaries of this IPO.
The funds raised by this IPO will allow these financial institutions to possibly relax some of the refinancing and mortgage restrictions that came about as a result of the subprime crunch and allow the housing market to see some improvement, which will have an overall positive impact on the economy.
Even with the economy teetering on recession, the increased use of check cards and movement away from cash will allow Visa and its member banks to raise much needed capital.
- With the publishing of interchange rates and the IPO of both MasterCard Worldwide and now Visa, some of the mystery of who and what these associations are, who are the members, and what are their purposes and costs to merchants and the general public are now out in the open.
This has helped us in explaining to our merchants where we as ISOs fit into the life cycle of the payment process, and also how our fees and interchange rate increases can be driven by the card Associations - not by us driving new interchange categories or rates. The Visa IPO and the continued effort of both Associations to demystify who they are will have an overall positive impact.
- The openness and publishing of information will have an impact on our business and force ISOs and merchant level salespeople (MLSs) to be able to explain and justify their fees now that this information is readily available.
Card Payment Systems
Frankly ... I see this having absolutely no impact on the industry.
- It's important to note that while a U.S. corporation, Visa's stock will be for an international company. If Visa meets its $42 per share target, it bodes well for the global economy, though a much lower per share price would indicate world credit is not in good shape.
- In the short term, Visa going public will not impact our business or our plans. Our underlying success is tied to the growth in merchant acceptance locations along with an increase in overall numbers of transactions. As long as the card corporations emphasize on those fronts, we'll ride that wave.
- I'm always reminded of what I was told 30 years ago:The only constant in the credit card industry is change. Status quo, no way.
For over a decade I have predicted the acquiring business will sever from the issuing business, as it is no longer mutually inclusive. I anticipate a spinoff of the acquiring business to those that already control it: the processors or an entity outside the industry more nimble and better versed in the transaction processing business. I expect more direct arrangements by the processors.
I expect to see a fracturing of the acquiring business along different business and economic lines. To capture the two ends of the spectrum of micro and larger ticket transactions, I expect tiered pricing based on the actual cost of processing.
What we now term the card transaction or payments industry will be like the Chinese symbol for change: opportunity and chaos. Seize the opportunity while managing the chaos. As a friend at Visa once told me, If you don't like the way things are going, don't worry; it will change.
U.S. Merchant Services
- No. The merchant does not know or care what Visa does unless it involves lowering interchange.
- In the beginning it will be status quo. However, down the road I believe that becoming a public company will change the way Visa handles lawsuits regarding interchange.
Charles W. Salyer
The largest IPO in U.S. history - trying to determine the actual impact on the economy is difficult at best.
An IPO this big could drive investors back into the market. The stock is relatively inexpensive, and the offering is big enough that pretty much anyone who wants to invest will be able.
The stock should not be as volatile as smaller IPOs, permitting strong but measured growth in the early days of the offering, allowing most investors time to get on board.
The impact? Investors need widespread success. After the continual hits to businesses, banks and equipment providers, investors need the boost of a success. This could be it. It cannot solve the mortgage issues or housing value decrease, but it can present a ray of light in an otherwise dark financial period.
The impact on our business depends on hope versus absolute knowledge. If people see a little light in the economy brought on by small investor success, they may decide to add that second store or restaurant location. Investors looking for a sign may pony up the funds for that new business venture or development.
Each positive step leads to another. Investors with little relief may spend a few more dollars on products, food, vacations and cars. This new business generates more hope, and the economy strengthens. All of this leads to the need for more processing, more machines and more equipment. That is good for our industry.
It will change the way Visa does business. A public company has enormous reporting requirements. Recent changes in the law, such as the Sarbanes-Oxley Act of 2002, mean the reporting has to be accurate, on time and very visible.
Financials are now public domain. Investors want to see stockholder value increase, period. Anyone who has taken a company public or gone from the private sector to the public knows this is a big, expensive, time consuming change. The reporting alone is mind numbing. It will be interesting to see sales, costs, income, expenses and more laid bare for the entire industry to see and contemplate.
Jeffrey I. Shavitz
Charge Card Systems
What will be the effect of Visa going public? In my opinion, very little. The merchant processing industry is complicated, and even as experienced industry professionals, there is a lot to truly understanding interchange, the issuing banks, acquiring banks and their respective fees. If MLSs and ISOs have questions, merchants will as well.
