Five “Innovation Centers” in Three Years: What Problem Is Visa Trying to Solve?

Visa’s strength and its weakness are the same thing: it sits inside almost every online payment option, and owns no consumer entry point of its own.

In three years Visa has opened five innovation centers around the world — something it never did in the previous fifty-odd years. More than ever, Visa wants to prove it is an open, technology-driven company, and of course it would like to wear the startup world’s signature label: nimble.

In 2016 Visa opened a 7,000-square-foot (about 650-square-meter) “Visa Innovation Center” on Robinson Road, in the financial district at the heart of Singapore. It already had one in San Francisco; since then it has set up offices with similar jobs in Dubai, Miami and London.

The Singapore center is a few blocks from Citibank, Merrill Lynch and UOB, and closer still to firms like Deloitte, Bloomberg and PwC.

Maybe that is a coincidence. It also says something about the change under way at Visa.

The company is drifting away from its old role as the plumbing between banks, and moving toward financial-services and technology companies.

“Visa is transforming into a financial services platform,” Matt Dill, Visa’s senior vice president and head of innovation and strategic partnerships, told QDaily. “Visa is only just past 50 this year, so in a way we’re a startup too.”

What Problem Did Visa Run Into, and Why Is It Transforming?

Visa’s biggest source of revenue, put simply, is the fee it charges banks on card transactions. That makes every one of its business strategies easy to read: issue more Visa cards, and get more cardholders spending more often and in larger amounts.

But over the past decade and more, the way people pay has changed — from swiping a card in a store to paying through a third party online, with more and more transactions happening on the web and on phones. Third-party platforms such as PayPal, which have taken the online channel, can skip card networks like Visa altogether and settle through the ACH (Automated Clearing House, a clearing network). Visa has lost clearing revenue as a result.

Only half of PayPal’s transactions now run through card networks at all, and Visa accounts for only 50% of that half. On those terms, the more PayPal earns, the more transaction revenue Visa loses. PayPal’s $354 billion in transaction volume is still small beside Visa’s $8.2 trillion, but paying without a card is where things are heading, and PayPal is growing fast.

In 2016, PayPal’s transaction count and transaction volume grew 24% and 28%. Visa’s grew 10.5% and 9.9% in its 2016 fiscal year. PayPal is growing at roughly twice the rate of Visa, the card network.

Visa has launched a comparable online payment system of its own, Visa Checkout (UnionPay has UnionPay Online; Mastercard has MasterPass). Against the third-party platforms it counts for little: PayPal has 192 million users, Visa Checkout 15 million registered users. PayPal has 15 million merchants; Visa Checkout has 300,000.

Visa’s strategy is to put its payment entry point into as many e-commerce checkouts, digital wallets and third-party payment platforms as it can. The innovation centers are how it pushes that strategy in the open. Through these half-open offices it wants to project an innovative, open “platform image,” and pull in merchants and financial-technology firms large and small so it can sell them value-added services.

Asked what the biggest challenge of Visa’s transformation was, Matt Dill said: “Our biggest challenge and opportunity is getting customers to understand the value of the Visa network, and to know how to use our existing infrastructure to grow their business.” Building the innovation centers, and inviting media and customers — mostly banks, plus some merchants and financial-technology firms doing third-party payments — to visit, serve that same end.

“Open” Like a Tech Company?

Part of the innovation center’s “co-creation” is Visa’s open platform, Visa Developer.

To make its services easier to reach, Visa lowered the technical bar for partners: it launched Visa Developer and opened up its application programming interfaces (APIs). That packages Visa’s own functions for app developers, who can plug into Visa products or technology without writing fresh code. Visa’s features then fit more neatly into digital wallets and e-commerce sites, big and small. Internet companies have been doing this for years.

Because of the open platform, Google did not have to write new code to build Visa Checkout (Visa’s own online payment system) into Android Pay. What Visa gets: Android cardholders are likelier to pick the Visa channel when they check out in Android Pay, and Visa keeps a better grip on the user experience. What Google got: access to the more than 300,000 merchants Visa Checkout already had.

Android Pay is only one case. In the end the open platform is about raising Visa’s “presence” in every digital wallet, third-party payment platform and e-commerce checkout — all to steer more cardholders into paying with a Visa card, and raise its revenue.

Visa is trying to take other payment channels too. Its work with IBM Watson on in-car payments is one of several efforts to put payment inside the Internet of Things: put a Visa token into an IBM Watson-powered appliance, and one day the appliance can buy the household goods itself. Visa’s goal is to create points of sale that did not exist before, and to raise the number and value of the transactions on its network.

