orbes recently commissioned a major investigative lead article on where Visa is placing its bets on the future of payments in this country and around the world. According to this article, Visa is in the final phases of a $200 million upgrade to its payment infrastructure. To get a sense of what Visa has in mind, listen to this quote from Visa USA President Carl Pascarella: "Credit is boring. It's yesterday's news. Our goal now is to displace cash and checks. We're not a credit card company, we're an electronic-payment company." In case you missed this important article, the rest of this column will summarize the highlights of what Visa is serving up as the future of electronic payments.

Executive Summary

VisaNet is the secure global communications network that Visa International uses to perform some amazing things that most of us take for granted. To make that point, the Forbes article starts with a description of a Visa card swipe at a Sydney, Australia retailer.

The terminal captures the 16-digit card number, encrypts it in a secure message and sends it to the merchant's bank, where it is immediately routed under the Pacific Ocean to a data center outside Tokyo and routed on to California and into the issuer's bank in Delaware, where it is authorized and routed back in its 24,000-mile round-trip journey that involves five stops plus various calculations of how much to charge the merchant in fees and how to share those fees among the banks associated with the transaction.

This process is completed in two seconds.

This is the network that is being virtually replaced with a much more robust set of capabilities to ensure that Visa's dominant position in the payment industry is not only maintained but vastly expanded. One of those capabilities is the authorization and settlement of commercial purchases of up to $10 million to be processed in the same stream as the $20 gas card purchase. The business-to-business (B2B) market is huge - estimated at $11.5 TRILLION in the U.S. alone - and today 86% of those payments are made with paper checks.

To convert these transactions from paper to VisaNet transactions, Visa had to commission the programming of more than 1.5 million lines of computer code and upgrade the network of 25 massive IBM mainframes linked to 32 Sun superservers while installing the latest routers to handle the more complex transaction sets, their altered process sequence and fee structure.

Visa member banks are assuming that large corporations are not going to pay that same 2% being collected on the $20 gas purchase to settle $10 million transactions. In fact, they believe those B2B transactions will be settled using a flat fee. Another dimension of difference in the B2B transaction is that the funds authorization process is reversed. The buyer needs to authorize the transfer as opposed to the traditional credit card transaction that originates at the seller's location.

This new Visa Commerce program will have many more differences. For example, the transitional Visa authorization message is 150 bytes in length. The purchasing cards that Visa and MasterCard now offer have messages four times larger. The new VisaNet is being designed to handle transactions of up to 100,000 bytes. These "deep data" transactions are required to address the complexity of B2B transactions. It is estimated that 30% of these B2B transactions are disputed, compared with the 1/10th of 1% of traditional bankcard transactions that end up as a chargebacks.

The intelligent network that Visa is building anticipates this complexity and is designed to intelligently identify discrepancies and provide trading partners with windows of time to correct mistakes before funds flow. Beyond the network capabilities, the Visa Commerce services dictate changes in the association rules and regulations to handle the increased risk and liability among banks representing the different trading partners.

According to this article, bringing the large-dollar transactions into the Visa fold is not nearly as important as replacing coin and currency in the "Visa Vision" - largely because other players are working on this same objective and have a head start on Visa.

For example, eBay and its new subsidiary, PayPal, have signed up 18 million members and are adding 28,000 more each day. Half of PayPal's 300,000 daily transactions are made via ACH transfers, thus avoiding the bankcard fees that Visa uses to fund its network.

Citigroup has a person-to-person (P2P) alternative to PayPal called C2IT that is designed to allow people to pay each other for free over the Internet. A similar program, called Certapay, is being developed by MasterCard and the four largest Canadian banks.

While these P2P alternatives seem to be growing rapidly, plastic still accounts for more than 90% of online purchase made over the Internet. Visa handles 55% of all Web transactions compared with 27% for MasterCard.

This is not the only front on which Visa faces competition. Its core business appears to have matured and may be entering an era of erosion. The limits of credit extension may have been reached, and debit cards are rapidly moving ahead in the bankcard industry. In the past five years, credit has grown at a 7% annual rate compared to a 42% rate for debit cards. The last quarter was the first in the history of Visa's reporting that debit card transactions exceeded credit card transactions.

Another challenge that Visa faces is the legal attack that major retailers have waged against both card associations for their policy of forced acceptance of both debit and credit at any location that decides to accept one or the other. Retailers see this as an antitrust violation and price fixing.

No one is debating that the annual take by bankers in the form of interchange and merchant deposit fees is more than $30 billion - fees that the Forbes article describes as the price banks charge to "let consumers spend their own money." It is this same fee structure that is driving upstarts such as PayPal into more and more merchant payment options.

This $30 billion figure is placed in another dimension within this article. This figure is larger than the annual profit the Federal Reserve makes by printing currency each year ($28 billion) - the value of what U.S. consumers are prepared to accept as legal tender and keep in the form of cash in their pockets, safety deposit boxes or under their mattresses. Cash also remains the preferred method of transacting business by the underground economy - criminals, drug dealers and tax-evaders.

Another interesting point made in the article is how often we notice the cashier holding up a $20 bill to detect a counterfeit; compare that with the two-second time Visa uses to turnaround an authorization. This authorization process also includes fraud screening, a highly effective process that has been refined to a stage where only seven cents in every hundred dollars of Visa card transactions is charged off to fraud. With all of Visa's past accomplishments, it still has a lot of growing room in the payment business. According to the article, Visa handles only 12% of all U.S. consumer spending, double the share of its nearest rival MasterCard. Last year, consumer payments in the U.S. totaled $5.5 TRILLION, and almost two-thirds of that figure was done with cash and checks.

Digitizing that over $3 trillion in payments represents a major business opportunity. The check component alone is thought to be worth more than $8 billion in annual new revenue to the acquirers/ISOs and card issuers who enable these transactions to be made electronically.

Another target for Visa is to gain control over the payroll market. The article reports that major employers, such as FedEx and ManPower, have converted their entire employee base to Visa Pay cards - forgoing the costs of creating and reconciling paper checks and eliminating the fraud risk of duplicate paychecks.

This is a very new product, with less than 1% of the $916 billion in payments that Visa handled in the U.S. last year. But the potential is huge - especially as it relates to bringing in the un-banked segment of our society.

Visa says 25 million people in the U.S. make more than $20,000 but don't have a bank account into which these checks can be deposited. That is $500 billion in cash that Visa plans to move under its umbrella with its PayCard offering. Other products are being rolled out to serve the apartment renter and all recurring payments, not to mention stored-value gift cards ... and, of course, smart cards - Visa still believes we all will be carrying one soon if only for the loyalty and incentive rewards that can be stored and redeemed on these intelligent pieces of plastic.

Author: Forbes Magazine - Daniel Lyons

Date: Sept. 16, 2002

Size: 8 pages

Relevance Rating: Medium to high

Web Address: www.forbes.com/forbes/2002/0916/078.html

Web Site for More Information on Visa

http://usa.visa.com/index.html

Eric Thomson is Executive Vice President of Profit Source Advisors. He can be reached at etprosc@attbi.com.