Understanding VISA Business Model

In the post titled, ‘Understanding Business Model Fundamentals’, we learnt why do we need to understand business models and how to visually represent a business model using the ‘Business Model Canvas’. In this post, we will try to understand VISA business model using the Canvas.

VISA business model is very different from a traditional business model. It is not very intuitive enough. Though most of us use VISA credit cards for our payments, very few of us would know how VISA works. In fact, many of us would not even know that VISA is a public-traded company and is listed in the New York stock exchange.

VISA is a Technology company providing global payment solutions to the banks. Its payment product platforms are used by the banks to develop credit and debit card programs for their customers. VISA does not issue credit cards or extends credit to the consumers. Instead, it operates an “Open-loop payments Network” to manage the exchange of information between different financial institutions.

To understand how VISA works, which customer segments it serves, what it offers to its customer segments, and how does it makes money from them, we need to get familiar with few terms. VISA classifies the banks as either Issuers or Acquirers. Issuers issue cards to the cardholders, whereas the Acquirers manage the relationship with the merchants. The diagram below explains what happens behind-the-scenes when a cardholder presents a card for payment to a merchant.

When a cardholder presents a card for payment to a merchant, the payment request is forwarded to the acquirer. The acquirer contacts the issuer through the VISA network. The issuer shares the information on whether sufficient balance is available to carry out the transaction. The information is then routed to the merchant. In case sufficient balance is available, the payment is accepted. Else, it is rejected. The issuer bills the cardholder on a monthly basis. The cardholder pays those bills then.

This is a very simplified explanation of what happens behind-the-scenes. The actual process involves separate loops for Authorization and Clearing & Settlement. VISA also offers several value-added services such as risk management, debit issuer processing, loyalty services, dispute management and value-added information services.

What the above diagram does not tell is how VISA and banks make money in the process. They make money from the transaction fees charged to merchants. To understand how it works, imagine a $100 payment from a cardholder to merchant. In case the merchant fee is 2.4%, the merchant would get $97.60 from the transaction. $2.40 would get unevenly split between issuer and acquirer, depending upon the interchange fee. In case of an interchange rate of 1.8%, the issuer will keep $1.80 and acquirer will keep $0.60. Issuer gets to keep more of the merchant fee because of a higher risk of payment default from the cardholder. VISA makes money on payment volumes, transaction processing, and value-added services.

VISA creates value for all its stakeholders during the process. Cardholders’ benefit because of convenience, security, and rewards associated with card payments. Merchants benefit from improved sales by offering payment method options to the customers. Banks get new revenue streams through card fees, late payment interests, and transaction fee cuts.

VISA captures value through the following revenue streams: Service revenues from banks for their participation in card programs; Data processing revenues for authorization, clearing, settlement, and transaction processing services; International revenues from transactions where the cardholder issuer country is different from the merchant’s country.

In order to create the value, VISA has built a global processing infrastructure consisting of multiple synchronized processing centers. These centers are inter-linked and are engineered for redundancy. Managing these payment networks is a core part of VISA operations to ensure a safe, efficient, and consistent service to the banks, cardholders, and merchants.

VISA is a great example of a “Multi-sided Platform” business model pattern. The platform induces “cross-side” network effects. More the cardholders use VISA, more the merchants will accept it and vice-versa. Since merchants are on the ‘money side’ of the platform, VISA focuses its marketing efforts on the cardholders who are the ‘subsidy side’ of the platform. VISA sponsored FIFA world cup in 2010 and will be Olympic sponsor through 2020. This marketing focus helps VISA in building a strong brand and attracting more consumers.

All the aforementioned discussion is captured on the business model canvas below. Does the Canvas help you quickly understand the big picture of VISA business? Who do you think can threaten the strong business model of VISA?

 

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19 Comments

  1. Rupert

     /  March 21, 2012

    This is indeed a great insight .Looks like you are some visionary or thought leader . Very few people are aware of what goes behind the credit card processing . There are few questions which i would further like to be answered

    1. What are the relationships VISA will have to maintain with it’s customer segments to stay in industry
    2. What are threats to this business model . Perhaps regulatory institutions setting their own payment gateway
    3. Maybe a simple way to look at this could be building a porter 5 force model . Since the current approach only talks about strengths and makes one feel good . There could be risks , opportunities which need to be looked at for complete evaluation of business model .

    Reply
  2. Hi Rupert,

    VISA business model can only be disrupted by some other MSP (Multi-sided Platform) provider. That MSP must have a large base of users with strong network effects. Following players can possibly disrupt VISA business model

    (1) Facebook. With Facebook credits, they present an alternative form of payments. Facebook credits are a virtual currency you can use to purchase virtual goods. It can be evolved to purchase real goods.

    (2) Google. With Google Wallet, they will turn your phone into your wallet. Google Wallet requires NFC-enabled (near field communications) phone in order to use the service

    (3) Mobile Carriers. Here, the payment charges will appear on your monthly mobile bill. In India, a leading telecommunication carrier company Airtel has recently launched Airtel Money (http://airtelmoney.in/)

    Having said all this, I believe VISA is here to stay for long. VISA is a big company with $8 Billion revenues and $4 billion in cash. In case they will find some startup coming their way, they will acquire. They acquired cybersource – a leader in payment solutions for online businesses – for $2 billion in July 2010.

    As we move away from using cash for payments, VISA total transaction volumes will increase further and it will make VISA a much bigger company.

