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May 28, 2010

Visa positions for mobile future

Signalling an ever-deeper move towards a digital payments future, and the resilience of online fraud, Visa is to pay $2bn in cash for e-commerce payment processor CyberSource, in a deal that strengthens its position in mobile commerce.

By Verdict Staff

In the battle for innovation among the card associations, Visa has upped the ante through a $2bn agreement to buy CyberSource, an electronic payment processor. Charles Davis reports on the deal, the company’s biggest-ever acquisition, and its impact on the development of the cards and payments market.

 

Signalling an ever-deeper move towards a digital payments future, and the resilience of online fraud, Visa is to pay $2bn in cash for e-commerce payment processor CyberSource, in a deal that strengthens its position in mobile commerce.

CyberSource’s fraud prevention technology is expected to help Visa to increase online use of the credit, debit and prepaid cards that bear its name, while also positioning the company as a major player in mobile payments.

The acquisition, the largest in Visa’s history, positions the credit card giant for a move into new revenue streams as well.

 

Security for merchants

CyberSource receives a small transaction fee for providing their services, revenues that Visa hopes to increase as CyberSource expands. The company provides a payment gateway for online merchants, connecting them to the payments networks in much the same way that POS terminals do in the physical world.

More importantly, the company provides additional services like fraud prevention and security for merchants – products that are growing more important daily and that Visa could market through its vast global network.

CyberSource, based in Mountain View, California, handles about 25% of online transactions in the US. Its more than 295,000 clients include Home Depot, British Airways and Google. Visa and CyberSource have worked together since 1999, and currently collaborate on risk models built into CyberSource’s automated fraud management.

Visa CEO Joseph Saunders said in a conference call with reporters that the deal was also about maintaining the company’s market share in a changing payments landscape.

“It also happens to be consistent with what we think our long-term strategies ought to be,” Saunders added.

He said the deal would “leverage the Visa brand globally” and increase “the usage of Visa debit, prepaid and credit products for online purchases”.

“We are paying attention to PayPal, as well as other companies getting into the e-commerce space, and we are obviously concerned it would have an effect on our market share,” Saunders said.

CyberSource CEO Michael Walsh will continue to oversee CyberSource’s operations, while the company’s executive chairman and founder, William McKiernan, will join Visa as an executive adviser to assist in the integration of the two businesses.

 

Expand market share

Adam Frisch, an analyst at Morgan Stanley, said in a note to investors that the deal should enable Visa to not only expand its leading market share in e-commerce in the US, but also help it develop markets outside the country.

It is hard to imagine that Visa is threatened by the competition, given its dominance of the overall payments market, but PayPal and other online payments scheme have a more impressive share of the online market. PayPal may have 12% to 14% of the $500bn global e-commerce market by next year, according to estimates by Mercator Advisory Group in Maynard, Massachusetts.

Visa has said that its share of the e-commerce market is about 47%. CyberSource currently plays a role in about 25% of all online commerce transactions in the US. The company’s revenue grew from $27.5m in 2003 to $265.2m last year, when it processed about $120bn through its system, or about one out of every four dollars spent online in the US.

It earned $11m in 2009 on revenue of just over $265m. For 2010, the company forecast profit between $14.5m and $15m on revenue between $310m and $315m. Visa paid a handsome price for Cyber-Source, as the purchase price of $26 per share represents a 34% premium over its price on the day of the deal.

The acquisition is the largest in Silicon Valley announced this year, according to the 451 Group in San Francisco. Observers and analysts said the acquisition should help Visa in future competition with PayPal, the online payment subsidiary of San Jose-based eBay. That competition should increase as Visa continues to expand in e-commerce outside the US.

The deal also is part of a strategic effort shift in Visa’s security efforts, as the card company moves its focus from retail locations, where anti-fraud capabilities have improved dramatically in recent years, to the Internet and especially to mobile phones.

Given its strong cash position and capacity to generate cash flows from existing operations, the rating agency Standard & Poor’s said that Visa will be able to fund the transaction entirely from existing resources and without issuing debt.

“The acquisition provides Visa with an opportunity to expand its position in the fast-growing e-commerce space where CyberSource performs, among other services, payment routing for online merchants, including fraud management,” the agency said.

“Although CyberSource’s current contribution to consolidated earnings is, in our view, minuscule, we believe that this acquisition represents a good strategic fit and allows Visa to develop its participation in a potentially profitable area of future payment services.

“We believe that through e-commerce, Visa has an opportunity to increase the use of its debit and credit cards, especially cross-border transactions, and also to build out its capacity in the area of alternative payment systems.”

That is especially important in mobile payments, which are widely considered the next great battleground for fraud detection. Visa’s acquisition of an online payment processor and services provider marks a radical change in the network’s position in the payment value chain, and is a clear stake in the ground when it comes to defending market share in online payment transactions.

