Glenbrook’s Perspective on Visa’s Acquisition of CyberSource

by Allen Weinberg on April 21, 2010

in Allen Weinberg, Card Networks, Credit Cards, ECommerce, Ecommerce Payments, Merchant Acquirers, Visa

Allen Weinberg - Glenbrook Partners

A number of us self-proclaimed “payments geeks” awoke this morning to learn of Visa Inc’s intention to purchase CyberSource for approximately $2 billion.  Over the course of the day, Glenbrook’s been getting a flood of emails generally asking, “What’s the REAL reason Visa’s buying this big gateway company?”

Before I go on any further, it might be helpful if we step back for a second and briefly describe what payment gateways do and why nearly all eCommerce and some physical world merchants use them.

It’s probably easiest to just think of a payments gateway as hosted middleware that sits between the merchant and its acquirer’s systems.  Merchants use gateways for a variety of reasons, including:

  • Merchants can access a number of value-added services specific to eCommerce, such as fraud prevention, shipping tools, and sales tax calculators through a single connection (a big deal for merchants) and via a single relationship;
  • Many eCommerce shopping cart/store builder applications come with gateway connections pre-installed, making it much easier for smaller merchants to connect to major (and often minor) payment systems;
  • Gateways allow merchants to switch acquirers quite easily, without any meaningful front-end systems changes (the gateway merely re-points the transactions to the merchant’s new acquirer);
  • Gateways reduce the complexity in accessing payments systems beyond the merchant’s own borders (e.g., a U.S.-based merchant can connect to its acquirer in the UK or Germany without having to establish and maintain separate interfaces); and
  • Gateways can also facilitate the process of incorporating new and alternative forms of payment on the merchant website (think PayPal, etc.).

So, back to Visa. The first thing I’d point out is that Visa stated its intentions to get into the gateway, and other merchant processing businesses, in its last investor call back in March.  That’s not to say that a lot of us weren’t surprised at a $2 billion dollar acquisition by Visa – it’s definitely a lot of money, but let’s not dwell on that right now.

The big question is whether getting into the gateway business makes sense for Visa?  In my opinion, absolutely!  For a number of years now, many of us at Glenbrook have been advocates of how strategic the gateway business could be.  For payments systems themselves, a large gateway provides them with somewhat more control than they otherwise would have, which is typical with vertical integration plays.  It also provides Visa with some key components of core and more value-added acquirer back office processing, such as:

  • Truly enhanced fraud prevention tools (Visa and other payment system providers see much more data at the macro level than anyone else, but thus far have been largely absent from offering merchant-centric fraud prevention tools);
  • The ability to provide a packaged offering to merchants around the world that would streamline their path to eCommerce sales (U.S. merchants have dominated eCommerce to date, but as in most areas, that is poised to change);
  • Tokenization solutions for PCI compliance;
  • The ability to support “end-to-end” encryption from physical POS devices (maybe they can be the first to turn what’s really “point-to-point” encryption into true “end-to-end”); and
  • Chargeback processing.

One less obvious and perhaps more interesting point:  both Visa and MasterCard have been promoting their merchant direct-connect offerings for a while now (i.e., the merchant puts a Visa or MasterCard server in their data center and routes authorization requests directly to Visa/MasterCard, bypassing their acquirer’s front-end auth systems).  In theory, CyberSource could do the same, although it could be putting its acquirer relationships at risk in the process.  We’ll see what happens a year or two out.

Of course, as a gateway provider, CyberSource must continue to support products and payment systems that compete directly or indirectly with Visa, both within the US and beyond (e.g., e-checks, PayPal, MasterCard, Bill Me Later, ELV in Germany, etc.).  If they disadvantage competitors’ offerings, their value to merchants will be severely diminished and they’ll quickly lose volume.  Having said that, Visa clearly understands and acknowledges that.

All in all, this is clearly a big deal for Visa and the payments industry.  The gateway space is certainly heating up!

8 Responses to “Glenbrook’s Perspective on Visa’s Acquisition of CyberSource”

  1. Bob says:

    Nice job Allen,
    All of your points are very well taken. The payments biz is about to take another giant leap forward.

  2. Allen,

    Nice job but you got the E3 part wrong. How can they be first when we (Heartland) have had beta merchants up since June of last year and are in soft launch mode right now??


  3. Tony Rajakumar says:

    Great points Allen.

  4. With Visa’s intention to get into the gateway and acquiring business, there really was no other choice other than CyberSource. No other provider has the merchant base that would have met Visa’s needs. And with the stickiness of gateways, they had to acquire. That begs the question, what is MasterCard going to do now?

    I think the same evolution that has occurred in the wireless business during the past 15 years is well on it’s way in the payments industry. Carriers use to acquire and maintain business based upon minute plans, calling plans, geography (regional or national) and other small value adds such as night and weekend minutes or text messaging. That value differentiator is no longer there, it’s now the phone and the applications on the device. I personally would never have considered using AT&T if it were not for the iphone.

    Gateways are the equivalent of the smart phone in the payments industry. Innovations will be built within, on top and around them. The ability for acquirers and ISO’s to capture and retain business will depend on their ability to build and or package these value added applications, which will be challenging if they don’t have a dynamic gateway.

    Visa and the card brands and acquirers will need to do something else to get into the developer space and combat Paypal X. Apps have greatly amplified the value of the iPhone and that of course is the hope of Paypal.

    MasterCard recently launched Labs, and AMEX spent 300 million on Revolution Money, which I still don’t understand how that made sense. So it appears that the message is out, the question is whether they can make something work.

    • Allen Weinberg says:


      Great analogy and articulation of why we feel the gateway business is so strategic. It will indeed be interesting to see how others in the market respond!


  5. Rajeev Jain says:

    Key question for me is that now they will have many important insights in to the competitive brands, what it does to the competitive landscape and how would they fair promoting consumer’s choice ?

  6. I think Allen is spot on on the synergy for Visa’s acquisition. Creating a true vertically integrated payment system helps the system holistically as it can (potentially) reduce processing costs, defend against MIM (Man in the Middle) attacks, and allows Visa to finally offer an anti-fraud suite that does not degrade the consumer experience (ala VbV).

    I am sure that Visa knows that this puts PayPal into play as well. While eBay was looking at a IPO of PayPal in the 2011 timeframe it may make more sense for them to spin it off into a JV with MC that monetizes PayPal in a much better tax-leveraged manner than an IPO, allowing eBay to “eat the cake and have it too”.

    Any way you slice this acquisition, the effects will reveberate across the industry for some time.

  7. Philip Cohen says:

    Visa and its banking partners preparing to eat PayPal alive—at last!

    It is with very great sorrow that “Dr Death” Donahoe MBA (aka Peter Principle), resident witch doctor at eBay, is expected to announce the probable imminent demise of eBay’s most ugly daughter, PayPal. He is expected to advise the market that it is probable that PayPal is about to be stricken by a particularly virulent strain of Visa + CyberSource, accompanied by financial institutions complications. If so stricken, PayPal may be expected to deteriorate rapidly and, if ultimately not completely incapacitated, will most likely be eventually confined to what little is by then left of the Donahoe-devastated eBay Marketplaces. There is no cure for the condition, and Dr Death will undoubtedly also say that he is particularly saddened by the inevitable presumption that it is unlikely PayPal will be able to continue to underpin eBay’s bottom line into the future.

    A detailed examination of and prognosis for the patient at

    eBay/PayPal/Donahoe: Dead Men Walking

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