PP005 - Innovations in Card Payments
Participants: William Reid, Vice President of Visa Commercial at Visa International, Peter Scott of Sun Microsystems and Mike O’Hara of Voices in Business.
Mike O’Hara: Hello and welcome to the Payments Podcast brought to you by Voices in Business and sponsored by Sun Microsystems.
Today we’re talking about innovation in card companies. As the payment space evolves card companies are rapidly evolving too and moving beyond the traditional range of services they’ve offered in the past into whole new areas of business. So what are these new areas that card companies are moving into? How will this evolution manifest itself in their offerings to both business and retail customers? And how will the other stakeholders in the payment space respond to these new innovations from the card companies? I’m your host, Mike O’Hara, and this week Peter Scott, Global Head of the Banking Sector of Sun Microsystems is in San Francisco to discuss some of these issues with William Reid, Vice President of Visa Commercial at Visa International.
Peter Scott: So, William, first of all, could we just talk about the ways in which you see card companies extending their services in the future and the potential that this is possibly going to open up in terms of the new innovative services that they’re going to provide in the future?
William Reid: Sure, and it’s a great question to start with because if we look backwards in the history of card systems, you can see that really cards themselves were born out of innovation, and that innovation was prior to a card, if you wanted to buy, say, a washing machine, you had to go to a store and either work directly with the seller to secure some sort of credit, bring cash or a cheque, and that was a very cumbersome way of making a payment. And then suddenly credit cards came about and, very quickly, became ubiquitous and that really changed the way commerce was done, because you went from actually having to have secured your credit earlier or to bring cash, and suddenly you could make a payment at the point of sale with unsecured credit. And that was really a radical innovation, because prior to that it didn’t exist.
Now, if you take that one innovation and then you move forward and say, so what else has happened? You can say that the card companies themselves have continually gone through innovation and product extension.
PS: I guess the ATM technology, I mean that was all driven by the card companies as well.
WR: That certainly was, and then if, you know, we talked about credit, but then shortly after that you had a debit network that could be used, and then there were product extensions, and we’ll probably talk more about things like adding data, or improving other services around the cards. So, really, it’s never been a static industry; if you look at a lot of other payment mechanisms, you could probably argue that there hasn’t been a lot of innovation around wire transfers over the past 30 years, they pretty much work the same way everywhere. Yet, you look at a card, and you look at what a card could do 30 years ago and what a card can do today.
Radically different.
Absolutely, yes.
Whereas the correspondent banking system has been pretty much the same, you know, since the time of the early sort of Medieval Ages.
That’s right, since double entry accounting I think is about the last innovation.
[Laughs]. Looking at extension, I mean you were talking about providing more information and around, I guess, the statements that people get from their card companies?
That’s right, and we’re talking about the value of it’s not just enough any more to make payment; now you need to move data with that payment, and data comes in a lot of different forms. Sometimes in a commercial arena it’s about providing an invoice number, or a PO number, or tax information or even line item detail. Even on the consumer side though people want to see, what did I buy at what store? So, the data has to be tailored for the audience but, nonetheless, you need to be able to provide that upfront.
Now, what can be done with a card system is that you don’t have to just move data along with the payment, you can also pass data post transaction, and that too is a bit unique. And by that I mean, for example, information that comes from third parties, so, car rental agencies, hotels, airlines, you can get a lot of data post transaction that can come back to you that is married with the original transaction.
Right.
And that is very valuable when you look at Corporates trying to manage very large numbers of transactions for all their T&E or their ad-hoc purchases and, in that case, that’s the right amount of data for that transaction.
So this is really procurement cards and people managing expenses and simplifying the expense claiming processes and this type of thing?
That’s right, and that would be another example of, you know, how you had a product extension then. There was a consumer card, and then there was some fairly rudimentary commercial cards, and now most commercial cards are very robust with their information that they can pass.
Can we move on and just talk a little bit about the way in which card companies are moving into higher value transactions, and the implications for that on pricing and this type of thing?
