We've been getting a lot of questions about Visa's new Account Verification service. Hopefully this will help clear things up a little.
For years, card not present merchants (ecommerce, phone, fax, mail) have needed to verify a cardholder's information upon acceptance when there was a delay between collecting the credit card data and actually charging the card. For example, a merchant may collect the credit card information during the initial sign up process but offer a 30 day trial period before charging the card. In this situation, it's in the best interest of the merchant to verify the cardholder's information including the credit card number, expiration date, address and CVV value for accuracy and legitimacy. The only way of doing this today is by doing a $1.00 authorization (Visa refers to these as Ghost Authorizations). While the authorization does eventually expire, some banks will show the pending $1.00 authorization which leads to merchants inevitably getting support questions regarding an improper charge.
Visa's new Account Verification program is an alternative to the $1.00 authorization. With this program, a merchant will be able to do a Zero Dollar Value authorization request which can include Address Verification (AVS) and CVV verification. MasterCard has as similar verification process for card not present recurring billing merchants with a $1.00 'test transaction'. Visa is charging for this service but MasterCard is not.
Interestingly, according to Visa, the problem that merchants have was not the primary driver behind creating the Account Verification program. Visa is trying to eliminate $1.00 authorization request because it has a negative impact on cardholder spending. For those us who live in the space and deal with the shortcomings and problems caused by the $1.00 auth, we're pleased with the creation of the Account Verification product whether we (merchants and service providers) were considered or not.
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Visa Misuse of Authorization
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Increasing fees for existing users of a product or service is never an easy thing. While there is rarely a perfect time to raise prices, there certainly are some times that are better than others. In the midst of some of the most intense dialogs that have taken place over credit card interchange, the fees that merchants pay the issuing banks to accept credit cards, Visa and MasterCard have announced one of the largest fee increases in years. The timing of their fee increase could possibly be written up in a case study as an example of what not to do.
Starting on July 1, 2009, Visa is introducing a U.S. Acquirer Processing Fee (APF). The fee will be $0.0195 on all Visa branded authorizations acquired in the U.S. regardless of where the issuer/cardholder is located. On April 18, 2009, MasterCard implemented a new Network Access and Brand Usage (NABU). Fee of $0.0185 for all U.S. based sales and credit/refund transactions.
For merchants that have a larger average ticket of $150, the Visa fee increase is pretty insignificant and amounts to 1 basis point (100 basis points = 1%). For a lower average ticket of $15, it amounts to a more significant 13 basis point increase.
The timing of the fee increase, while bad, may have been strategic in the wake of all the congressional activity surrounding the credit card reform that passed last month. I'm speculating, but I wonder if both Visa and MasterCard, facing some legislative risk, were trying to re-anchor the pricing discussion at a higher starting point in case congressional mood were to turn in favor of the groups lobbying for action. Alternatively, the fee increase could have had nothing to do with this 'chatter' and was fueled by that fact that both are now a public companies and need to take care of their shareholders and stock prices.
I spoke to a Visa representative recently at an industry conference and asked about the fee. I was told that they were increasing the price to more fairly align value created and price. Even if that is the case, and it's quantitatively supported, they need to do a better job selling these measurements with everyone actively engaged in the interchange pricing debate.
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Following in the footsteps of Amazon's efforts in the payments space, PayPal announced a new service they're calling Adaptive Payments (TechCrunch has the new API posted). It allows merchants/developers to become payment aggregators whereby they can accept and dynamically distribute payments among multiple parties. It's a great move by Paypal that leverages the network of users they've built over the past decade as well as their global payments capabilities, but there are some limitations. I think there are a few things to note.
Context
Paypal has overcome several limitations and or unappealing features of traditional payment methods (check and credit card - I'm excluding cash in this discussion) and payment channels (banks and wire transfer services). For example, for an individual to pay someone, instead of writing a check or sending a wire transfer, a Paypal user can easily send money to another Paypal user.
Credit cards, which are used for a substantial percentage of all commerce in the U.S. and around the world, were built around a 1:1 relationship between cardholder and merchant. However, not user to user (though MasterCard just recently announced a transfer service using Obopay's platform). This is one structural limitation that has provided Paypal the opportunity to grow like it has.
Target Opportunity
Adaptive Payments solves a few key problem for merchants and developers: 1) global B2B, B2C and C2C money transfers. A U.S. business can accomplish the same payment flexibility as Paypal's new service by using electronic funds transfers (EFT) domestically, and not require that the recipient have a Paypal account. However, things get complex and there are several limitations when expanding outside of the U.S. 2) Paypal service eliminates the need for recipients to have a bank account and 3) dynamic, global and multi-party payment distribution.
Limitations of Adaptive Payments
According to Paypal's API's, all payment participants are required to have a Paypal account: “The payment sender, receiver(s), and application owner must each have a PayPal account. Senders and receivers may have personal accounts; however, application owners must have business accounts.” The solution works for prearranged payment distribution relationships as the barrier to participate is setting up a new Paypal account beforehand.
For realtime, non-prearranged payment situations, this solution has a serious drawback which could hinder it's adoption. Paypal has no choice but to maintain this requirement because payments have to stay on it's network. In other words, in some situations, its greatest strategic asset may also turn out to be its Achilles heel.
Network Effect
I think the big story in all of this is the following: the major card brands such as Visa, MasterCard, American Express and Discover have done an exceptional job over the years building a global network of cardholders and accepting merchants to facilitate commerce. It's now a global standard. They have built substantial barriers to entry for others (look at Revolution Money who has raised around a $100 million to try and penetrate the U.S. market).
Collectively, the internet, globalization, social networks, and mobile phones have been shifting the payments landscape and reducing these barriers. It's the wave that Paypal and other innovators have been riding and has turned what was a potential threat and minor scratch for the card brands into an open wound.