CyberSource recently released its first quarter results. CEO Walsh said net income of $3.8m showed the business was continuing to grow in e-commerce both domestically and internationally. Transactions increased 34% compared to the same period last year, to 738m. <

ignalling an ever-deeper move towards a digital payments future, and the resilience of online fraud, Visa is to pay $2bn in cash for e-commerce payment processor CyberSource, in a deal that strengthens its position in mobile commerce.

CyberSource’s fraud prevention technology is expected to help Visa to increase online use of the credit, debit and prepaid cards that bear its name, while also positioning the company as a major player in mobile payments.

The acquisition, the largest in Visa’s history, positions the credit card giant for a move into new revenue streams as well.

 

Security for merchants

CyberSource receives a small transaction fee for providing their services, revenues that Visa hopes to increase as CyberSource expands. The company provides a payment gateway for online merchants, connecting them to the payments networks in much the same way that POS terminals do in the physical world.

More importantly, the company provides additional services like fraud prevention and security for merchants – products that are growing more important daily and that Visa could market through its vast global network.

CyberSource, based in Mountain View, California, handles about 25% of online transactions in the US. Its more than 295,000 clients include Home Depot, British Airways and Google. Visa and CyberSource have worked together since 1999, and currently collaborate on risk models built into CyberSource’s automated fraud management.

Visa CEO Joseph Saunders said in a conference call with reporters that the deal was also about maintaining the company’s market share in a changing payments landscape.

“It also happens to be consistent with what we think our long-term strategies ought to be,” Saunders added.

He said the deal would “leverage the Visa brand globally” and increase “the usage of Visa debit, prepaid and credit products for online purchases”.

“We are paying attention to PayPal, as well as other companies getting into the e-commerce space, and we are obviously concerned it would have an effect on our market share,” Saunders said.

CyberSource CEO Michael Walsh will continue to oversee CyberSource’s operations, while the company’s executive chairman and founder, William McKiernan, will join Visa as an executive adviser to assist in the integration of the two businesses.

 

Expand market share

Adam Frisch, an analyst at Morgan Stanley, said in a note to investors that the deal should enable Visa to not only expand its leading market share in e-commerce in the US, but also help it develop markets outside the country.

It is hard to imagine that Visa is threatened by the competition, given its dominance of the overall payments market, but PayPal and other online payments scheme have a more impressive share of the online market. PayPal may have 12% to 14% of the $500bn global e-commerce market by next year, according to estimates by Mercator Advisory Group in Maynard, Massachusetts.

Visa has said that its share of the e-commerce market is about 47%. CyberSource currently plays a role in about 25% of all online commerce transactions in the US. The company’s revenue grew from $27.5m in 2003 to $265.2m last year, when it processed about $120bn through its system, or about one out of every four dollars spent online in the US.

It earned $11m in 2009 on revenue of just over $265m. For 2010, the company forecast profit between $14.5m and $15m on revenue between $310m and $315m. Visa paid a handsome price for Cyber-Source, as the purchase price of $26 per share represents a 34% premium over its price on the day of the deal.

The acquisition is the largest in Silicon Valley announced this year, according to the 451 Group in San Francisco. Observers and analysts said the acquisition should help Visa in future competition with PayPal, the online payment subsidiary of San Jose-based eBay. That competition should increase as Visa continues to expand in e-commerce outside the US.

The deal also is part of a strategic effort shift in Visa’s security efforts, as the card company moves its focus from retail locations, where anti-fraud capabilities have improved dramatically in recent years, to the Internet and especially to mobile phones.

Given its strong cash position and capacity to generate cash flows from existing operations, the rating agency Standard & Poor’s said that Visa will be able to fund the transaction entirely from existing resources and without issuing debt.

“The acquisition provides Visa with an opportunity to expand its position in the fast-growing e-commerce space where CyberSource performs, among other services, payment routing for online merchants, including fraud management,” the agency said.

“Although CyberSource’s current contribution to consolidated earnings is, in our view, minuscule, we believe that this acquisition represents a good strategic fit and allows Visa to develop its participation in a potentially profitable area of future payment services.

“We believe that through e-commerce, Visa has an opportunity to increase the use of its debit and credit cards, especially cross-border transactions, and also to build out its capacity in the area of alternative payment systems.”

That is especially important in mobile payments, which are widely considered the next great battleground for fraud detection. Visa’s acquisition of an online payment processor and services provider marks a radical change in the network’s position in the payment value chain, and is a clear stake in the ground when it comes to defending market share in online payment transactions.

CyberSource recently released its first quarter results. CEO Walsh said net income of $3.8m showed the business was continuing to grow in e-commerce both domestically and internationally. Transactions increased 34% compared to the same period last year, to 738m.

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