Visa’s “Everywhere you want it to be” tagline might become even more everywhere—if that’s even possible—if the aspirations set forth last week with the launch of Visa Digital Services and Visa’s digital acceptance mark, Visa Checkout, become reality.
The largest payment network on the planet has finally shown us at least a few of the cards it’s been holding pretty close to the vest since Charlie Scharf took over as CEO and the subsequent radio silence around V.me ensued. And by the sounds of it, Visa seems to be taking a page out of its 1995 debit card playbook by, among other things, stimulating consumer adoption of Checkout with massive amounts of consumer advertising.
The big question is whether those strategies will produce the same outcome since the circumstances almost two decades later, I think, are vastly different.
Here’s where a little payments history lesson might come in handy.
In 1995, if people wanted to pay for something in a store using the funds they had in their bank account, get this, they wrote a check. Debit cards had been around for 20 years but hardly any banks issued them and virtually no consumers had them. Marketed as a debit product, consumers confused “debit” with “debt” and thought using the product was a bad thing. Of course, the merchants all had terminals that could accept signature debit cards if only Visa could persuade banks to issue them and consumers to want to use them. (Around the same time the ATM networks were also pushing PIN debit cards and that added to the momentum on the part of banks and consumers to get these cards and start using them. That’s a longer story for another day.)
Visa set out to solve that problem in two ways: By giving issuers a business model that made it worth their while to issue the cards and by spending boatloads of money on advertising to get consumers interested in using them. For starters, they launched an $8 million, month-long campaign in 21 markets that rebranded the product and educated the consumer on its merits. The value proposition was rooted in convenience and speed and used an analogy that was familiar to most consumers: Using a Visa Check Card had all of the benefits of writing a check but none of the downside that came from having to produce an ID at checkout and waiting forever for approval. That campaign quickly ramped up to one that over the next year featured Bob Dole (probably the most famous), Daffy Duck, and Pierce Brosnan (clearly the most handsome) as James Bond; all of whom famously underscored that point and that cost something like $100 million.
Over the next ten years as Visa worked to get issuers and consumers on board, the advertising drumbeat grew louder and more expensive. In 2004, it was reported that Visa spent in excess of $350 million overall to advertise in the US market, including ads to promote the Visa Check Card product, one that featured “The Donald” dropping his Visa Check Card from the roof of the Trump Tower.
“Over the last ten years, the Visa check card has grown from a great idea to common currency for millions of Americans”
Ten years later, in 2005, Visa reported that US consumers used their Visa Check Cards 5.1 billion times and that the number of banks issuing their debit cards grew to ~9000. Its market share then was roughly 74 percent of the debit card market (today it is a tad more than 60 percent). Even a Wal-Mart instigated lawsuit that prohibited Visa from forcing merchants to take debit cards as a condition of accepting credit cards didn’t derail Visa’s momentum. Given the choice virtually all merchants continued to take Visa debit as well as credit.
Consumer surveys done by Visa then also reported that 63 percent of consumers said that the Check Card was their preferred method of payment, up from 46 percent three years earlier. Interestingly, I think, 76 percent said they used their Visa debit card to make internet purchases, up from 44 percent in 2002. And, 84 percent of consumers also said that the Visa Check Card was a more important innovation than the iPod and 62 percent said it was more important than the cell phone. Interestingly, of course, no one calls it a Check Card anymore – they call it a debit card! And by the time of the financial crisis everyone knew that credit meant debt, and debit meant pay as you go.
Reading the transcript of Visa’s Q3 2014 earnings, I couldn’t help but think that things sounded vaguely familiar.
- In 1995, Visa had bupkus in terms of debit card consumer adoption and relatively few issuers on board. A press release that year claimed that there were something like 25 million Visa issued cards in the market – big whoops – and getting consumers to use them was a challenge. In 2014, Visa has 2.2 billion cards in the market worldwide; until recently, the largest number of debit cards (China Union Pay eclipsed that last quarter) and nearly half of the credit card market. Getting consumers to use cards isn’t the problem, but getting them to adopt a new way of paying is, once again, Visa’s challenge.
- In 1995, Visa used tons of media advertising to juice consumer adoption of its debit products in order to generate consumer usage and with that volume, get more issuers interested. In 2014, Visa says it’s set to unleash a major advertising campaign around back to school and holiday to drive awareness of Visa Checkout and to get consumers to use it.
But here’s where things are dramatically different.
