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By some standards, Visa would qualify as the world's single biggest business. During 2016, the organisation processed transactions worth a combined total of over $8 trillion. Virtually every individual reading this paragraph either owns or has used a Visa card. There are currently more than 3.1 billion of them in circulation worldwide, and the company more or less invented our modern world of cash-free payments without boundaries. Literally thousands of other businesses (not least online giants like Amazon or eBay) would probably not exist had it not been for Visa's innovation. Despite high profile marketing battles against rivals Mastercard and American Express, Visa remains the world's leading provider of payment solutions, and by quite some margin. But it is also arguably the world's best-known unknown. Until its IPO in 2008, few of its everyday customers would have known who owned it, and are still probably unaware of what exactly the company does.
Who handles advertising? Click here for Agency Account Assignments for Visa. Visa Inc declared marketing expenditure of $869m in fiscal 2016.
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Visa is still unquestionably the global leader in electronic payments, despite years of consistent competition from Mastercard. The industry is currently experiencing explosive expansion, fed by the growth in online payments. That is undoubtedly good news for Visa, but it has also led to a sharp increase in competitive pressure as well as the need for ever more sophisticated security systems. The position of Visa and MasterCard has come under fierce attack from regulators, as well as from merchants and financial institutions, who are resentful over fees and charges and the limitations imposed on their own charge card offerings. Under this pressure, the uneasy truce that previously existed between the two suppliers has broken down. The gloves truly came off when Visa managed to snatch away MasterCard's long-established sponsorship arrangement with the FIFA World Cup tournament, a move which demonstrated how cut-throat the competition had become. Visa's biggest strength lies in its global payment processing network and its security systems, and it must maintain this technological lead if it is to fight off rivals and maintain the trust of cardholders.
In 2010, the group strengthened its service further by agreeing to pay $2bn in cash to acquire CyberSource, a company which offers eCommerce software and systems to online retailers. As a result, it launched its own web payments service in 2012 under the name V.me. It later rebranded as Visa Checkout, and had over 20m registered customers by mid-2017. The service works along similar lines to Paypal and Google Wallet, allowing users to make online payments via a single secure account, funded by an existing credit card. The card lodged with the account can be from any of the major suppliers, for example, MasterCard or American Express as well as Visa itself. The group also has a separate global strategic partnership with Paypal, which allows the rival company to issue Visa payment cards in its own right, and has an investment in mobile payments company Square.
Visa's systems provide the electronic link between a virtual triangle made up of around 17,000 banks and financial institutions, around 44m merchant locations and more than 2bn cardholders worldwide, allowing for the easy and secure transfer of electronic funds from one to another. Unlike American Express, for example, which itself lends funds to its individual cardholders via charge or credit cards, Visa has no such direct financial relationship. Instead, in its simplest sense, the company merely provides an intermediary processing and collection network which routes funds backwards and forwards between cardholders, their bankers and retailers, or "merchants" as Visa prefers to call them. It has virtually no direct contact with its cardholders.
The two most crucial elements in the payment process are the authorisation procedure at point-of-sale to verify each transaction and the efficient routing mechanism which allows merchants subsequently to collect actual funds from the cardholder's bank. These two functions form the core of Visa's service, which is processed by an extremely sophisticated worldwide electronic transaction system, known as VisaNet, which can process up to 65,000 transaction messages every second. In return for the use of this service the group derives revenues from three main streams: service fees charged to its member institutions and cardholders, currency conversion fees, and data processing fees.
Visa outreaches all its rivals in terms of universal coverage. In terms of market share, the organisation handled 54% of all credit or debit card purchase volumes worldwide in 2016, according to Nilson Report figures. That total compared to 26% for Mastercard, 15% for China's UnionPay and just under 3% for American Express. It handled 139bn separate transactions around the globe. In Europe, where UnionPay has a much lower profile, Visa had 66% of all transactions and Mastercard 3%.
For the 12 months to June 2016, total transaction volumes totalled $8.12 trillion. Of that sum, $5.65 trillion related to credit and debit card payments and $2.3bn for cash withdrawals.
There are almost 2bn cardholder accounts, with a combined total of just over 3bn cards in circulation, issued through around 16,400 financial institutions.
