Apple Pay

VISA CEO Confirms Tokens As New Network Revenue Stream

Visa CEO Charles Scharf on Wednesday (Nov. 12) said that not only is tokenization “the single biggest change that’s been made in the payment networks easily over the past 15 or 20 years and maybe longer,” but he spoke about how it enables Visa to control the data and to potentially charge a lot more for it.

“Tokenization has opened up this whole world for us to be able to use digital devices to be a meaningful part of the payments flow in a way that (those payments) wouldn’t have in the past,” Scharf told attendees at the Bank of America Merrill Lynch 2014 Banking & Financial Services Conference. “Those of us that participate in the token infrastructure can make decisions on who you want to give access to, whether you want to charge for it and things like that. So it’s hugely meaningful to our ability to open up new channels and to make sure there’s clarity in terms of who controls the payment information. We put a rate schedule out there for tokenization. We said we’re waving everything through the end of 2015. We want people to adopt tokenization. We think it thus creates a meaningful set of opportunities that would be difficult for us to participate without something like tokenization.”

The Visa CEO said the specifics of post-2015 token pricing are still being decided. “Down the line, if we specifically monetize it as a service or we participate in the broader volume set and it helps justify the price that’s out there today, that’s a decision we’ll make as time goes on in the context of how we feel at that point in time. But the reason why we built it wasn’t to create a new stream. It was to insert ourselves into digital commerce in a way that we and our clients control on destiny and that’s huge,” he said.

When Scharf made his comment about tokenization being “the single biggest change” in payments, he argued that the way tokens have been deployed goes way beyond simply improving security. “When we first started talking about tokenization publicly, everyone was focused on the security aspects of it. The idea of taking the actual account number out of the flow, common sense is that’s a good thing, especially in the light of the data compromises that we’ve seen,” he said. “But we also talked about—when we announced tokenization—was ‘Hey, because of tokenization, there is series of products that we are going to see in the marketplace that are now possible because of tokenization.’ Apple Pay is the first example of a product that wouldn’t have been possible unless the network community created tokenization.”

Yes, the Visa CEO is saying that the token didn’t merely help improve the security on Apple Pay, but that Apple Pay wouldn’t have been viable without it. “Our willingness to use the secure element that exists inside the iPhone, if there was no tokenization, we wouldn’t have done it, but putting randomized credentials on that phone in a way that is controlled in a very clear process-oriented way is something that we have great comfort in. And that will then allow other types of experiences, whether Google wants to do something on their own, whether they are HCE driven through Android and the developer community, whether it’s with device manufacturers,” he said.

Scharf also spoke about a different security effort, EMV. He said EMV plays well into Visa’s new business model and the card brand retaining its dominant role, even as mobile payments adds a lot of uncertainty potential in all of payments. “Our model, our business, has great benefits and it carries with us some roles that you have to play. But when you woke up in the morning, you might not choose to play. So we know our structure of the economics of what we do and the growth that’s there and why we love it so much,” Scharf said. “The other side of it is we are in the middle of relationship between the merchants, acquirers and the issuers. That’s the role we play. We manage the pricing. We manage the rules. But we are also responsible because it’s in our best interest, as well as all of their best interest to drive the industry towards the most secure things we possibly can.”

He touched on the uncomfortable position that EMV forces the card brands in, to pressure retailers to do things they may not be able to easily afford. “We sit here today just like we sat here two, three years ago, knowing that EMV is a more secure method of payment than (magstripe). So having said that, it’s very difficult for us to go tell all of our clients you now have to go spend a lot of money or else,” he said. “Having said that, we do that along with our competitors and we put out I think in 2011 we put out rules that said by 2015, if you don’t do this, there’ll be liability shifts. We gave plenty of time and we gave them an incentive to go ahead and do it. Leading up to that no one wanted to do it.”

Recently, though, he said that cyberthief activity has forced the EMV situation to change. “Unfortunately, this past 12 months, we’ve had a lot of data breaches at retailers and while EMV wouldn’t have stop that, it would have stop the ability to take that information and actually create duplicate cards, because you cannot duplicate an EMV card, it hasn’t been done. It’s got everyone focused on, ‘Hey, it’s in our interest to move the security standard to something that is the highest security standard. So there’s a lot momentum for both the issuing community and the merchant community to move towards EMV. We’re very confident by the time we get to end of 2015, there will be material amount of adoption and then we’ll continue through 2016 and 2017.”

He also reminded the audience of what will happen if the payments space doesn’t embrace EMV and tokenization quickly enough. “When things get into Washington, you’ve got to know that they’re listening, but know what’s going on behind the scenes. When it gets to Washington, that becomes lot of fingerpointing as things like that, so when you’re in the room with the door closed, there is a lot of conversation. If we don’t do it as an industry ourselves, the government is going to tell us how to do it and we’re probably won’t like how they tell us to do it,” he said.

Scharf also briefly touched on whether Visa is likely to embrace Bitcoins.

“Bitcoin is two things, right? Bitcoin is a currency and it is a way to create a network. And the two today aren’t associated. People (ask): ‘Are you going to accept the coin?’ And the answer is, we’ll think about it when our clients actually want to use it. So when we have banks and merchants saying ‘Hey, our clients really want to pay in Bitcoin,’ then it becomes a meaningful question for us to answer. Until then, it is just theoretical would we do it, and we have – I forget a couple of hundred currencies or 170 currencies that we do business in. If we chose another one, we can certainly do that.”

He was also asked about global changes—competition-wise—for Visa. He was asked, for example, about Alibaba and Alipay. “I still think within China, it’s still problematic and very difficult. To the extent that Alipay has ambitions to do things outside of China, that’s a different story. I mean whether it’s Alibaba on its own or through Alipay, I think ourselves and other networks can bring a lot of value towards helping them to what they want to do. Within China, I think we still we still need to have access, we still need to build and issue cards in the local currency and that’s going to be governed by what they say.”

Then there’s Union Pay. “UnionPay, which is big from nothing 12 or 13 years ago, they want to be global, they are coming. They’ve got their own challenges, but when someone that big who is backed by the Chinese government wants to, has global ambition, you better have your eyes open.”

On the world payments stage, Scharf pointed to Russia as having huge disruptive potential in that region. “The reality of everything that we’ve seen is the only thing that is a structural change is what’s going on in Russia. We’ve said that Russia is deciding to build its own domestic processing network that will cost us $50 million next year and a full year runrate will be $75 million. That’s a permanent reduction from which we can then grow from there, because we still participate in the Russian marketplace, all the other things that have affected us, the things that are just very short term oriented. And the underlying growth and the performance of the payment volume across the country is double digits.”

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