Visa International plans to create a new for-profit credit and debit card processing company April 3, one that could ultimately compete directly with First Data Corp., Electronic Data Systems Corp., and other outsourcing companies that banks hire to handle their consumer card accounts.
Malcolm Williamson, president and chief executive officer of Visa International, said the new company - which has yet to be given a formal name but is known temporarily as the shared services organization - will be a direct subsidiary of Visa International that could one day be spun off as a public company, if Visa's board of directors decided that was wise.
Mr. Williamson said that on "day one" the new company would simply function as an enhanced version of the VisaNet processing network, which does not compete with third-party bank card processors. But he said the venture would eventually add more services that would put it in the same category as a First Data or an EDS.
Visa expects the move to bring needed commercial discipline to its core processing business.
But the new venture could also force a reshaping of Visa's relationships with some of its bank members that may not feel comfortable with the new service paradigm. In addition, it could cast a new light on the lawsuits pending against Visa, which include an antitrust case filed by the U.S. Department of Justice and a class action from U.S. retailers that do not like the association's debit card fee structure.
The venture "opens up a range of possibilities that don't exist today," said Mr. Williamson, who is busy approaching banks around the world to get them to sign long-term processing contracts with the new Visa entity. Groups of banks - or entire countries - "will negotiate with our company a price and the service level to do it," he said, and "out of that, the company will win on its own merits, or it won't. Hopefully, it will."
In a wide-ranging interview Tuesday with American Banker, Mr. Williamson portrayed the processing company as part of a broader effort Visa is making to become more of a "pay-as-you-go organization" in which member banks can pick and choose from a menu of services. Visa, he said, has been trying to respond to bankers' complaints that the association is not flexible enough, and does not clearly identify the benefits banks get from the membership fees they pay. John Reed, the former co-chairman of Citigroup, brought these concerns to a public spotlight early last year, when he and a colleague from Citigroup quit the Visa International board of directors and said that Citibank - the world's largest card issuer - would tilt its weight toward MasterCard International.
Mr. Williamson, a British banker who took the helm of Visa 18 months ago, said the processing company will present customers with itemized bills. Shared services "will start trying to price out much more specifically its products and services to the different constituencies receiving them," he said. The venture will specifically court international business that is now handled abroad, Mr. Williamson said. He gave the examples of Canada's debit card processing, or credit card processing in Spain.
"We're simply saying, 'Well, look, Visa International is no longer going to just make you pay tax,' " Mr. Williamson said. "You pay tax on a limited number of things that you've all agreed that it's important that Visa International does at its head office" in San Francisco. "It's my job to run that efficiently and not make you pay more tax than you think is reasonable."
Under a new regimen of "transparent pricing," Mr. Williamson said, "You're not going to pay for things you don't want. We will try over a period of time to break down our services into a sort of menu, which is very cost-based." Banks are "not going to be asked to cross-subsidize what they don't want to."
Over time, Mr. Williamson said, Visa will go "beyond that to market-based pricing, so that we can allow you to go and get a quote from EDS and, if we can't beat it, then, theoretically, you have the right to go." [For excerpts from the interview with Mr. Williamson, see www.americanbanker.com.]
A Visa spokeswoman said shared services will be "doing the same business it's currently in in terms of transaction processing" and "won't be going after the issuer or acquiring portion of the business" that companies like First Data, Total System Services Inc., Vital Processing Services, and others handle. She said the changes being made are "really a matter of putting in some more commercial principles, a higher degree of customization," and other service enhancements.
Three weeks ago, Mr. Williamson said, Visa International's board endorsed a strategy that the company hopes will lead to a doubling of worldwide transaction volume on Visa cards in four years. Current annual transaction volume is just over $1.5 trillion, according to Visa, and there are a billion Visa cards in force around the world.
Groundwork for the strategy was laid in September, when Visa announced a reorganization that created two headquarters entities: the center operation and the shared services organization. The former is in charge of global business strategy, payment platforms and standards, and brand management. The latter - the division soon to be cordoned into a separate subsidiary - was set up to offer transaction processing and systems formerly within Visa's global support services group.
John Partridge, former senior vice president and chief information officer of Unum Corp., an insurance provider in Portland, Maine, was named president of shared services, and will be in charge of the new company. Visa said Mr. Partridge was unavailable to comment for this story.
At first, the new company will only offer the settlement and authorization functions handled by what has been known as VisaNet. These services do not overlap with those offered by First Data and other processors. But as time goes on, Mr. Williamson said, shared services will offer "everything. All processes."
An ongoing upgrade of VisaNet - which Mr. Williamson said is now called VisaNext - makes it easier to add new capacity, Mr. Williamson said. He said it is logical from a business standpoint that Visa should want to capture more market share, particularly from foreign banks that First Data and others are targeting.
