Visa’s $2 billion purchase of CyberSource, a leading e-payments provider, may mark the beginning of the wars over who will help merchants and consumers transact over the web.
PayPal has had a sweet deal up until now. It pioneered a method for people and businesses to transact at the beginning of the last decade. It won the hearts and minds of the buyers and sellers on eBay, whose numbers were exploding; figured out how to deal with critical risk and fraud problems; and so out-classed eBay’s homegrown payment service that the auction site threw in the towel and bought PayPal. Since then it has become a profit machine for eBay and become a global acceptance mark online. It has moved off of eBay and has aggressively courted merchants, from the small to the large, to offer it as a mechanism for consumers to pay them.
While adored by many users for its convenience, PayPal hasn’t been loved by all. Some merchants don’t like its fees, the fact that it takes consumers off of their sites, and the fact that PayPal gets much of the valuable data associated with those transactions. As a result, many merchants continue to make consumers go through the daunting and time consuming process of filling out a detailed form, including inputting their card info, each and every time when they go to checkout online. Most consumers never consummate sales they start because they don’t have the time, don’t want to run downstairs to get their cards, or make a mistake and give up in frustration. These merchants aren’t stupid of course–they include many large and sophisticated ones. They’ve just decided that partnering with PayPal isn’t in their long-term economic interests.
Now, you might think that the card networks would appreciate PayPal providing a handy wallet where people can put and use their payment cards online. But, of course, everyone knows that having gotten your card in their wallet, and gotten you hooked on the ease of use, PayPal is trying to get you to drop your cards in favor of your checking accounts. That reduces PayPal’s costs and expands its margin. So while the card networks savor the fees from card transactions that have been done through PayPal they know that party is going to wind down someday. (They are being disintermediated for readers who like words with lots of syllables.)
Fifteen years after the start of the commercial internet, the card networks are scrambling to figure out how to make online work as well as offline. Offline consumers walk in, swipe their cards, and cardholder and merchant have smiles on their faces a couple of seconds later. It would be weird offline if the merchant said, hey consumer, why don’t you step outside and give your card information to this other firm—by the way that firm might suggest some other payment options to you–and then come back and see me. Online, that is what the merchant is sort of doing in offering the consumer PayPal. Unfortunately, the other alternative is to say to the consumer, thanks for your business, now could you fill it the next two pages and lot’s of luck if you get through it all.
This brings us back to Visa’s CyberSource buy. CyberSource is the e-commerce engine for about 300,000 merchants (their Wikipedia stub entry says half of all NYSE-traded companies but I haven’t verified that). It mainly helps these firms with key back office tasks—risk and fraud most importantly, call centers, and then processing. It will be a great building block for Visa to provide e-commerce solutions to merchants. What merchants need, and hopefully what Visa will ultimately provide, is what they have offline: a fast and convenient checkout without leaving the premises, without losing control over their own data, and with risk and fraud control.
The stakes here are huge. Internet commerce is going to expand worldwide. Internet-connected mobile phones are going to be pouring gasoline on that fire. Over the next decade or two billions more people will obtain access to the internet over the mobile phones. They will have near-constant connectivity to web-based sellers and devices that will facilitate transactions. Consumers and merchants are all looking for ways to reduce frictions at checkout and the card networks-which have done that offline–are sure to want to do that online as well.
My guess is Visa’s $2 billion is a bet on being there. The other card networks will do their own things to get there. Of course PayPal isn’t standing still. This highly innovative company is trying to get entrepreneurs to develop applications using its payment engine. So, I say, let the games begin.
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