VISA : Payments & Product Research — Strategy, Business Model, Advancements & Next Big Moves

VISA — Company Logo

Mission Statement: “connect the world through the most innovative, reliable, and secure payment network — enabling individuals, businesses, and economies to thrive.”

Business Strategy: Visa’s strategy is to aggressively expand its presence in contactless payments, e-commerce, and other digital vehicles.

Different Payment Methods

VISA business model is very different from a traditional business model. It is not very intuitive enough. Though most of us use VISA credit cards for our payments, very few of us would know how VISA works. In fact, many of us would not even know that VISA is a public-traded company and is listed in the New York stock exchange.

VISA is a great example of a “Multi-sided Platform” business model pattern. The platform induces “cross-side” network effects. The more the cardholders use VISA cards, the more the merchants will accept it and vice-versa. Since merchants are on the ‘money side’ of the platform, VISA focuses its marketing efforts on the cardholders who are the ‘subsidy side’ of the platform.

Fifty years ago, Visa had a vision: To provide consumers, businesses, and governments around the world with a better form of payment. The technology behind this vision is VisaNet, a proprietary transaction processing network.

VisaNet supports economic empowerment to people, businesses, banks, and governments in 200 countries and territories.

How does VISA Inc. work?

VISA is a Technology company providing global payment solutions to the banks. Its payment product platforms are used by the banks to develop credit and debit card programs for their customers. VISA does not issue credit cards or extends credit to the consumers. Instead, it operates an “Open-Loop Payments Network” to manage the exchange of information between different financial institutions.

Behind-the-scenes when a cardholder presents a card for payment to a merchant.

VISA classifies the banks as either Issuers or Acquirers.

  1. Issuers issue cards to the cardholders.
  2. Acquirers manage the relationship with the merchants.

The complete ecosystem:

  • Cardholders are the individuals that possess a Visa payment card.
  • Issuers are the financial institutions that issue Visa cards to the cardholders, extend the credit to them, and determine the interest rates or the other fees charged to them.
  • Issuer Processors are the third-party institutions with proprietary technology platforms to handle the transaction processing for those issuers that do not have in-house capabilities. Issuers often outsource the transaction processing to the issuer processors.
  • Merchants are the businesses that accept Visa cards as a payment mechanism for their goods and services.
  • Acquirers are the financial institutions that solicit merchants to accept Visa cards. They offer Visa network connectivity and payments acceptance services to the merchants. They establish merchant discount rates for card acceptance.
  • Acquirer Processors are the third party institutions with proprietary technology platforms to handle the transaction processing for those acquirers that do not have in-house capabilities. Acquirers often outsource the transaction processing to the acquirer processors.

When a cardholder presents a card for payment to a merchant, the payment request is forwarded to the acquirer. The acquirer contacts the issuer through the VISA network. The issuer shares the information on whether sufficient balance is available to carry out the transaction. The information is then routed to the merchant. In case a sufficient balance is available, the payment is accepted. Else, it is rejected. The issuer bills the cardholder on a monthly basis. The cardholder pays those bills then.

What Customer Segments does it serve?

VISA serves the following customer segments:

  1. Financial Institutions — Issuers
  2. Financial Institutions — Acquirers
  3. Card Holders
  4. Merchants

VISA Business Model Canvas

VISA creates value for all its stakeholders during the process:

A. Cardholders benefit because of convenience, security, and rewards associated with card payments.

B. Merchants benefit from improved sales by offering payment method options to the customers.

C. Banks (Issuers & Acquirers) get new revenue streams through card fees, late payment interests, and transaction fee cuts.

What are VISA products and services?

While best known for its Visa credit card used by millions of consumers, the company provides an unusually broad range of services. That includes authorization, clearing, and settlement services for financial institutions and merchants; and credit, debit, and prepaid card services to consumers and businesses.

  1. Products: Visa-branded Credit cards, Debit cards, Commercial Cards, and Prepaid cards; Mobile and Money Transfer products
  2. Services: Authorization, Clearing, and Settlement services; Mobile financial services, such as mobile payments, money transfer, and top-up services.

VISA Services

How does VISA make money?

It makes money from the transaction fees charged to merchants. To understand how it works, imagine a $100 payment from a cardholder to the merchant. In case the merchant fee is 2.4%, the merchant would get $97.60 from the transaction. $2.40 would get unevenly split between issuer and acquirer, depending upon the interchange fee. In case of an interchange rate of 1.8%, the issuer will keep $1.80 and the acquirer will keep $0.60. Issuer gets to keep more of the merchant fee because of a higher risk of payment default from the cardholder. VISA makes money on payment volumes, transaction processing, and value-added services. VISA also offers several value-added services such as risk management, debit issuer processing, loyalty services, dispute management, and value-added information services.

VISA captures value through the following revenue streams: (The Four-party payment model)

  1. Service revenues from banks for their participation in card programs;
  2. Data processing revenues for authorization, clearing, settlement, and transaction processing services;
  3. International revenues from transactions where the cardholder issuer country is different from the merchant’s country.
  4. Other revenues: These are revenues generated through license fees for usage of the Visa brand; Visa Europe; account holder service fees; licensing and certification; and other activities.

In order to create the value, VISA has built a global processing infrastructure consisting of multiple synchronized processing centers. These centers are interlinked and are engineered for redundancy. Managing these payment networks is a core part of VISA operations to ensure a safe, efficient, and consistent service to the banks, cardholders, and merchants.

VISA sponsored the FIFA world cup in 2010 and will be an Olympic sponsor through 2020. This marketing focus helps VISA in building a strong brand and attracting more consumers.

Who are its competitors?

VISA has only a handful of big rivals, including Mastercard, Inc. (MA), as well as digital payments companies such as PayPal Holdings, Inc. (PYPL).

How Visa Business Model Is Different From American Express?

Visa and American Express both offer payment cards. But, their approach to making money is different. Visa operates an open-loop network and has a transaction-centric business model. American Express operates a closed-loop network and has a spend-centric business model.

In a closed-loop network, payment services are provided directly to the cardholders and merchants by the owner of the network. American express acts as both the issuer and the acquirer. American Express makes money primarily from the merchant discount fees. It focuses on generating revenues primarily by driving spending on its cards through attractive reward programs for cardmembers. This helps them earn more discount revenue from merchants. Hence, they have a “spend-centric” business model.

Open-loop networks are multi-party and operate through a system that connects issuers and acquirers. The network owner manages the information and flow of value between them. Visa operates an open-loop network. Visa does not make money from the merchant discount fees or cardholder membership fees. Merchant discount fees are split unevenly between the issuers and acquirers depending upon the interchange rate. VISA earns revenue primarily on the payment volume and the transaction volume carried out through their cards. Hence, Visa has a “transaction-centric” business model.

VISA Latest Trends and News?

  1. The company in January agreed to acquire for $5.3 billion fintech startup Plaid, a network allowing individuals to securely connect financial accounts to apps.
  2. Visa is rapidly moving into new digital payment areas. The company announced in mid-January that its Visa Token Service, a security technology helping to facilitate e-commerce, had achieved combined e-commerce payments volume of $1 trillion across its participants.
  3. Visa has launched small business hub to help entrepreneurs put their best digital foot forward.
  4. Visa Partners to Launch Payments on WhatsApp in Brazil

VISA developer center resources and APIs?

A sandbox environment is offered to developers to test and customize APIs with the code in 6 different languages and serve their specific client needs.

REST APIs Reference Doc

Payment Fundamentals for Developers

Who do you think can threaten the strong business model of VISA?

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  7. VISA Inc 10K report filings

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