You know, it’s something that all the card companies have looked at, and certainly the success within the travel and entertainment space or the lower value ad hoc type purchases, there’s been a lot of growth in that with cards. However, when you look at the card systems as global, ubiquitous, secure systems that can provide predictability and visibility into a payment, it makes a lot of sense to begin to move into the larger payments or the more strategic payments around cost of goods sold. And that’s where I think the industry as a whole is trying to go, however, we have to solve a couple of things and this is where, again, innovation and product extension come in. So for example, if we take probably two things that are preventing a lot of growth in this space would be price and process. And the price is most cards are based upon an ad valorem type fee, a merchant discount rate.
It works very well, there’s a strong value proposition around it; however, with certain transactions you begin to struggle with the ad valorem based pricing. However, if you could change the way the pricing is made and change some of the cost drivers behind it, you could potentially the industry could offer some sort of a transaction based pricing. It may not be at that point a card anymore, because a card brings certain values, but you could change the way the pricing is calculated and that would solve half of it.
The second piece is that you then have to change the process and, as I talked about unsecured credit at the point of sale being innovative, once again you need some innovation, which is moving from payment at the point of sale to a buyer initiated payment solution. And if you look at ACHs and wire transfer systems, they lend themselves to buyer initiated payments, as do cheques. And that would be something else that the card systems, or the card companies may turn to and say, that is something that the industry needs, the corporations need.
Okay, so this is really moving into areas that were historically the domain of banks who are taking bulked or batched initiated transactions and uplifting those through the banking system, and you’re saying that the card companies could move into this space potentially?
Well, the card companies could provide a very strong, robust infrastructure that would allow the banks to provide better service, and that’s what we’re talking about. We’re not – I don’t think card systems today are thinking about going directly to clients. I mean we can’t – there are lots of things that banks offer that bring a lot of value: credit facilities and cash management services and things like that. But certainly a ubiquitous infrastructure that can move payments efficiently brings a lot of value to a bank, and I think banks would agree that they want to try to use the best infrastructures to support their value added products to the Corporates.
Yes, that’s interesting. I mean certainly when you start looking at some of the trends around the world and what they’re doing to the payments business, you have things like SEPA in Europe, which is really driving the banks towards much more commoditised services in terms of the pricing that they can actually wrap around payments and is driving all the banks to the, really to the lowest cost optimised solutions. And I think also to a certain extent the extension of the MACUG the score system by SWIFT, which is allowing banks to capture somewhat commoditised, standardised initiated transactions, also trends to this pattern of having a much more commoditised and simplified proposition from the banks. So, processing services at low cost is what they’re looking to actually access in order to conduct this business in a competitive way, so it could be interesting in terms of the way that the card companies will fill that space. Can you tell us just a little bit about how you see the card companies potentially offering financial supply chain type solutions?
Sure, and I believe that the card infrastructures could provide it a couple of different ways. One is again, there are a lot of payment infrastructures around the world, and typically they’re almost all domestic in nature. So, at the domestic level, there is pretty good, in at least your G7, G10 type countries, where you have good predictability and visibility of a funds flow. When you go cross border though that quickly begins to break down. And going back to this concept of a ubiquitous system, or a ubiquitous infrastructure, you could conceivably have full visibility of payments throughout the world, and that as trade goes cross border, and sourcing, and logistics are all supporting international trade, the last piece is really the payment. And if you can improve the way payments are made and the predictability of those payments, you then can begin to offer better, or I would say cash flow forecasting for example, that corporations are looking for, because they see the inflows and outflows of payments.
Now that’s one piece, the second thing is that if you have an infrastructure that plays the role of, say, I use the example, a cloud in the middle, so all banks come into this cloud, this infrastructure. The infrastructure has the ability to see everything, and beyond what even a global bank could see, and that has a lot of value because suddenly you could capture information, could be around credit, or payments and things like that, that really have value to everyone, not just a single bank. And that’s something that, say, a card company could offer that everyone benefits from, including Corporates.
So you’re really thinking about something rather like eBay, which tells you the frequency of transactions of a trading partner – party, and the number of times that trades have effectively settled effectively by being that cloud in the middle, that would give some insight into the…
That’s right, and the difference is, is that we’re not thinking that we would ask a CFO to please logon and post their experience of a previous transaction. But certainly knowing when payment was made within terms.