Like the open platform, another sign of Visa’s “service posture” is a change in how it works — cutting its capabilities into modules, for instance. On that count, Visa has grown more customer-minded.

The first thing you see on walking into a Visa Innovation Center is this “wall.” Every Visa service, technology and capability is listed out, one per cube, assembled into something that looks a bit like a periodic table. The “Visa cubes” are also the most common prop in the innovation centers, scattered through the display areas. Staff will set the “e-receipt” and “tokenization service” cubes beside an iPhone, for example, to show what Visa does in its Apple Pay partnership with Apple.

Visa wants the cubes to demonstrate the more flexible way it now works.

“Two or three years ago this was how we worked — talking to a bank or a merchant, we’d say something like, ‘Are you going with this, CyberSource [a payment gateway and anti-fraud solution], or with mVisa [mobile Visa]?’ Basically holding up a package of services and asking, ‘Do you want to buy it?’” a staff member at the innovation center said. “We realized Visa should change the way it partners — have an environment for them to come into … it’s not telling you that you have to use this. It’s looking at it from the customer’s side: what do your consumers and your business need?”

To become a service platform, Visa is indeed chasing partnerships of every kind. In June last year it struck a strategic partnership with PayPal, and the two old enemies each gave up something: PayPal stopped nudging users to bypass the Visa channel and link a bank account directly, and put Visa in a more prominent spot instead, which sends a good deal of transaction revenue back to Visa. PayPal, in return, got some offline payment entry points through Visa. The two will also share some data. Every opening and every partnership of Visa’s rests on the other side accepting its “four-party model” — an effort, really, to preserve the old order. This is openness with conditions and limits.

“So openness isn’t a new corporate philosophy, it’s a new market environment,” Matt Dill said. Visa has no choice but to open up.

What Are Visa’s Opportunities and Challenges in China?

The truce with PayPal aside, Visa’s challenge in the Chinese market is far harder.

The technologies Visa is proudest of — mVisa, now India’s national QR code standard, and Visa payWave, which pays with a wave rather than a swipe or a dip (somewhat like UnionPay’s QuickPass) — still cannot be used in China. Visa does not yet hold a license to clear in yuan. Its main business in China is what Chinese consumers spend abroad. China is a market that has not opened to Visa.

Visa’s chance did finally come. In 2015 the central bank announced it would open the clearing market. But before that takes effect, Visa and Mastercard have to lay down clearing and processing infrastructure, which will take several more years. At the latest investor conference, in February, Visa’s new CEO, Alfred Kelly, said: “We are very much looking forward to formally submitting our application for a yuan clearing license in China, but we’re still waiting for the relevant policies to be issued.”

When Visa does get the license and enter China’s clearing market, what it walks into will be thorny.

For one thing, Visa has to issue cards faster — far fewer Visa cards have been issued in China than UnionPay cards. And the habit of using a credit card is not widespread among Chinese consumers. According to central bank data, as of the third quarter of 2016, China had 0.33 credit cards per person; the total credit line on bank cards stood at 8.62 trillion yuan, a small share of the 177.72 trillion yuan in bank card transaction volume.

For another, Visa has to compete with other clearing institutions. Offline its rival is UnionPay, which has held a monopoly for years; online its biggest enemy is Alipay. PayPal chose to join the four-party model (card network, issuing bank, acquiring bank and merchant); Alipay instead plays the part of an “online UnionPay.” With the country’s largest e-commerce site behind it, it has every reason to route around the card networks.

In China, Visa has no offline entry point for card payments — a few lanes for foreign visitors take Visa cards, and not much else. Online it is weaker than Alipay or Tenpay, because it has nothing like Taobao or WeChat: no app or site consumers use every day.

Alipay and WeChat’s Tenpay have grown into a force the card networks cannot ignore. We analyzed this in an earlier piece: they threaten, in varying degrees, many companies in the mobile payments market.

It is less that third-party platforms have threatened the standing of oligopolies like Visa, Mastercard and UnionPay, and more that consumers’ habits have changed it. Visa’s strength and its weakness are the same thing: it sits inside almost every online payment option, and owns no consumer entry point of its own. For now Visa can only reach and educate consumers through banks.

In its first year, Visa’s Singapore innovation center has mostly handled business in India, Australia, New Zealand and other Southeast Asian countries. India’s demonetization drive has handed Visa plenty of openings; because Australian and New Zealand consumers use credit cards, Visa payWave’s penetration among cardholders there has passed 60%. Visa is doing well in these markets.

In China, where paying by phone is already everywhere, Visa’s Singapore innovation center may have a great many problems left to solve.

Images from Pixabay