Mr. Williamson would not elaborate on the exact nature of the services that will be added. Visa is a 50% owner of Vital Processing Services, a Tempe, Ariz., merchant processor that competes with First Data Merchant Services, a First Data Corp. division, and a Visa spokeswoman said shared services would "absolutely not" be competing with Vital. Vital's other owner is Total System Services Inc., the processor that competes against First Data for the processing business of bank-card issuers. Total, in turn, is owned by Synovus Financial Corp. of Columbus, Ga.
When a customer uses a Visa card at the point of sale, the VisaNet switch identifies the customer's card-issuing bank and the merchant's bank, and routes information about the transaction to the banks (if they handle their own processing) or to outsourcing companies like First Data, which manage individual customers' accounts and track remittances.
Charles T. Doyle, a Texas banker who sits on the Visa U.S.A. board of directors, said the scope and parameters of shared services have not been clearly defined yet. "Shared services could encompass a lot - it is rather unlimited in terms of what new products and services come under it," he said. "The general project and programs have been approved, [but] I don't know who will sit on its board and how it will be run."
Mr. Doyle, who is chairman and chief executive officer of Texas Independent Bancshares in Texas City, said he had reservations about shared services, fearing that smaller institutions like his might not benefit. "In the past we [small banks] have not done very well when things are taken out from the Visa umbrella," Mr. Doyle said. "Obviously, it is the big [members] who are calling the shots."
One backdrop to Visa's efforts to expand its market share is the pending antitrust lawsuit that the U.S. Department of Justice has filed against Visa and MasterCard. Some industry observers speculated that Visa's new venture could represent an attempt to deflect or defuse the government's monopoly charges. Mr. Williamson denied that the shared services organization was "driven by our court cases." But he added, referring to the antitrust matter: "It does in the process make their case look rather silly."
The companies Mr. Williamson identified as potential competitors to the shared services organization did not express concern. A spokeswoman for First Data said her company would not comment directly on the matter. First Data's 1999 revenues were $5.5 billion, of which $1.4 billion came from the card issuing side of the processing business, and $1.5 billion came from the merchant division.
A spokeswoman for Total System said executives there would not comment on the Visa subsidiary until they learned more. Executives at EDS of Plano, Tex. - the company Mr. Williamson repeatedly named as an alternative to shared services - said Visa does not offer the breadth of services that EDS does. Besides transaction processing, EDS has consulting, Internet services, and information technology lines of business.
Martha Hulse, general manager for financial process management at EDS, said her company is distinct in its ability to integrate a bank's credit card systems with the computers that run checking accounts, general ledgers, account numbering, and many other functions.
"Typically, we integrate into 127 different subsystems of a financial institution when we implement our credit card capabilities," Ms. Hulse said. "I'm not aware that [Visa] has the dramatic capabilities that we have, nor does it have the capability to integrate those capabilities."
Still, Ms. Hulse said EDS - which does processing for both card-issuing banks and merchants - would "welcome" the competition, and perhaps the potential to work more closely with Visa, either through a reselling relationship or in some partnership in which Visa would use EDS' infrastructure.
"In some cases maybe we would compete, but in other cases we hope we would come together and provide services together," she said.
Ms. Hulse speculated that Mr. Williamson targeted EDS because it is a "strong global player," which does processing in 19 countries. First Data has "a large portion of the business in the U.S.," she said.
John Cahill, a vice president of marketing, advertising, and public relations for First Data from 1992 to 1998, said shared services could be perceived as a threat to the bigger banks' merchant processing businesses. "It's the big banks that have the bulk of that business," he said. Chase Manhattan Corp., Bank One Corp., and about 10 other banks have merchant processing alliances with First Data, and there have been rumors for some time that Citigroup is thinking about getting back in to the merchant processing business.
The processors "have been down this road" before with Visa and MasterCard, Mr. Cahill said. Visa's stake in Vital and MasterCard's partnership with National Data Corp. of Atlanta have already alerted the processors to competitive threat Visa and MasterCard pose.
Charles Marc Abbey, a principal at First Annapolis Consulting in Linthicum, Md., who specializes in transaction processing, said Visa can easily pick up business in foreign markets by offering the same sort of switching services that VisaNet handles in the United States. But to go beyond that, Visa would be stepping on vendors' toes.
"If they're entering into the market as a processor in the same sense that a First Data or Total System is, that's huge," Mr. Abbey said. "It would be a real business change."
Mr. Abbey added, "In today's environment, where both card associations are getting more commercialized, it would be easier for them to compete in a for-profit business like that than probably at any other time in their history."
Despite the strength of the Visa brand and its power in the market, Mr. Williamson said it could take time to enlarge the customer base of shared services.
"We're having to get our clients - whether it be [geographic] regions, or groups of banks - to actually sign on for services for a length of period to give us the security and peace of mind to make investments," he said. Visa is telling the potential customers, "We can do a better job for you than EDS."