- In 1995, Visa’s problem was one-sided. Merchants were already on board in the sense that they had terminals that were capable of accepting signature debit card products: All they needed was consumers to get cards and swipe them. All the banks had to do was to swap ATM cards for debit cards – no biggie. In 2014, Visa Checkout is of the nasty, gnarly and dreaded two-sided variety: Merchants and consumers both have to sign on – and change what they are doing today to boot. And neither side will sign on without proof that enough of the other has already done so, so we have your classic chicken and egg problem or maybe the classic Mexican standoff. Solving a two-sided problem is inherently more difficult and something that Visa hasn’t had to do in 50 years.
- In 1995, Visa was owned by the banks. As a result, the Check Card business model had to advantage their bank owners and increase both the number of cards that got into the hands of the consumer and its usage. Visa did that by establishing interchange rates that were right up there with credit cards. Issuers didn’t really care about cannibalizing their money-losing check product since this new product would produce a new source of revenue for them. And the cards all worked at the merchant terminals so Visa didn’t have to do any work on that side either.
In 2014, Visa is a publicly traded company with shareholders. The stakeholder here that Visa has to worry a lot about this time is the merchant and Visa (and the networks more generally) are hitting the merchants at a time when they are particularly grumpy. These are, of course the same merchants that are already pretty ticked off about interchange fees and fought like tigers to get debit rates reduced – and won, although the reduction wasn’t as much as they wanted. Although Scharf declined to comment on interchange fees for its Checkout product, card not present (CNP) rates are higher for merchants, especially if consumers attach a credit product to their Checkout account (but obviously good for issuers). Of course, Visa has to make sure that issuers support Checkout and get their consumers to load their cards into Checkout, but they also have to do that with both a technology and a business model that merchants find appealing. And, that’s not the slam dunk it was in 1995 for a whole bunch of reasons. More on that later.
- In 1995, there was a technology standard in-store that was consistent across all merchants: The mag stripe reader. All debit cards worked at all merchants. In 2014, the in-store digital acceptance standard is TBD. Visa, like MasterCard, over the years has invested tons of money into promoting NFC acceptance at little gain. Less than 14 percent of all merchant locations can enable an NFC transaction today and some big merchants have turned it off entirely. Scharf said in the earnings call that Visa’s platform will support NFC and QR code but merchants all believe that the network end game is NFC, an end game that they have resisted for years for fear of being locked into a business model that gives them very little control over pricing and their relationship with their consumer.
- In 1995, the competition for the Check Card was the check and who wouldn’t want that as a competitor! In 2014, there’s a ton of competition in the digital “wallet” space and a pretty big entrenched competitor by the name of Amazon. Online, which is where Visa Checkout is focusing its efforts, it’s probably fair to say that Visa isn’t really even a fast follower. PayPal has a ~16-year head start and ~160 million registered users and massive online penetration. New players like ShopRunner have gained acceptance at more than 100 online merchants and a big bunch of registered accountholders who are incented to use it across the ShopRunner network because of free shipping and exclusive offers. And for power online users who frequent the same stores, the registered card on file model is probably the hardest player to unseat. Bottom line, in order to shift consumers to Visa Checkout, it’ll mean asking consumers to ditch whatever they are doing today – and that’s never easy.
So, Visa has a bunch of stuff to work thru to be successful in the digital space. It has the potential to become a pretty fierce competitor in the mobile commerce space: Visa has the market share, consumer brand familiarity and $5 billion in free cash flow to fund a massive amount of stuff to solve their two-sided market problem with Checkout. They have embraced the open platform model that my colleagues and I have advocated for years (and which MasterCard’s MasterPass has been in market with for some time). But they have a big hairy set of problems to work thru and an ecosystem that has gotten more, and not less, complicated over the last 20 years.
I’m not inclined to spill all of my guts here in terms of what Visa could be doing to be successful long term but here are a few initial thoughts as I went thru my own Visa Checkout experience.
The consumer is the one stakeholder that Visa has never personally touched even though they market to consumers massively and many consumers believe their card relationship is with Visa and not their issuer. Now, with Visa Checkout, they can. When I signed up for Visa Checkout, I had to give my name, email and mobile phone number; Visa now has an ability to communicate with me and all Checkout customers directly. That will make the issuers (and maybe the merchants too) even more nervous about the degree to which Visa is only an enabler of their digital commerce ambitions. As a publicly held company with Wall Street and shareholders to worry about, more than one person has remarked more than one time over the years about Visa’s long term ambitions to go direct to consumer. Visa Checkout won’t quell those concerns as loudly and forcefully Visa management says they don’t plan to.
