Online Exclusive: Excerpts from Interview with Visa CEO Malcolm Williamson

Branding and the Olympics I. Introduction Malcolm Williamson: I want to talk about what I've been doing to try to restructure Visa somewhat. And I wanted to talk about the strategy that we have which has been sort of updated and recently approved by the Board.In our most recent quarter which ended last December, we've seen worldwide volume up by more than 19% over the previous year. So it's been a very, very sort of strong quarter.

Obviously there are regional variations. For example, Latin America had growth of 40%. You've got these differences obviously between mature and not so mature markets.

We've got we believe a billion cards out there. We're not quite sure whether we've past that mark or not. We're trying to find out where it is, and have some sort of celebration because it's quite a landmark for the industry.

The transition of Y2K went very seamlessly. We had no repercussions from it at all.

We founded a thing called Global Platform this last year which is a cross-industry group which is driving this development to multi-applications - smart card standards around the world. That group now has 37 members including American Express, BT, JCB, all sorts of famous names. We think it's totally important to put aside parochial issues in the interest of trying to get global standards sorted out, which is more important ... for everybody, particularly if you're to make inroads into cash and checks, which are still our biggest competitors. On the Internet, we're by far the most preferred payment.II. Shared services Mr. Williamson: I just want to tell you a little about this reorganization next that we did last September. I spent a lot of time talking to people before and after I joined Visa. When I say people, obviously staff, and members to try and find out what they felt about the Visa association, what we were doing well, what we were doing wrong. It was quite interesting the feedback. [Some bankers] felt that paying fees to Visa was a bit like taxation to the government. You pay for what you got and you didn't have much say in what you got. There were others who felt we needed a great deal more flexibility to do things . what the market wants to do.

So what we did as a result of all this is that we said, Okay. Never mind what we've got in San Francisco, but let's think what we actually have if we were creating this sort of head office of the global empire like this. What would you actually put in there? What wouldn't you, for example?

So we kind of started from the upside down position. We concluded that there were things that were important for Visa to do in the center. Those were primarily brand management, because it is so important to keep the brand integrity and it's such a valuable brand. [Visa is the] 14th most known brand in the world, which is quite remarkable for a brand that is sort of joint venture brand. It's not a Coca Cola.

We decided that the center should be responsible for risk. You don't want the regions doing silly things on risk. We obviously wanted to keep tight control over interoperability and global platforms. So if you've got a credit card that works in the States, it will work in Timbuktu or anywhere else you wanted&

Other than those things that sort of platforms, risk, brand, strategy it was felt that it was a great opportunity to do a bit more decentralization within fairly straight parameters. We start of with a principle of . if it can be done in the regions, why would we do it in the center. Center should be policy. It shouldn't really be doing things.

Now historically, we've had occasional other things that the center would do things. Also it was IT-related and it was there because it was hopeful to do it with benefits of scale . give to the regions. It wasn't much point for the regions doing all the own processing, we felt. But it's true that some countries today do their own domestic processing, but obviously all the international processing and a lot of domestic processing is bundled up and sent to San Francisco.

So the thing was with all that, let's run that much more commercially. And certain people were moaning about the taxation. Let's take all this doing stuff at the center and put it in a separate company. Let's run it to those straight commercial principles.

One, it's going to be very transparent. If people pay bills, they know what they're paying for. It's absolutely clear what they're paying for. They're not going to be asked to cross-subsidize what they don't want to. If they have to pay for things they don't need to... let those who want to pay for it, pay for it. Those who don't, don't need to. If you want to come in later than others, pay an entry fee to get back in. But the whole basis . let's run this like an EDS. Why would you not? How does an internal business, something that really in theory could be totally outsourced anyway? Why not run it like an outsource business?

In September we announced the reorganization of the center. Much that is involved is taking about 270 jobs out of the center. We passed a few jobs to the regions. I said this is better done in the regions. I don't know why we fiddling about at the center anyway. But you regions talk to your local boards and make sure you're doing what your members want&

We announced that we're going to set up this shared services operation. That is due to be launched in early April as a separate company, although there's been a lot of work going on to try and address the principles on which it is going to operate . transparency, improvement of management and accounting information and things like that. American Banker: What is it called? Mr. Williamson: It hasn't got a name yet. We're calling it the shared services organization temporarily. At the moment it's run as a division. But we are going to launch it as company in early April. So I think it's a case of watch this space.

