Sep 27, 2007

Interchange value differentiation versus price differentiation

Several of my presentations include a quote from an article in the American Banker:

“Historically, MasterCard and Visa were mirror images of each other. Visa should spell out if and how it plans to differentiate its interchange strategy, the markets and business it intends to cultivate, and the information-based services enhancing its customers’ profitability.”

The article is titled “Lessons Visa can learn from MasterCard’s IPO” and was written by Eric Grover of Intrepid Ventures. In my attempt to create simple uncluttered slides I made the mistake of not including his name. Not a good excuse I know.

In another article, “Valuing Visa”, Eric further develops the need for Visa and MasterCard to differentiate their interchange strategies instead of simply copying each other. He paints a rosy post-IPO future for Visa, notwithstanding what he calls a huge blemish:

“Visa’s European Union region will not participate in the IPO. While Western Europe is the slowest growing major card payments market, it is Visa’s second largest region."

“European banks too would benefit from a vigorously competitive Visa. However, they have always been more comfortable with clubby, association governance and having a sleepy, pliant, reliable utility network. Moreover, an independent Visa could hurt banks insofar as it served mobile-phone operators and retailers directly."

“With its separate European business Visa will be clumsier and slower than MasterCard in adopting new strategic initiatives and adapting to a changing payments landscape.”

While I’m on the same subject, it is interesting to watch how the payment schemes are organizing themselves to potentially deal with differentiated interchange strategies. Visa’s web site provides a short profile of William M. Sheedy, who carries the title Executive Visa President, Interchange Fee Strategy.

“Bill Sheedy, executive vice president of interchange strategy for Visa U.S.A., is responsible for managing Visa pricing and product profitability strategies. His priorities include expanding merchant acceptance and consumer usage of Visa, while maximizing Visa member revenue within the Visa interchange fee structure. Sheedy also oversees areas responsible for industry cost and revenue studies, merchant incentive programs, and improving the point-of-sale operating performance of Visa products.”

“Interchange is meant to balance both the issuance and merchant acceptance of Visa products in order to reflect the costs to operate the Visa payment system and maximize the long-term industry revenue streams. Sheedy's role is key in the support of Visa product and brand strategies, as well as other initiatives that are critical to realizing long-term growth potential.”

I am not familiar with other similar executive positions in other organizations or other Visa regions, but I understand that if it is needed in the US, you can expect to see similar roles eventually being defined elsewhere.

1 comment:

Pauli said...

Interchange strategy has been the "lifesaver" for Master Card in 2006 and although they don't have a similar executive position as Visa does (at least I don't know about it) they played around quite a bit with their Interchange rates in the last few years.
I agree that in the past either Master Card or Visa set a strategy and the respective other just copied it. This is obviously about to change.
Another trend I got aware of is that especially online payment processors got smarter in classifying payments to minimize interchange for the merchants.
Could it be that the industry is moving towards a liberalization of interchange rates in general and on various levels? And will in the near future not only Visa and Master Card have executive positions for Interchange Fee Strategy but also payment processors and card issuing banks?