First thoughts on marriage between Visa Inc. and Visa Europe

First thoughts on marriage between Visa Inc. and Visa Europe
Today Visa Inc. announced it would be acquiring Visa Europe, subject to regulatory approvals. The press release is here; the executive team also held an investor call earlier today – the recording and the presentation are here. The deal was widely expected, and so should not be a surprise to anyone who follows payments. Still, it poses a number of questions, such as, for example, how effective the combined entity will be in dealing with intricacies of the European market, and whether this would lead to the Europeans calling (again) for a new separate pan-European card scheme. It’s true the European payments market has unique dynamics in terms of regulation and competition, both in cards and in payments more broadly. PSD2 will have profound effects on the existing market players, including Visa. Depending on the final interpretations, some provisions such as scheme and processing separation requirement might introduce undesirable complexities to the integrated Visa. However, I am sure none of this news to Visa’s management and they must have a plan for how to deal with the regional challenges. Visa has committed to maintaining a strong European presence, including an “empowered European leadership team and in-country resources”, “local data center”, and “differentiated country and regional strategies.” Furthermore, the potential synergies are real – a more consistent product set and fewer duplicated efforts should help Visa drive innovation and move to digital on a global basis.​​​ Visa also said it was planning to incur up to $500 million of integration-related costs over the next 4-5 years, most of which would go towards integrating Visa Inc. and Visa Europe systems. In the past, I have seen on occasions Visa Europe appealing to European banks by playing up its ownership structure in Europe and contrasting it to the global approach of MasterCard. This argument is now gone – both networks will be global commercial entities. Would this re-open calls for a pan-European card scheme? I had a look at this issue a few years ago in the Celent report, “In Search of a Third European Card Scheme” and concluded that it was “time to move on.” I still stand by that conclusion today; in my view, it has always been a politically motivated initiative, with no particularly clear business rationale. When “plastic” was the main/ only form of electronic payment, it at least made more sense to consider various options. Now, the world is changing rapidly, as digital payments and real-time networks between bank accounts emerge. Let’s hope that the European banks will find better use for their financial windfall from this transaction than trying to create a new pan-European card network. Given the original “put” option, it was always more a question of “when” rather than “if”. Congratulations to Visa team for deciding to move forward with the deal. P.S. Stay tuned for my reflections on last week’s Money 20/20; I was planning to post those today as well, but Visa’s deal prompted a number of inquiries, so wanted to offer a few thoughts on that first.

Changes Ahead at Visa?

Changes Ahead at Visa?
When Visa restructured in 2007-2008, Visa USA, Visa Canada, and Visa International were merged into the new public company. Visa Europe became a separate company owned by its member banks. An article in Wall Street Journal this week claimed that the European banks were ready to sell their stake in Visa Europe back to Visa Inc. I am not in the position to comment on the validity of that claim, but our clients have been asking for our views, so I wanted to post a few observations:
  1. The option of merging back Visa Inc and Visa Europe has always been on the table, and it has long been the question of “when”, not “if”.
  2. Visa Europe’s separate processing infrastructure and various regulatory concerns are among a number of factors that would make a quick deal unlikely. A number of options could be considered for ownership of various assets of Visa Europe, and careful negotiations would likely take place before any deal is struck.
  3. The article seemed to imply that the banks would use the funds to set up a rival system in Europe. I would argue that it would be an extremely difficult and probably unnecessary thing for them to do. Even if the deal were to happen, Visa payments system will continue to be available for banks in Europe, just like MasterCard has been, even though it opted for a global model since the IPO. Also, there have been multiple attempts to create a “3rd card scheme” in Europe, but none of them have succeeded so far and, as I suggested in my report on the topic last year, it’s time to move on. In my view, given the current economic climate and the latest developments in payments, the European banks would have better uses for the proceeds of sale than to try and set-up an alternative cards network.
  4. Each ownership structure has its own advantages, but one of the effects of the IPOs on Visa and MasterCard has been their increased ability to buy other companies and strike partnership deals improving their competitiveness.
  5. While the integration of the two companies would naturally cause a degree of disruption, a unified Visa would arguably be better placed to compete and innovate on a global scale.
While the buzz is on the potential deal with Visa Europe, other interesting changes are already hapenning at Visa Inc. For example, an agreement between Visa and JP Morgan Chase to launch Chase Merchant Services has potentially far-reaching implications. Under the agreement, the new platform powered by Visa would process Chase-issued Visa cards acquired by Chase Merchant Services, a situation known in the industry as an “on-us” transaction. Visa’s network is most valuable when it processes and “sees” the transaction, but “on-us” transactions have typically been processed outside of VisaNet. The customised solution would enable services that may not be available to the open-loop network, benefiting Chase and their cardholders and merchants. At the same time, Chase is planning to shift additional credit and debit card volume to Visa, driving more transactions on the Visa network. It remains to be seen whether other similar deals would take place and what the broader impact on the card acquiring market would be, but it is clear that Visa is changing to the extent that would have been difficult to imagine in the old “bank association” days.