Visa issues no cards of its own. Instead all customer relationships are handled by its partner banks. The company provides effectively three payment systems, which it describes as "pay later" (credit or charge), "pay now" (debit) and "pay before" (prepaid). The company is also introducing an increasing number of more sophisticated charging systems, especially since the rollout of smart cards with embedded microchips in 2001. These include smart chip technology that turns mobile phones into virtual credit cards, and radio-based "contactless" Visa payWave cards which allow holders to check-out in seconds without having to swipe their cards. It also operates a number of strategic partnerships with tech developers to build payment processing functions into a wide range of other electronic devices from phones and smartwatches to cars and other mobile or wearable devices.
To counter internet-based fraud, the group is developing new security devices that issue time-limited authorisation codes as well as unique digital tokens to replace traditional account numbers.
Business expenditure has become a major focus of the group's expansion, as it attempts to increase its share of B2B purchasing. On the consumer side, the two fastest expanding sectors are debit cards, and a range of prepaid services including Visa Buxx, which allows parents to deposit preset funds into a child's personal card account, as well as Gift and Payroll cards. In 2007, in a move designed to tempt away high net worth American Express customers, the group introduced a new premium card through selected US banks under the name Signature Preferred. Aimed at users with a card spend of over $50,000 per annum, it offers similar benefits to the Centurion "Black" American Express card. It has also ramped up the assault of consumer spending, and has launched a series of programmes designed to widen the uptake of card-based payments. In 2017, it began offering funding to restaurants in the US to upgrade their payment processing systems in return for no longer accepting payments in cash.
Marketing plays an increasingly important role in maintaining the pre-eminence of the Visa brand. The group is a major sponsor of sporting events, and has been one of the six lead sponsors of the Olympics since 1986. Its current agreement runs through to 2020. It is a key sponsor of the NFL in the US (now until 2014), and has been a sponsor of the Rugby World Cup since 1999. In 2006 it gate-crashed the relationship between rival MasterCard and the FIFA World Cup football tournament, signing a new contract with FIFA to covert the next two tournaments in 2010 and 2014. MasterCard successfully issued an injunction to prevent the switch at the end of 2006. The following summer, however, as a result of an appeal by FIFA, another US judge ordered that the injunction be overturned. Visa was confirmed as the sponsor for 2010 and 2014, and the relationship was extended in that latter year until 2022. Visa also has a worldwide partnership with Disney, as well as with other suppliers of goods and services.
The group has traditionally served as the umbrella for four separate entities, Visa USA, Visa Canada, Visa Europe and Visa International, each of which handled partnership arrangements and marketing in its region. Until comparatively recently Visa was legally an association, jointly owned by 20,000 member financial institutions. In October 2006, however, the group announced plans to follow its arch-rival MasterCard into public ownership. That decision was in part designed to shield its member banks from the growing legal challenge from monopoly regulators, rival credit card services and retailers. As a result, Visa Inc was created as a corporate umbrella and acquired full control of Visa USA, Visa Canada and Visa International. Because of the intricacies of the European Union, Visa Europe was split off from the rest of the business and remained a separate members' association, jointly owned by around 4,600 member banks and operating the Visa brand under license from Visa Inc, in which it has a minority shareholding.
Despite turbulence in the financial markets, Visa Inc issued a very successful IPO in March 2008, raising $17.9bn in funds, then America's biggest ever offering. The Brazilian operations of Visa, then known as VisaNet Brasil, were also set apart from the rest of Visa International, jointly owned by a collection of local banks in association with Visa Inc. In 2009, that business issued a massively successful IPO of its own, then the biggest ever in Brazil, raising $4.3bn. The following year it adopted the new name of Cielo. It remains an entirely separate and independent business, and is no longer the exclusive processor of Visa transactions in Brazil.
Also in 2009, Visa Europe announced plans to merge with SAS Carte Blue, the separate entity which had been its exclusive licensee in France. In 2015, the two main divisions under the Visa badge were reunited when Visa Inc announced an agreement to aquire Visa Europe for a final total of €18.5bn in cash and stock. The deal completed in June 2016.