It will have a name. I'm not going to be more specific than that. American Banker: Will it be wholly owned? Mr. Williamson: Oh, yes. American Banker: And that's a long-term thing? Mr. Williamson: Well, you never know. I mean we say it's long-term plan. For the foreseeable future I think it makes sense to run it as a subsidiary. American Banker: What's it going to do? Mr. Williamson: It's going to effectively . let's just say hypothetically that a country suddenly decides it wants to do all its own processing of the domestic type locally instead of with us in San Francisco. There are all sorts of reasons why people want to do that. You've got countries that have had problems with their currency, where they're charging their customers in local currency [and] paying us in hard dollars for the services we provide. So we can see why a country might want to have its control over the domestic processing and pay for it in local currency.

It's the job of shared services to do that. It's clients out there. Your job is to do what the clients want. Not to take what they can have.

So it will start of by simply doing what is happening in San Francisco today which is all this mix of domestic processing and international processing that goes on. Not all the development work associated with that. It will be done in a much more transparent way where there will be cost-based pricing and people can see what they're paying for and decide what they want and what they don't want.

Over time, we're changing all this to market-based pricing as our information gets more robust. So that people have the choices dealing with this company or going somewhere else.

It is also possible if you want to run it like EDS, that you allow that company to take in other people's work. A bank in . doesn't matter where it is really - [might] want to see some sort of domestic processing done, no reason why that company couldn't quote for it.

There are services that the center is going to provide. Clearly we have to have staff to deal with brand management and things like that. They will be passed out to the members rather like taxation. It's my job to keep their tax bill as low as possible and convince everybody that's it's being efficiently done. There are some things that you can't expect to sort of pay-as-you-go organization do. Research and development is a good example, which probably needs to be done at the center because . you have to get everybody to pay for that in the interest of the organization. You can't do that on a sort of pay-as-you-go basis. So there will be an element of taxation . . . to the center.

Shared services, as I say, will start trying to price out much more specifically its products and services to the different constituencies receiving them. So the U.S.A., for example, does all its domestic processing through Visa International. They will get a clear bill itemized for the U.S. processing... separate bill over time for international processing& something different. If they want to do all sorts of other things than they do today, they will negotiate with our company a price and the service level to do it. Out of that, the company will win on its own merits or it won't . hopefully it will. American Banker: And this is credit and debit card processing? Mr. Williamson: It's everything. All processes. American Banker: Are you creating a First Data, another EDS? Mr. Williamson: Yes.

III. Competitive ramifications of the new unit American Banker: Would you go public with something like this? Mr. Williamson: We've got all sorts of options, haven't you? There's nothing stopping you from doing that if that's what the Board decides it wants to do. We have no immediate plans to do that because I think there's a hell of a lot of work to do to get this up and running and running efficiently. To change the sort of internal way of thinking which hasn't been . if we're honest about it . as customer focus as it should have been. Trying to stand it on its head.

So it seems to me and the Board agrees it will take a period of years . two to four . to get this thing sorted out, established, make existing customers happy, maybe start to bring in new customers. I think if the Board at that time decided it was a logical reason for doing a quotation or partial quotation that would be debated at the time. You've got to ask why you'd do it because it's still a pretty integral part of what we do is processing. But you might take the view over time that you've become a company that's sort of extended beyond these activities. [At some point it could] make sense to bring in outside capital. They have a need for investment. These members feel they want to put into it and therefore it grows out some capital too. Enable it to expand in other directions.

What I'm saying is you have infinite possibilities. We haven't got a goal at this stage. It would be quite incorrect to see what we have. It opens up a range of possibilities that don't exist today. American Banker: Would members eventually choose this entity over a First Data or an EDS? Are you actually providing new products and services that you aren't already providing now? Mr. Williamson: Probably not on Day 1. Although we're debating to what extent it might be appropriate to offer some new services within a reasonably short period. I think the Board is anxious in the first instance that the service levels which are very, very high at the moment are maintained at that level. People aren't distracted by rushing out after other business to the point where it degrades existing service levels. So I think the company has to . it has to prove over time that it's working better than it worked before and it's got the scope to take in some extra work, if that's what it wants to do. American Banker: Do you have anything yet what revenues are associated with this isolated unit? Mr. Williamson: No. American Banker: How would the services differ from country to country? Mr. Williamson: For example, the U.S.A. which is a separate company, Visa U.S.A., books its domestic processing transactions through Visa International. But it also has a processing center of its own which deals with Plus amongst other things. If you take a country like Spain which is a contrasting example, the Spanish banks do all their domestic processing through a Spanish company which carries the Visa banner. The international transactions come through Visa International. So you've got this kind of separation at the local level and the international level.

If you take a country like Canada, their credit transactions all come through Visa International. Their debit transactions do not carry the Visa banner. There is a local debit system in Canada and the processing is done in Canada by the Canadian banks for that system.

