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!