And the value, I guess?
The value, the currency used, all of that has great value.
And the frequency too?
That’s right, and it will all help improve overall global trade.
In order to be able to operate that type of global cloud in the middle, you would need extremely strong branding and market visibility, but also those two things that are most important in branding, a ubiquity and, secondly, trust, it could position you to effectively do that. Could you just talk to us a little bit about how card companies and card companies have got some of the strongest brands on the planet, how that could be leveraged around things like e-services, mobility within the payments infrastructure and, specifically, some of these Near Field Communication technologies that are beginning to emerge?
What we’ve seen is that if you look at the three largest card companies in the world, those three card companies all have brands that are globally recognised. Yet, most other forms of payment don’t have any branding associated with them. Now we’ve seen where brand is being introduced at the ACH level, but even still, if we pick on wire systems again, it’s very doubtful that there’s any brand associated with wire, it’s seen as a commodity and there’s no distinction between wire systems.
Now, if you then look at the cards, who have very strong branding, and you begin to talk about, for example, the success throughout the 70s and 80s at the point of sale and the growth of where cards could be used, in some countries you began to reach saturation, that it was truly ubiquitous. That you no longer, at least in the UK, or the US, Canada, pretty much throughout Europe, you don’t even have to look at the door anymore and say, “Gee, I wonder if I can use my card here?” Certainly, if it’s a Visa card you can just assume you can use it, and you probably don’t check for signage.
However, if you go back to the mid 90s, late 90s, when the internet started to become an actual solution for e-commerce, where you could go online and suddenly there were stores selling and there were people procuring, you needed a method of payment. And, it’s kind of interesting because, in the late 90s, you had solutions for internet currency or to make payment, such as beans, flues, cyber cash, and all of these ultimately disappeared or merged into other companies who kind of no longer used that name. And yet credit cards were used, to a point now that credit cards make up the bulk of payment online.
And I would have to say that that’s because, as a consumer or even a small business or large corporation, they recognise that there’s great understanding with cards now of how I can use it, the security, the billing, everything about it we’re very comfortable with, so it’s just a natural use of the card to go online.
If you then take that and we talk about mobility, let’s take in its – maybe one of its simplest forms around mobile payment with a phone. There are a lot of different phone services out there who are all competing to be the phone in your pocket or the service on the phone. Yet, when you talk about payment you have to wonder, is someone going to be comfortable using an unbranded, unknown, method of payment or, will they want, again, some security of, I already have a method of payment, it’s in my wallet, that is what I prefer to use.
Yes, it’s kind of branding again.
And I think it is, it’s definitely branding.
It’s interesting, I actually met the CTO of Obopay yesterday at the JavaOne Conference here in San Francisco and there’s an interesting service because it’s actually leveraging the strength of brand from the card companies. They’ve recently announced something with Citigroup, so it’s actually an infrastructure, which is in the mobile payments base, but it is riding top – on top of existing card services’ infrastructure.
That’s right, and this is where we’re going to see a lot of product extension and innovation. And one of the things that Visa has been working on, and we actually did a demonstration of this about a year or so ago with some senior executives within Visa. And what we did was, we took an RFID tag and put it into a phone, and that phone could be used not just for payment, but also collecting of information. And the way this phone worked was that we mocked up a small town to show how this would work, and all of these executives had the phone, and you would go up to a poster, and the poster is in a language that you can’t read. But there would be a place that you knew that you would put your phone on and it would be a recognisable symbol, and as an example, as I pull this card out of my pocket, more and more often you’ll begin to see that recognisable symbol, and it’s just a bunch of lines that…
This is the Visa Wave symbol.
It’s the Visa Wave and it’s not just simply going to be used for Visa, but all cards. So it’s going to be something that again you’ll look for. But going back to my example, what would happen is you would take your phone, hold it up to the poster and even if you can’t read Mandarin, the information would be downloaded to your phone, and if you read French, that text would be in French, or if you could read English, it would be in English. And that’s an example of there was no payment made, but data had to be passed from one object to the next.
Right, so, William, what you’re saying is then, that card companies are looking at ways in which they can move from the payment provisioning space into more of an information servicing space?