So this is why I say it's complicated because you've got different answers virtually everywhere you walk around the globe. Is how this things works. But the theory behind the shared services organization is that if they can get the benefits of scale, they can run themselves efficiently. If we can keep the services levels as high as they are today. They may well encourage some of our Visa Espana to actually give up and come into shared services because it can be run more efficiently for them, than doing it on their own. Or it might encourage the Canadians to put their debit transactions through the shared services organization. It would be just an outsourcing. So there are all sorts of possibilities behind this and we're doing this quite deliberately to open up possibilities.

IV. Visa's evolving strategy

American Banker: What else is on your agenda?

Mr. Williamson: Our strategy [was] endorsed by the Board three weeks ago. Which is sort of positioning Visa to probably double its worldwide volume in four years. Re-invent Visa from the company that's just sort of based on consumer business [into] a major force in business to business and maybe some other market segments. And to try to seize the leadership role in the Internet channel.

This doesn't mean we've thrown out previous strategy. In fact, the strategy that was last visited with the Board in early 1998, and I came on the board in late 1998. I said when I came that I wanted to do is strategic review. But I said that one of my concerns at the time that the technology side ... is changing is so fast that I really was concerned that we wouldn't have a robust strategy if we didn't do some heavy re-thinking.

I have been with Visa now 18 months and we just concluded what we've been doing.

We agreed in 1998 that we wanted to accelerate the implementation of debit. The world has gone on at a pretty fast clip since then, we need to decide whether we are moving fast enough or far enough.

There was a lot in the previous strategy about driving chip card viability and establishing a leading e-commerce position. Nothing wrong with that, but again I had the debate on chip -- quite difficult when I first came to Visa because of the very different polarized views in different parts of the world about chip and its viability.

We knew that we had to do something to improve our processing capacity and update what's called our VisaNet, which was the system on which we process all transactions. It was looking rather old and not incapable of managing the transaction loads, but incapable of adapting quickly enough to the changes that members were demanding on a very accelerated basis.

So we've largely delivered on that, and I think the feeling was that the first thing we needed to do though is sort of advance those goals and probably put more steam in.

So we reaffirmed the brand strategy that it's very important that we keep the Visa brand top. We concluded that we could do more to accelerate the implementation of debit in some markets. And that's been worked on.

We felt a lot had happened on chip card viability. What we need to do was go harder in some areas on this. We have already agreed at the Board how to redevelop our major processing system, VisaNet, now called VisaNext. There's been a big expense on that to update it. But it's all been done as a sort of managed program over many years. We've gone for much more flexible range as it were. Every year we're agreeing a package of work will done on this system. That will make it more efficient and quicker to change and get some of the old programming, but giving us always the flexibility to move in a different direction, if that's what the market dictates.

We're sort of changing our definitions. Our definitions used to be cardholders and merchants. From issuing banks to cardholders from accepting institutions to merchants. We're now calling them buyers and sellers because the whole process is the way people working today means that you can make payments without having the card. If you've got your Visa application buried in a chip in a Nokia phone, we wouldn't call you a cardholder, would we? But that's actually happening in Europe as an experiment ... You have to call you a buyer. In the same way, sellers aren't necessarily merchants. It could be governments, it could be anybody. Or individual. So it's buyers and sellers rather than the old classification of cardholder and merchant.

We're saying let's look harder how we can expand selectively into some of these other markets. Attack payments much more aggressively overall. So that part of the strategy if you like is what I call the "expand" part.

The third pillar is to command the Internet. We have to protect our already leading position as an Internet payment settler. Somehow we've got to make our brand on the Internet as successful as it is in the physical world. To do that we've got to overcome some of these issues of security and the concerns that people have about the integrity of transactions. We've got to also look at whether we can take the Internet into our main VisaNext system.

So that's our strategy really. We're calling it Advance, Expand and Command. Advance, Expand and Command.

Advance the current strategy.

Expand into new areas. V. Smart cards American Banker: What is your current thinking on smart card acceptance?

Mr. Williamson: I think the issue of smart cards in the U.S.A. is quite complicated. I mean, sitting in Europe I couldn't understand why the U.S.A. was so aggressive about the Internet and yet so unaggressive about things like chip. It didn't seem to make sense to me.

Then I came over to live here and realized that the American payments industry is very different from the British banking industry, which is very different from the French or the German industry. There is good news and bad news about the American system.

The bad news is it still is a massively check-oriented society. The banks have made it historically extremely difficult to organize bill payment efficiently for their customers. Unlike Britain, where I could pay bills with incredible ease without writing checks. So I found myself as consumer here frustrated in my first month or two here that I seemed to write all these ghastly checks every time I wanted to do anything.

