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?