With this said, merchants are getting smarter and more educated in this arena. Visa and MasterCard currently post on their Web sites all of their interchange categories and their respective fee structures. Why then isn't every merchant paying interchange?
Even with full disclosure and the card Associations going public, merchants need the education, communication and service that we provide. In this regard, we need to teach merchants why a particular card type will hit a specific fee class or why the transaction is downgrading to a mid- or nonqualified rate.
With any maturing business such as payment processing, rates will continue to become more competitive (but this is not a direct reflection of the Visa IPO).
I would think this IPO may cause some long-term pricing pressures on Visa. Banks currently set the interchange rates, and with this IPO and the public having ownership, you would surmise that the shareholders (many of which are owners of small and mid-size businesses) would start to question the escalating credit card fees.
Just like lobbyists raise the awareness of issues in Washington, D.C., new Visa stockholders will have the opportunity to understand rising fees hurt the profitability of their businesses.
The consequence of this IPO on Charge Card Systems is that we must continue to educate our sales partners and merchants alike on how to effectively run their businesses by accepting credit card payments. Once we stop adding value, we will undoubtedly lose that merchant account.
In conclusion, it would be funny if shareholders had to pay into the $17 billion IPO using their credit cards - assuming an average of 2.2 percent (of course a MO/TO transaction), that would be $374 million in fees. Without breaching any CCS confidentiality, this would be the biggest merchant in our portfolio.
Group ISO Inc.
- Visa's IPO has given a slight boost to the economy but an even bigger boost to the sector in which it falls.
Giving the public a chance to invest in a "household name" will bring back some belief in the marketplace. With all the turmoil in the markets since Enron's demise and other events, giving people the opportunity to get involved with a staple in the industry is like renewing hope in investments, as Visa is a tried and true organization. Remember the adage, You cannot go wrong by buying IBM.
- I am not exactly sure what impact this will have on our business. We have been and always will follow criteria, rules, regulations and the guidance of Visa and MasterCard. They are the industry grandfathers.
Our business will continue to grow with or without Visa going public, only because we have based what we do on strict guidelines, compliancy and tutelage of the card Associations for many years. We, as many others, depend on them and know that while processors, ISOs, agents and merchants may come and go, Visa and MasterCard will always be here.
- Within the payments industry, my feeling is that Visa going public has given us a certain air of confidence overall. Down the road, now that Visa is a tradable commodity, the industry may start to measure success, profitability or growth based on stock valuation and earnings from Visa and MasterCard.
I'm not sure if I would consider that to be a true indicator in the credit card industry. MasterCard and Visa were quite successful for a very long time before their IPOs. We have to keep in mind that success and growth in this industry are based upon many factors such as consumer spending, the unemployment rate, the Federal Reserve Bank, the European Union, global economies and other variables. Overall, business should run as it has except now maybe with a little extra "oomph" in its step.
Humboldt Merchant Services
If we extrapolate based on the MasterCard world post-IPO, I would say Visa post-IPO will be status quo. Rates will continue to fluctuate (mostly head north), new card categories will be introduced, merchants will clamor, and legal action will be both threatened and initiated.
Not much different than today or a year ago.
However, there is a rub. Post-Visa IPO, who will MasterCard and Visa be beholden to? Clearly, it will no longer be the member banks. In its simplest form both companies will be driven by the same designs and models as every other publicly traded company - the bottom line.
The investment community will have a large say and sometimes even dictate on how these companies thrive. MasterCard basically has been a Wall Street darling from the day it went public. Markets being what they are today, Visa likely will not have the same impact.
While MasterCard and Visa are different brands and companies, they are likely so similar and closely related in the marketplace that they will behave, react and trade in a like manner.
So, what happens down the line? The next quarter? The next year? What happens when they don't earn what they projected they would or, in other words, they miss the street's number?
At what point do investors and funds pull the plug and bail? Who pays if or when that happens and stock values plummet? Right now the markets are at best tenuous, so is the fear of missing earnings and falling stock prices real? What might happen to interchange rates?
You have two potential answers: Interchange rates will either decrease or increase. If you are not sure which, I will narrow it down for you: Interchange will not go down. Is it possible merchants could be looking at significantly higher rates in the near term?
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