Walking the Walk: Visa Gets DirectExchange on the Move

Two months after the new-and-improved piece of Visa U.S.A.’s transaction processing network was announced with fanfare, it has been connected to several large banks, and the association expects that a majority of Visa transactions will be running through the new part of the system within a year.

The enhancement, called Visa DirectExchange, lets banks process transactions from any kind of electronic payment device — including wireless terminals, cellular telephones, and smart cards. DirectExchange is a “front end” that connects banks and merchants to the VisaNet processing network, which is the “back end” of the system.

Visa executives say the changes that DirectExchange will bring about when it is completely set up — probably within two to two and a half years — will be enormous. The VisaNet system, which was built in the early 1970s and has changed very little since, is “hard wired,” meaning it can convey to merchants and banks a relatively small amount of information about transactions made on magnetic stripe Visa cards, and cannot easily be adapted or modified. The DirectExchange system is far more flexible and sophisticated, Visa executives say. It can transmit vast amounts of data about specific transactions, and can be adjusted easily using software.

Banks will be able to use the richer transaction data to offer better service to merchants and retail customers, according to Visa, and merchants will be able to extract information of value to their businesses.

Visa says this is no modest achievement.

“This is the rebirth of the payment system,” said Carl Pascarella, chief executive officer of Visa U.S.A., in a telephone interview Tuesday. “This is the next major change in the whole payment system industry. I liken it to when we first launched the credit card in the early 1970s — it was a sea change, a quantum jump.”

DirectExchange was developed by Visa with Sun Microsystems Inc. and Cisco Systems Inc., and is being run by Inovant, the Visa International subsidiary that was created in April to run VisaNet. Visa is now busy connecting DirectExchange to VisaNet’s 700 to 800 “endpoints” around the country. The two systems will run parallel for a while, until the front end of VisaNet gets phased out.

As Mr. Pascarella explained it, “running a transaction has been pretty static for the last 25 years,” because “the magstripe has a certain amount of data in it in a certain location.” Transactions carried on VisaNet can convey only that limited amount of data — which gets the job done on the payments front, but does not accommodate Visa’s lofty vision of “U-commerce,” or universal commerce among a cacophony of parties on a multiplicity of devices.

Mr. Pascarella spoke Tuesday at a conference in Vancouver sponsored by Giga Information Group and Business Week in which he described this term thusly: “Universal or ubiquitous commerce, where barriers of time, geography, and access will — over time — erode and eventually cease to exist.” In a subsequent interview, he said Visa and its partners coined the term “U-commerce.”

Malcolm Williamson, chief executive officer of Visa International, has also been promoting the neologism. Speaking in June before the Organization for Economic Cooperation and Development Forum 2000 in Paris, he described U-commerce as a kind of elysian pinnacle above electronic commerce and mobile (or wireless) commerce. He said the U-commerce marketplace will be “characterized by choice, convenience, and empowerment for the consumer, scale and efficiency for the merchant, and new sources of profitability for banks and other card issuers.”

DirectExchange is meant to be Visa’s platform to support this vision.

When a transaction runs over DirectExchange, “we can take any message length in any format and route it in any way that is optimal to the consumer, the merchant, or the bank,” Mr. Pascarella said.

“This new front end to our existing legacy system gives people access to any device, any time, to allow for total flexibility in terms of message format and data that’s in the message.”

Mr. Pascarella said data provided by the system will help reduce risk and fraud associated with card transactions, and will better enable banks and merchants to “offer customized products to their customers.”

“We could do a deal with a retailer where we get a stream of data out of their system. We take the SKU data that’s so important to them and route it off into their system, and we take the transaction data, which is important to us, and route it to use,” he said.

Installing the new system is no simple feat: VisaNet processes 20,000 transactions a second, and a mere eight-minute outage of the network last Friday morning was enough to merit a story on a national news service. (The glitch was not related to the DirectExchange transition, Mr. Pascarella said). Great care is needed to move from “the old legacy network into the new DirectExchange network,” he said. “We’re doing it very carefully, and we’ll have a majority of the transactions over in about a year.”

Visa recently announced a new chip card, and named three U.S. banks that are either issuing it now or planning to soon. VisaNet can process smart card transactions, Mr. Pascarella said, DirectExchange can do it better.

“One thing that’s so important with a smart card is the amount of data that can reside on the chip,” he said. DirectExchange will “tremendously impact the ease with which transactions occur on the Internet through those Smart Visa cards.”

While Visa barrels forward with smart card news, Olympics advertisements, and network conversion, its lawyers — as well as those representing MasterCard and the Justice Department — are preparing for the final phase of the antitrust trial against the associations. The trial in U.S. District Court in New York is scheduled to resume Oct. 16 with oral arguments on recent legal filings and closing arguments.