Visa U.S.A. is about halfway through a technology upgrade it says will boost its processing capabilities - most notably, according to some industry executives, in PIN-secured debit card transactions, which are at the center of a huge legal battle.
The company says that the system it is building, Direct Exchange, improves efficiencies for all types of transactions - including wireless and smart card - and that it would be misleading to suggest that the upgrade was designed to bolster its debit business in particular.
However, the enhanced debit horsepower may also put pressure on the electronic funds transfer networks, which currently handle most of the PIN debit business, and change the dynamics of the Wal-Mart lawsuit, in which the nation's largest retailers are suing Visa and MasterCard over the discrepancy between PIN and signature debit interchange fees.
Executives at Visa described the Direct Exchange effort - which it called no less than a momentous processing breakthrough that will put the company way ahead of competitors - to American Banker but would not let executives be quoted directly about it.
Visa said that it began working on Direct Exchange, a front-end technology based on Internet protocol that hooks to the legacy VisaNet processing system, three years ago. Executives say that the system - which is 50% to 60% implemented today and will be 90% done by the end of next year - will let consumers and merchants initiate Visa transactions on any type of device, including PDAs and mobile phones.
A flexible routing system ensures that data flows faster among the parties involved - banks, merchants, and Visa - while new features such as data encryption and compression services give it sophistication and additional security, the card company says.
Sun Microsystems Inc. and Cisco Systems Inc. are Visa's vendors.
Visa says that those who are already connected to Direct Exchange are thrilled with it, as it replaces very old technology with much less bandwidth. The old system - designed for use with magnetic stripe cards and conventional point of sale terminals - uses a message format with static, standard data, while the new one can accommodate all protocols and devices.
The card company runs a PIN debit network called Interlink, but it does not handle a great deal of volume, and Visa has not emphasized it. MasterCard International just begun touting its analogous network, Maestro, as part of its effort to win more debit processing business from banks.
Stan Paur, the president and CEO of the Pulse EFT Association of Houston, predicted that in the near future Visa will exert the "greatest influence over [PIN] debit," because it has "the money, the brand, the determination, and the allegiance of many key financial institutions."
Speaking at the ATM & Debit Forum conference in Baltimore this week, Mr. Paur said that Visa has been "ramping up to aggressively capture more of the PIN debit market," which today is dominated by Star Systems. The Concord EFS Inc. subsidiary processes about 56% of all PIN debit transactions, according to ATM & Debit News, a Thomson Media newsletter and sister publication to American Banker.
Visa recognizes consumers' and merchants' preference for PIN over signature debit, as well as the fact that PIN debit is growing much faster than signature as more merchants install PIN pads at the checkout, Mr. Paur said.
"I think Visa and, to a certain extent, MasterCard, are advocating that the banks choose an industry-owned single network solution for PIN debit," he said. "Whether the financial institutions embrace that concept remains to be seen, but it does appear that the associations and the third-party payment companies are going to invest heavily in securing relationships for PIN debit in the next 18 to 24 months."
Unlike its larger competitors - Concord and First Data Corp.'s NYCE - Pulse is an association owned by banks rather than public companies.
Despite Visa's initiatives, there is room for Pulse to thrive, Mr. Paur said. "I think of our company in the context as Southwest Airlines. You don't necessarily have to be the largest, but you can make a living by being cost-efficient, high-quality, and very service-responsive."
Other industry executives said they did not foresee Direct Exchange forcing the regional networks out of business.
MasterCard, meanwhile, has been busy replacing its transaction processing network with a system that it says gives banks more information about transactions, lets them settle all transactions in real time, adds loyalty programs, and helps them avoid currency conversion headaches.
Company executives say the original network, which has been recurrently patched up with upgraded software, is first-rate but will nonetheless look like an antique compared with the new Global Payments Processing Platform.
Furthermore, MasterCard executives like to point to their strong gains in credit cards, which are more lucrative products for banks than debit cards. MasterCard's market share of outstandings on U.S. bank credit cards at midyear this year was 49.26%, up from 46% a year earlier, according to The Nilson Report.
Visa continued to make gains in debit, according to the newsletter - its share of debit cards in circulation rose 10 basis points, to 74.13%, and its share of debit card purchase volume rose 25 basis points, to 78.05%.
Richard G. Lyons Jr., MasterCard's senior vice president for North American deposit access, said at the Baltimore conference on Tuesday that debit is "exploding around the globe" and that his company has started a major effort to raise the profiles of its debit networks and to pick up new contracts.
Visa, too, has been throwing its weight around in the PIN debit world. When it increased interchange for Interlink this year, the other PIN debit networks followed suit.
Scott Wellham, a senior consultant at Collective Dynamics LLC, a payments system consultancy in Atlanta, said that Visa's Direct Exchange effort seemed like a judicious response to consumers' enthusiasm for PIN debit and their interest in using cell phones and PDAs for small-dollar transactions.
"I think they're in a strong position to leverage their brand," he said.