As prominent as the Visa Checkout promotion was on the Neiman Marcus site where I signed up, I wasn’t tempted to sign up because I was offered anything special if I did. Further Visa Checkout is the last option on the checkout page, after registered account, ShopRunner and PayPal. For Visa Checkout to get more prominent placement, they’ll have to give the merchant some sort of incentive. For consumers to take the Visa Checkout bait, they’ll need, well, bait – and then lots of places to use their Visa Checkout account after that. Just ask PayPal how hard that is to accomplish, even when the starting point to getting merchants interested is millions of digital accounts. Visa says that offers and promotions are on the way, but they’ll need to be thoughtfully crafted in order for consumers to establish long term preference for the product and not the one time promotion. Given the competition, that’s going to be expensive and take time – since it also requires merchant acceptance, oh, everywhere consumers want it to be.
As simple as my Visa Checkout account was to create, it’s still a process that interrupts the checkout flow and the first time is a bit clunky. Setting up the account requires validation via email which takes a user off the merchant page. After I was done, I also wasn’t entirely sure that I had an account established back on the merchant site. So, checkout with Visa Checkout just takes longer the first time increasing the risk of an abandoned cart – merchants hate that thought. Checkout also doesn’t force the user to put in a Visa-branded card, which is a puzzle, to be honest. Visa has the largest share of debit and half the market in credit, so why not make their wallet a Visa Checkout product that advantages Visa products and creates even stronger card preference? Further, to advantage Visa issuers, why not enable account registration via the issuer’s mobile banking page so that by the time a consumer gets to the merchant checkout page, their Visa Checkout account is all provisioned? Seems like such an obvious thing to do. That would make it easier for consumers, make the issuers happy since their card would be “top of wallet” at the same time it would increase the number of people with enabled Visa Checkout accounts, which would also increase Visa transaction volume.
Visa Checkout is an online mark now but everyone knows that the big land grab is for in-store payments via a mobile device. I think that if Visa really wanted to get massive penetration of digital accounts to be used both on and offline in a relatively short period of time, they’d stop steering the market to NFC and promote tokenization and QR codes in order to reach every human being with a smartphone today. That’s also something their relationship with Loop can help them do, as well, if issuers get on board. Yes, I know that the rumor is that Apple is going to release a phone with NFC and that, when it does, it will mean “game over” for everything but NFC. But, even if that were the case (and I have my own theory of the case – article on that coming soon) that still won’t reach the majority of people with phones nor give people places to use it today or in the foreseeable future.
Speaking of Apple, Scharf discussed Visa’s plans to make it easier for developers, OEMs, telcos and technology companies big and small (code for Apple) to embed Visa Checkout into its solutions by going directly thru Visa. This is where I think things could get interesting and pretty hairy. Visa has to get merchants on board somehow someway. We all know the one big lever that they can pull to do that – interchange rates. But Visa will have to decide (maybe they have) who gets the good deals and who doesn’t to ignite acceptance – and it will have to be careful. Does Apple get them and not PayPal? PayPal is a Checkout competitor but also drives a lot of volume to Visa and has the capability to flip consumers to ACH, not to mention leverage their own acceptance network in creative ways with some of the same powerful players. The complexities of the ecosystem make it impossible for Visa to make everyone happy anyway but how they decide who gets what deals to get the merchant side of the network revved will not only be interesting to watch, but determine how other players in the ecosystem react to take advantage of perceived “inequities.”
Scharf also addressed tokenization in his remarks and it’s clear that Visa wants to set the standard for tokenization and play a role in issuing tokens. That’s coming, though, on the heels of bank initiatives to do the same thing, not to mention a bunch of technology players that do, too. One has to imagine that Visa’s efforts will be somehow linked to its interchange rate scheme – use our tokens and you’ll get a preferred rate since we can reduce your CNP fraud. Again, how this gets sorted will determine who aligns with whom as well as who in the tokenization world lives or dies.
So, for Visa Checkout to succeed, I think that Visa needs to party like it’s 2014, and not like its 1995 since the music and what people will be wearing to the party aren’t the only things that are different. Visa has a two-sided problem to crack that is the hardest problem in payments and commerce. To get the party started, it needs enough of the right merchants and consumers to arrive at just about the same time in a good mood. I know I can’t want to see how people on the invited guest list respond and how long it will take them to show up.
I just hope they bring back Pierce Brosnan in the Visa Checkout ad campaign.