Revenues for Visa Inc topped $10bn for the first time in the year to Sept 2012, rising 13% to $10.42bn. However, net income plunged by 41% to $2.14bn, its lowest level since 2008, because of a $4bn reserve for litigation with Discover and American Express among others. There was a strong recovery for ye 2013, with net income of $4.98bn on revenues of $11.78bn.
Visa delivered solid results for the year ended Sept 2014, with revenues up almost 8% to $12.70bn. Net income rose 9% to $5.44bn. Both were best-ever figures. Another increase during 2015 took total revenues to $13.9bn, with net income of $6.3bn. That included a one-off tax gain of almost $300m.
Until 2016, Visa Europe operated separately from Visa Inc, managing the payments operations in 37 European markets. It had remained an association jointly owned by 4,500 local banks. Total payment volumes for the year ending Sept 2015 were around €1.7 trillion for the first time, from 37bn individual transactions. Visa Europe generated revenues of €1.9bn and profit of €344m.
For the year to September 2016, total gross revenues for Visa were $18.5bn. Of that total, $6.7bn was for client services, $6.3bn for data processing revenues and around $4.6bn in currency conversion and cross-border fees. The remaining $800m or so included licensing fees, including payments received from Visa Europe, pre-merger. Of the total gross sum, the company paid out around $3.4bn in incentives to clients, merchants and partners to build volumes and its global payments footprint.
Net revenues for the year to 2016 were $15.08bn, including a three month contribution from Visa Europe. Revenues were more or less evenly split between the US and international. Net income slipped back to $5.99bn, largely as a result of acquisition expenses relating to Europe and various related charges and adjustments.
The seeds of the Visa concept were first sown in 1958. That year the Bank of America, then the world's largest financial institution, began issuing the first credit card to its customers in Fresno, California. The Diners Club card had launched in 1950, and American Express launched its first card in 1958. However both of these were "charge cards", which required cardholders to pay off their entire balance at the end of each month. The BankAmericard was the first scheme which allowed only partial repayment of the balance. To kickstart the scheme, Bank of America mass-mailed around 60,000 unsolicited cards to virtually every household in town. However there were several hurdles to overcome. For a start, the concept of buying with plastic was largely unknown among ordinary households, and many consumers were highly suspicious of this apparently free credit. Compounding this problem was the fact that comparatively few retail outlets accepted the card. Yet Fresno's inhabitants promptly went shopping, racking up around $59m of purchases (around $350m in today's money) over the following 12 months. Americard was extended to all of California in 1959.
Gradually of course the concept of playing with plastic took off, and by the early 1960s had even become reasonably profitable. In a bid to extend its business, Bank of America began franchising its system nationally to other banks. At the time, US banks were prohibited from having branches outside their home state, so California-based BofA selected one bank from each other US state to serve as its local partner in that territory. Inevitably this spurred rival organisations into action as well. Banks excluded from the Americard scheme formed their own rival groups. All this seemed like a good idea at the time, but it was to prove a financial disaster since there was no suitable technology to ensure the validity of any of these new cards. Worse still, cards were issued to literally anyone. Between 1966 and 1970, more than 100 million unsolicited credit cards were sent out by the country's various banks. Famously, some banks began sending out cards at random to names off mailing lists, with the result that cards were even issued to children or family pets. In one Chicago mailing, the city's newborn babies all received their own credit card. Fraud was widespread, and within two years, several of the banks were on the verge of collapse as a result of huge bad debts. However the largest of Americard's competitors, Interbank (later MasterCard), was quick to extend its footprint into the international sector as well as the US, and had become the bigger player by 1968.
In 1970, in a bid to prevent the huge losses suffered by some of its partners, National BankAmericard was established as a separate company, jointly owned by Bank of America and more than 240 licensee banks around the country. Management of the business was entrusted to CEO Dee Hock, who conceived the decentralised structure which continues virtually to this day. This was designed to accommodate the daunting central paradox of the business, which was that these banks were all fiercely competing with each other for customers, but would need to work together to ensure the effectiveness of the credit card scheme so that retailers and customers could trust in it. Banks were given the freedom to be as competitive and innovative as they wished with their Americard offering, provided they worked together on fraud protection, payment systems and brand marketing. In fact, against the odds, the system ended up working almost perfectly. Hock also pushed his team to develop ever more effective transaction systems, gradually closing the gap with Interbank during the 1970s.