Trying to build a business case with chip, it's got several elements attached to it. One is fraud. The other is this sort of disintermediation strategy -- if you don't do it, somebody else will. You might lose your customer. And the other is the sort of added value you can get out chips with loyalty points and all sort of other things. A lot of countries are finding they can make a business case quite easily because the fraud levels are high. So Britain has decided to migrate to chip over five years because it can make a good business case. Part of it is based on fraud.

You try to do that in the U.S.A., and U.S. banks don't feel they have the same conviction of because of the low level of domestic fraud on magnetic stripe because of its peculiar system -- which is totally unique in the world. Nobody else has a zip code system.

So either the banks are going to find they have to run from behind the game of chips soon because I don't think they can afford to be out of it, particularly now you're getting all these different other kinds of devices that people can buy through, like the telephone. What they may find by waiting, of course, is that they can reduce the infrastructure spent at the merchant because the idea I think that you got to alter all your tills to put chip-readers in is fast becoming I think redundant. I'm not saying that it's redundant today, but I think it soon will be through wireless communications and things like that. So I think there is an awful lot going on with technology that is challenging, but I think the American banks have to do something in this area of chip card soon. VI. Antitrust American Banker: Are there comparisons to be drawn between the Microsoft antitrust case and the one filed against Visa? Is the shared services effort related to the antitrust case?

MALCOLM WILLIAMSON: It hasn't been driven by our court cases but there are a number of things that we're doing at the moment that probably undermine the basis of some of the challenges that have been made lately about what Visa is up to. For example, Visa U.S.A. has introduced a partnership program which I think is very sensible idea and which is being adopted in other parts of the world to the extent that it can be. Which says that if you will commit the major part of your business to Visa, you will get very clear discounts for that. So what you're really trying to do is to get banks to choose between Visa and MasterCard and go unambiguously with Visa.

Historically the battle with MasterCard has tended to be under-the-counter instead of on top of the counter. You come to us and there is a bit of paper rustling goes on over here, and nobody knows what the hell they've got at the end of it really. So you try to make things more transparent. Now the Department of Justice quite frankly their argument that we don't compete with MasterCard is completely undermined by that partnership program.

Some of it is hard on our business on the basis of defending lawsuits. But I always work on the principle that if you don't have a very open transparent way of running the business, it's much harder to attack. Because you have tend to have more logic behind it and individual decisions that go into that transparency.

Now you know when things go to court, it's always something of a lottery. You can never be sure of the outcome. But you're going to do your best to put yourself in a position where you win obviously. I don't think that anybody feels our cases in these suits are anything but quite defendable. But you know, I can't really hypothesize beyond that. It gets into difficult problems on the legal turf. VII. Branding and the Olympics American Banker: With the Olympics coming up, we're all bound to see Visa's name an awful lot. Are there any ambitions on the branding, marketing front that you are hoping to realize? Mr. Williamson: We've got a lot of debate going on until we have a Board [meeting] in June [about] our brand strategy and what we're trying to do. It's interesting you know, the regions take different views about the tie-ins. The United States has spent a colossal amount of money on Visa brand. As a result has an extremely strong market share. You can see a direct correlation between what's been done in advertising and where the brand has gone.

Some of the other regions have had a much less cohesive approach to advertising, probably because they're multi-country and the issues between different countries are different. So you might have had advertising in Germany for Visa, but you might not have had it in Britain, for example. So I think we can do a better job than what we do around the world in trying to protect the brand value on a total basis.

When it gets to sponsorship you get the most amazing differences appearing amongst Board members from people who are very hawkish about it and people who are uncaring. I think we've concluded, the Board has eventually concluded, that the Olympics is the best thing if you're doing sponsorship that you can do. Because it is so universal and has a total universal appeal. Anything else doesn't.

If you want to sponsor baseball, nobody will understand it much outside the United States and maybe one or two Latin American countries. If you want to sponsor basketball, in England we think that's a girl's game. My son will kill me for saying that because he's absolutely passionate about it since we came to live here.

If you want to do rugby which is a British, sort of commonwealth game, apart from one or two strange places -- Guam and Fiji, you won't find much interest generally. Americans wouldn't understand it probably. If you want to do soccer which MasterCard does -- again it's got all of the appeal, but it hasn't got the global appeal of the Olympics.

So we feel very satisfied with our sponsorship of the Olympics because it -- we think it's very supportive to our idea of payment anywhere at anytime. Beyond that we do some local sponsorship, but we don't do anything heavy.

What you do in this whole area of advertising and sponsorship is part of how you support your brand so we're going through quite an additional piece of work now on the brand. Having gotten the Board to acknowledge that we still believe that it is important that we promote the Visa brand and use it as a partnership brand with banks.