A Look At Visa’s Mobile Payment Strategy And The Associated Challenges
Visa (NYSE:V) is the largest credit card and payments company in the world in terms of total number of transactions processed. The company is looking to capitalize on the growing mobile payment space, as it has been gaining traction among businesses and consumers alike.
In a previous article, Mobile Payments – A Look At Trends And Future Outlook, we explored mobile payment trends across the industry. In this article we take a look at how Visa is shaping its business strategy in order to grow its mobile payment solutions, as well as the associated challenges.
We have a price estimate of $217 for Visa’s stock, which about in line with the current market price.
See our full analysis of Visa here
What Is Visa Doing To Capture The Market?
As highlighted in the previous article, mobile commerce is expected to cross $110 billion in the U.S. this year. [1] Going forward, the market is slated to cross $600 billion worldwide by 2016. [2] Clearly this provides a significant opportunity for credit card companies such as Visa.
Visa’s Offerings
Earlier this year, Visa launched a service called Visa Checkout, which enables customers to make payments online via any device. Another service, Visa payWave, offers contactless payment through cards as well as mobile phones, facilitated through near field communication (NFC) and host card emulator (HCE) technologies. NFC is a radio-based communication technology, while HCE allows the use of virtual cards through mobile phones or other devices.
Technology Innovation
Aware of the importance of secured transactions, the company recently launched Visa Token, a service which replaces the 16-digit card number with a unique number (or token) each time a transaction is conducted. This way the company is able to offer enhanced security and mitigate the risk of customer information being misused. [3] Visa stores tokens in a digital vault, and links these tokens to customer account numbers during transaction processing. Going forward, there is a possibility that tokenization service will become a considerable revenue source for Visa, since maintaining such huge databases and infrastructure to process token matches is not feasible for all banks. [4]
Building New Partnerships
To increase the usage of mobile payments, payment companies need to partner with financial institutions, merchants as well as mobile hardware and software companies. A prime example is Visa’s recent collaboration with Apple (NYSE:AAPL) on its Apple Pay service. Apple Pay will support credit and debit cards on the payment networks of Visa, MasterCard (NYSE:MA) and American Express (NYSE:AXP). [5] Another example of using incentives to create usage is Visa’s recent partnership with Pizza Hut in the U.S. for customers conducting transactions through Visa Checkout. [6] We expect the company to make concerted efforts to build partnerships and to incentivize adoption going forward.
Challenges
Below we take a look at some of the challenges Visa will face as it tries to introduce mobile payments on a larger scale. We also review some of the steps the company is planning or currently pursuing in order to overcome these challenges and risks.
Revenues And Scale
With the emergence of a new payment channel, there will be issues regarding the fees charged on transactions. For instance, Apple will be charging a cut per transaction on Apple Pay, which may be paid by the issuer bank. [7] This could impede widespread adoption. Additionally, there are chances that payment companies will be under pressure from issuer banks to reduce the transaction fees charged, resulting into diminished revenues. Visa will need to devise a mechanism to ensure that its revenues do not suffer.
Competition
Within the mobile payments category, Visa faces stiff competition from MasterCard and American Express, both of whom are also working to include seamless ways to pay through mobile solutions. The primary factors that matter to consumers are convenience of use, pricing and security in conducting transactions, and we expect the competition will primarily be based on these fronts.
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- Visa Enables Internet-Connected Devices to Become Secure Commerce Vehicles, Forrester Research, Visa Press Release [↩]
- Mobile Commerce: Transactions, Advertising and Smart Data, PWC presentation at ‘Mobile Money and Digital Payments – Asia’ [↩]
- Visa launches innovative token service, Visa Press Release [↩]
- Visa Presents at Jefferies’ West Coast Electronic Payments Summit Conference Transcript, Seeking Alpha [↩]
- Apple announces Apple Pay, Company Press Release [↩]
- Pizza Hut and Visa Checkout Ready to Dish Up A Million Pizzas, Visa Press Release [↩]
- Can Apple Solve Riddle of Mobile Payments With Apple Pay Service? [↩]