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Changing their stripes
There’s been a flurry of e-commerce activity from Visa and MasterCard. What does it mean for e-retailers?
Editor in Chief
More than 12% of Visa's global transaction volume comes from the web, and in the U.S. it's nearly one transaction in five. And, at a time when overall retail sales are barely growing, Visa's e-commerce growth is in double digits.
"The e-commerce channel is growing faster than other channels, and we see the same in our system," says Charlie Wilson, Visa Inc.'s head of e-commerce. "Therefore, our focus on it has increased in the last year."
That sharper focus is evident by a series of moves in 2010 from both Visa and its main rival, MasterCard Worldwide, which does not break out its e-commerce volume. Here's what they've done this year:
— In March, Visa announced plans for an online social shopping service and electronic wallet called Rightcliq.
— MasterCard soon afterward unveiled MasterCard Marketplace, featuring discount offers from online retailers.
— Later that month, MasterCard created a new research and development unit called MasterCard Labs to speed new payment products to market. Its first initiative, announced in May and called Open APIs, is designed to make it easier for mobile and web developers to integrate MasterCard payments into their applications.
— Visa in April announced it was paying $2 billion for CyberSource Corp., a major provider of fraud prevention and payment processing services to online retailers.
— MasterCard last month announced plans to pay $520 million for U.K.-based payment processor DataCash Group plc, calling it a move to strengthen its position in e-commerce.
What all this will mean for web and mobile retailers is still coming into focus, as these initiatives are so new. But experts agree that the Visa/CyberSource combination could bring valuable new services to retailers and that MasterCard's Open APIs puts it in the thick of fast-changing developments in mobile payments.
As for Visa and MasterCard making offers directly to online shoppers—a departure from their past practice of working through their card-issuing banks—that can only benefit e-retailers, says James Keller, chief marketing officer of web retailer Shoebuy.com Inc., which is participating in MasterCard Marketplace.
"There aren't a lot of brands people interact with as frequently as MasterCard and Visa," Keller says. "When our partners innovate as fast and hard as they can, it accrues to us in making the overall experience of online shopping better. We love to see this type of activity in the marketplace."
Threat and opportunity
What accounts for this sudden rush to e-commerce? Experts agree it's the combination of the growing opportunity of the web and mobile—and the emergence of significant threats to Visa and MasterCard.
The two big payment brands, and competitors American Express and Discover, are happy to see consumers shop online because plastic is the Internet's de facto currency. 71% of online purchases last year were made directly with credit and debit cards, according to Javelin Strategy & Research. And the 16% that Javelin says went through alternative systems like PayPal, Google Checkout and Amazon Payments mostly end up charged to credit and debit cards.
Plastic is not as dominant in physical stores, where how consumers pay varies widely by category. Consumers use cash and checks for 42% of cosmetics purchases, but only 28% of purchases of furniture and appliances, according to a June 2010 consumer survey by BIGresearch.
The threat comes from the bevy of challengers anxious to take a bite out of the $4.6 trillion Visa processed last year or MasterCard's $2.5 trillion in volume. And those threats are proliferating as consumers increasingly pay through computers and mobile phones, and not face to face.
The biggest immediate threat comes from PayPal, which counted 87 million active users in the second quarter, up 16% from a year ago. It is true that much of PayPal volume winds up in the Visa and MasterCard networks today—60% of PayPal transactions are funded with payment cards, 25% by direct debits to bank accounts and 15% from funds stored in PayPal accounts, largely the result of sales on eBay, which owns PayPal, according to industry sources. PayPal did not comment.
"That's 40% of transactions that are not going to Visa and MasterCard," notes one payments expert.
And PayPal is aggressively seeking to extend its reach through its PayPal X program that encourages software developers to integrate PayPal into online and mobile applications.
That's begun to move PayPal into the offline world, as two PayPal accountholders now can exchange funds by bumping their mobile phones together. "I could pay my plumber using PayPal," observes David Evans, founder of payments consulting firm Market Platform Dynamics. "It is very early days, but if you're an entity like MasterCard or Visa it should cause you concern." And PayPal executives have spoken openly of late of extending PayPal payments to store checkout counters, increasing that concern.
Visa is aware of the PayPal threat and is partly playing defense, conceded Visa CEO Joe Saunders, in response to an analyst's question about the CyberSource acquisition, but is mainly driven by the e-commerce opportunity. "That defense," Saunders said, "happens to fit in with what we believe is the right direction for Visa to go in."
There are threats beyond PayPal, including Facebook Credits for making purchases on the social network, and start-ups like Zong and Boku that let consumers charge digital purchases to mobile phone bills.
In fact, MasterCard's Open APIs announcement appears aimed at developers looking for ways to sell games, music and other digital content to mobile consumers, says Dax Hansen, a partner in the electronic financial services practice of law firm Perkins Coie. "Developers are looking for flexible, easy solutions that don't require customers to input their card numbers," Hansen says.
He says the explosive growth of digital content sales and mobile commerce may explain why Visa and MasterCard are bypassing banks with their recent initiatives. "This is happening so quickly that there's not time to go through traditional channels and negotiate agreements with financial institutions," Hansen says. "There's less structure and more risk. But revenue opportunities remain for sure."