    Regards,
    BMIMatters

    Reply
  3. ken

     /  April 3, 2012

    Hehehehe ahhh we have designed, built and beta tested a business model that will disrupt not only Facebook and Google but also Visa. They do not connect in a meaningful way that is relevent to all parties creating a mutual benefitucal relationship. They haven’t at all transitioned into the digital era well as they are still using a old business model like google and Facebook. Yes, people are still thinking in today’s offerings not the next generation. 🙂 Cheers Great outline and overview on Visa. Would love to say more but under a NDA. Doing the investor dance at the moment.

    Reply
    • Hi Ken,
      Thanks for your comments. We are really looking forward to know more about your offering and how it will disrupt Google, Facebook, and VISA payment offerings. We request you to drop a line here once your product is released to the public.
      All the best,
      BMIMatters team

      Reply
  4. This is really insightful! Thanks for this example, I always wanted to understand how the VISA business model worked.

    A Quick question: Shouldn’t Sponsorship / TV Commercials, etc be part of Relationship and “Payment Gateway” be the channel?

    Regards
    Gaurav

    Reply
    • Hi GK,
      Thanks for your comments. We are glad to hear that this case study helped you.
      Relationships represent the depth of an engagement with the customers. Some companies provide personal assistance, whereas others provide self-service or automated services. In case of VISA, the nature of relationships is more of Personal Assistance. This kind of relationship is required to solve any payment related issues. Moreover, VISA relationships are long-term in nature than short-term or transactional.
      Channels represent either Marketing and Sales channels or Distribution channels. Sponsorships/TV commercials are a channel for communicating the VISA value propositions to card holders and merchants. Card holders are the key target because they are the ones who initiate the payment process. Payment Platform is more of an offering for Issuers and Acquirers than a channel.
      Hope this helps.
      Regards,
      BMIMatters team

      Reply
  5. Hi

    I am just curious why the banks will not want to issue their own credit cards and provide another form of payment service. It seems like Visa’s business model do not have any competitive advantage such as having a strong relationship with merchants. Many consumers like me think that we are benefitting from the banks/different cards instead of the subsidy Visa is giving us. As such, won’t Visa be irrelevant the moment banks decide that they will want to have a share of this 8billion revenue?

    Thank you.

    Regards,
    XY

    Reply
    • Hi XY,
      The core business of a bank is to make money from the interest differential between a depositor and a borrower. Please refer to the blog post http://bmimatters.com/2012/03/24/understanding-the-business-model-of-a-bank/ for details. Credit cards offer an add-on revenue stream to the Banks. It is not their core business. Credit card business has two key roles: Card Issuer (Entities that extend credits) and Payment Processor (Entities that build the network of merchants and participating banks). It is easier for Banks to play the former role than later. This is because of the complexity involved in building the network and the associated transaction-processing infrastructure. The key competitive advantage of the companies such as VISA lies in their network, their IT Infrastructure, and their Brand. Please download and read Item I (Business Section) of VISA Form 10-K. It will help you gain a better understanding of how it all works.
      Regards,
      BMIMatters Team

      Reply
      • Francesco

         /  October 8, 2012

        Hello XY,

        I guess one more point is the fact that having VISA in the middle assures interoperability between all the different banks. With each bank having its own credit card system, the merchant should have on the desk one POS for the Bank A + another for Bank B + ….

        Isn’t it?

        Ciao

  6. TGX

     /  September 22, 2012

    Hi~
    Great insights! But I did not really understand the role the acquirers play in the process. Why don’t merchants go directly to Visa for information processing but have to go through the acquirer first? Thank you!

    Reply
    • Hi TGX, VISA is not a Bank. VISA does not directly issue credit cards to consumers and credit card swipe machines to merchants. Banks do that. VISA connects with the banks and helps complete the transaction loop between consumers and merchants. We know its little tricky to understand in the first time. But, once you do understand, you will like how the scheme of things work in this business model. Regards, BMIMatters Team

      Reply
      • TGX

         /  October 16, 2012

        Hi, thank you for your reply! Maybe I should phrase my question as what is the difference between acquirer and issuer? Is it that acquirer is the bank that receives the payment from the customer or where the merchants open account and issuer is the bank where the customer’s card is issued and pays the payment in the transaction? If this is the case, why is it necessary to go through acquirer when verify the card information of the customer when presenting the card (step 2)? I think it is only necessary when the card information is verified and when the money is about to be transferred to the acquirer.

  7. Francesco

     /  October 8, 2012

    Hello,

    Great post on VISA, too.

    I would add a Customer Segment: OEM and card manufacturers paying for Partnership Programs and Product Certification Programs…unless you already included them in the Canvas.

    Ciao,
    Francesco

    Reply
    • Hi Francesco,

      Thanks for your suggestion.

      Would you have any idea on the size of that revenue stream? If it is too small compared to the other revenue streams, we can avoid representing it. This is because our focus is on providing a big picture of the VISA business model using the Canvas.

      Regards,
      BMIMatters team

      Reply
  8. Manish

     /  May 31, 2013

    Great insight! However have 2 quetions:
    1) out of 2.4% of fee, 1.8% goes to issuer and .6% goes to acquirer making it full 2.4 fee, so could please elobrate who pays to VISA?
    2) Why can’t VISA have some pie from 2.4% of fee? as it is a facilitator in the middle.

    Thanks,
    Manish

    Reply
  9. Łukasz

     /  June 2, 2013

    I found the insight very helpful indeed.
    Great job!

    There is still one thing I cannot figure out. Namely, how does VISA earn via payment?
    As shown in the example, some of 2,4% goes to acquirer, some to issuer. What about VISA’s dole?

    Thank you in advance!

    Rgds,

    Reply
  1. Understanding the Business Model of a Bank « Understanding Business Models
  2. Assessing a Business Model Attractiveness « Understanding Business Models

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