I think it makes logical sense that you can say that today card systems provide financial messages, and that’s what is done every day. Yet, to look at a global infrastructure, you could easily say, “Why does it have to be a financial message? Why can’t you pass a non-financial message?” And it would be a logical extension if a system today can efficiently provide that information better than anyone else, why wouldn’t that system do it?
Can we just explore a little bit more the Wave symbol, this Wave symbol is shared across different card providers?
Yes, it is. The reason why we did that is sometimes you have to say, yes, we’re competitors, but where it makes sense we need to co-operate.
Right.
And the term that I’m beginning to hear more and more often is co-opetition, which is kind of an awkward term, but no-one’s come up with anything better, so I guess we’ll stick with it. But the concept of co-opetition is, if competing companies can come together on something that is at the level of infrastructure that will help the industry over all, or will improve efficiencies for Corporates, then it’s probably worth doing. And, an example that I would use is, recently I was in the Omaha Airport, which is not a large airport, but there’s a small food court and there are competing food restaurants, fast food restaurants, and they recognise that in a smaller area, rather than have very large storefronts, they had very small storefronts, and they all competed on their signature sandwiches. When it came to the time of the drink, all the drinks were centralised, so each of these companies didn’t have to hold their own inventory. So the thought was, if I can use the example of Kentucky Fried Chicken, you would buy your KFC sandwich, when it was time to buy the drink you took it from a communal cooler and then, at checkout, they just applied that Coke to that KFC bill.
So the restaurants realised that they were competing in the differentiation of the different types of foods, but they weren’t differentiating in the drinks that they were supplying?
That’s right, bottled water, they weren’t competing on a Coke, or Pepsi, or anything like that.
Well, I think that’s interesting, and it brings us really towards the end of this Podcast, so just in summary, I mean, I think some of the things that we’ve talked about here will have some of the larger institutions around the world gasping in terms of the potential threat that they might perceive from card companies moving into areas of the business where they’ve considered themselves to be sole providers. Have you got a, sort of, last message to those organisations who might perceive you moving into higher value payments, moving into financial supply chain, as being something of a move on to their turf?
Well, that’s a concern that we’ve heard before, it’s certainly when Visa was formed as well as some of the other card systems out there, that there was always a fear of levelling the playing field. But, if you look and say, these systems provide infrastructure, and just like my example with the restaurants not wanting to compete on soda and water, but rather their branded sandwiches, the same argument can be made that, as a very robust, efficient network grows and continues to add more transactions to it, there’s probably less value in proprietary systems that maybe banks would like to offer.
The real value is the services that they can offer off the ubiquitous backbone, and that is really why the BofA franchise was sold and it became Visa because, at some point, there was just no reason for every bank to try to run their own network. Why not just put everything together and have a single network, and then everyone could benefit from that very large network?
And we would do the same thing again, I mean just because it’s a card payment, why would it be any different for a larger value payment if we can provide the enhanced data in the post transaction data, in the security and the infrastructure, and a ubiquitous solution that touches 100 plus countries, why would you want to try to make that yourself?
Indeed, and to what extent, I mean do card companies themselves, are they likely to be outsourcing services and operations to lowest cost suppliers? I mean, there are people like China UnionPay and other card processing organisations in the world that probably operate at lower cost basis than some of the card processors in the United States and inEurope. Do you see that that move toward commoditisation and the seeking of lowest priced services, something that the card companies themselves will start using?
Well, I think it’s a great question, because if you look at just industries in general, most industries have looked and said, “Where do I add value?” Where do I outsource? And although I don’t know exactly what parts of the card systems could be outsourced, certainly if the card companies realise that they can provide better service from outsourcing certain pieces, or maybe actually being the in-sourcing from other operations, it could go the other way. I think it makes sense, and if it benefits the industry as a whole then it’s probably something that ultimately will happen.
Yes, they’ll consider doing. Fantastic, well, I think that’s been a really interesting conversation, and certainly I hope fascinating for our listeners in looking at the ways in which card companies are driving innovation and some of the potential impacts on the way the world will work in the future. William, thank you very much indeed.
Thank you.
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