In 1974, Americard followed Interbank into the international market. However customers outside the US didn't take to the BankAmericard name, and in 1976 the company rebranded as the more internationally appropriate Visa. More important still was a breakthrough in the development of Visa's retail network. Until then many of the biggest stores in the US still refused to accept third-party credit cards. The change came in 1979, when Visa finally persuaded JC Penney to accept its cards. Montgomery Ward and Sears, then the country's #2 and #3 retailers, followed suit and by the early 1980s, Visa had overtaken MasterCard (as Interbank was now known) as the world's most widely accepted credit card. However, as both credit card suppliers expanded their international networks, they faced growing pressure from member banks, who were themselves unhappy about having to choose between the two companies. During the 1980s the two rivals agreed a truce, allowing member banks to offer both payment services. At the same time, Visa pushed aggressively into new areas, issuing debit cards and travellers cheques, and then acquiring a share in several ATM networks worldwide to rival even the biggest bank's coverage. In 1988 the company became a major sponsor of the Olympics, beginning a relationship now extended until 2012.
As competition between banks intensified during the 1990s, Visa and MasterCard saw a new threat in moves by American Express to increase its share of the credit card business. In 1996 Amex agreed a deal with Advanta Corporation to offer American Express Optima credit cards to its members. However Advanta was also a Visa and MasterCard member. The credit card companies responded by issuing guidelines prohibiting their members from working with American Express or smaller rival Discover. This inevitably led to a lawsuit from the latter, and a subsequent investigation by the US Department of Justice. In 2001, a federal court decreed that Visa and MasterCard should not be able to prohibit their member banks from also issuing cards for American Express and Discover. However the big two continued to hold up implementation of this ruling with a series of appeals. These were finally overturned in 2003, and the following year American Express sued for damages over the attempted boycott. Visa eventually agreed to settle the claim in 2007, agreeing a payment to American Express of $2.25bn over three years.
The apparently close relationship between the two credit card suppliers led to a number of further cases. In Europe, the companies were accused of prohibiting competition by artificially fixing transaction fees on international payments. Visa agreed to make a reduction in rates in return for a five-year exemption from further investigation. Similar allegations in the US forced both companies to offer rebates in early 2003. Meanwhile an even more serious suit was brought by a consortium of more than 4 million US retailers, among them the mighty Wal-Mart, claiming that Visa and MasterCard had established an artificial monopoly on debit cards. During the 1990s, in order to ensure the success of their own debit cards, which carried higher transaction charges than rivals, Visa and MasterCard forced retailers to accept the cards or be dropped from their credit card program. Facing the risk of substantial financial damages from losing the case, MasterCard was the first to fold, agreeing to settle out of court just before the case went to trial in April 2003. Left to face trial on its own, Visa was forced to follow suit a few days later, agreeing to pay the retailers about $2bn in combined damages over several years. The company also waived its "honour all cards" policy, and said it would significantly lower its fees for processing debit card transactions.
Shortly afterwards MasterCard began a campaign to persuade Visa's regional members to switch allegiance. Visa responded by introducing a new "exit fee" structure for its members, designed to penalise any banks tempted to resign their Visa affiliation. Meanwhile, following a refusal by the US Supreme Court to hear any more appeals over the American Express/Discover ruling, American Express issued its first joint card with member bank MBNA at the end of 2004.
A new legal battle erupted in 2005 when large US retailers began filing suit against both Visa and MasterCard, accusing the pair of colluding over the fees charged to merchants for processing credit card payments. Many smaller retailers also joined the suit, which rumbled on for several years. It was finally resolved in favour of the merchants in summer 2012, with Visa, MasterCard and their card-issuing partners banks forced to pay a total of $7.2bn in cash and merchant fee rebates. The agreement will also allow merchants to charge an additional fee at their own discretion if their customers choose to pay by credit card rather than cash.
Last full revision 19th July 2017
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