How Visa Chief Is Fighting Back asTransactions Go Digital

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By Elizabeth Dexheimer Oct 2, 2014 9:16 AM ET 4 Comments Email Print

A 4-foot-tall robot with a video screen for ahead swerves past an orange couch andbumps into the wall of a conference room. Afew feet away, an engineer tests a virtualreality headset that can allow a coffee-shopowner to forecast hot-chocolate sales duringa blizzard.

Oct. 2 (Bloomberg) -- In an effort to bring credit cards into the twenty-first century, Visa’s Chief Executive OfficerCharlie Scharf is embracing Silicon Valley from the company’s new design lab office in San Francisco, in search ofnew technologies to develop a digital wallet. Bloomberg’s Elizabeth Dexheimer reports on “In the Loop.”

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This is Visa Inc. (/quote/V:US)’s new outpost in San Francisco -- part executive office, partdesign laboratory and entirely the brainchild of Charlie Scharf(http://search.bloomberg.com/search?q=Charlie%20Scharf&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja), Visa’s chief executive officer.

Scharf, who this July day had unveiled the latest version of the company’s digital wallet, is sittingin an office overlooking San Francisco Bay one floor above the lab. He’s wearing jeans, loafersand a gray shirt with no tie. One leg is propped up on his desk.

Moving into the heart of the city, 23 miles (37 kilometers) from Visa’s suburban headquarters inFoster City, California, and three blocks from a Google Inc. office, is a statement about howScharf is seeking to embrace the new technologies(http://media.bloomberg.com/bb/avfile/r0vM8A31t2Rc) transforming the way consumersmake payments, Bloomberg Markets will report in its November issue.

More from the November issue of Bloomberg Markets:

“We have to think and act much more like a technology company than we have before,” Scharfsays a few weeks later at a restaurant in Sag Harbor, New York, where he’s on vacation with hisfamily. “The payments world is changing. There are new entrants, new opportunities for people toget into our business and other opportunities for us to grow our business in ways that didn’t existbefore.”

Dimon Protege

Visa runs the world’s largest paymentsnetwork

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(http://media.bloomberg.com/bb/avfile/r0vM8A31t2Rc), and Scharf, 49, the quiet,methodical former protege of JPMorgan Chase & Co. CEO Jamie Dimon(http://search.bloomberg.com/search?q=Jamie%20Dimon&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja), is fighting to ensure that the 56-year-old company staysrelevant and ubiquitous as more transactions are made online or by mobile phone and otherdigital devices.

Visa and its smaller competitor MasterCard Inc. (/quote/MA:US) control 87 percent of globalcredit- and debit-card transactions and profit from fees banks pay them to process thosepayments. Once associations owned by the biggest U.S. banks and now independentcompanies, they act as middlemen between lenders that issue credit, merchants that acceptelectronic payments and consumers who use cards to make purchases. Although the model hasbeen profitable (/quote/V:US), some investors say it also can be inflexible and outdated,making the networks vulnerable to disruption.

“Visa and MasterCard are holding on for dear life,” says Josh Siegel(http://search.bloomberg.com/search?q=Josh%20Siegel&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja), CEO of StoneCastle Partners LLC in New York, which

(/photo/visa-s-charlie-scharf-/-ibXRWe.fuvVA.html)Photographer: Ian Allen/Bloomberg Markets

Visa CEO Charlie Scharf at the company's new designlab in San Francisco.

invests in financial firms. Scharf “has to figure out how to take this cash cow -- which does havemassive market power -- and either stifle or acquire technology to maintain the status quo orbecome that renegade and totally overhaul the company.”

Bitcoin, PayPal

The disruptions Scharf faces include virtual currencies such as bitcoin, alternative online-payments systems like PayPal that can bypass credit cards and new methods for enablingmobile-phone transactions. He’s also battling competing networks, fending off lawsuits overswipe fees with retailers such as Wal-Mart Stores Inc. and contending with rules in China andRussia that restrict what foreign firms can do.

In Scharf’s two years at the company, his strategy has focused on opening Visa’s network to newtechnologies. That has included collaborating with the likes of Apple Inc. and Google; givingdevelopers and startups such as Square Inc., which helps small businesses accept cards, accessto Visa’s systems; and investing in firms like LoopPay Inc., whose software allows customers tostore credit-card data on their phones.

Apple Pay

That strategy paid off in September, when Apple announced it was turning its new iPhone into amobile wallet that makes in-store payments possible with the tap of a finger.

Instead of developing Apple Pay on its own, the company partnered with Visa, MasterCard andAmerican Express Co. (/quote/AXP:US), piggybacking its technology onto already existingpayments systems. The phone uses wireless near-field communication to deliver a digital identifiercalled a token, which helps prevent hacking by eliminating the need for merchants to have accessto account numbers. Companies including McDonald’s Corp. and Target Corp. have agreed toaccept Apple Pay.

The systems required to process bank-card payments and the security needed to protectconsumer data are potent weapons for defending Visa’s business model.

The company’s primary command center, at a location in the Washington area that Visa askedBloomberg Markets not to identify, is guarded by a moat, features floors that are 4 feet (1.2meters) thick and has enough food and water to supply 120 employees for 45 days in anemergency. There are four backup sources of water to cool machines the size of cars whose dataare duplicated at another center. Computers track more than 70 billion transactions a year,displayed on 40-foot-wide screens.

‘Nearly Impossible’

“For another company looking to break into the payments business, it’s nearly impossible for themto replicate the systems that Visa has in place,” says David Ellison(http://search.bloomberg.com/search?q=David%20Ellison&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja), who oversees more than $5.5 billion, including Visa shares,at Hennessy Advisors Inc. in Boston. “Keeping their network secure is key to sustaining their highmultiples and sustaining the economy. They are probably one of the most important financialcompanies outside of the Fed.”

Although Scharf won’t provide specific forecasts, he says the technology and securityinvestments he’s making will translate into revenue increases in the next 2 1/2 years. And hisefforts to collaborate with retailers and startups will contribute to earnings growth during the nextfour, he says.

Profit Margins

Visa’s profit margins (/quote/V:US) show how resilient the network has been to disruption asconsumers replace checks and cash with electronic payments. Net income in the first six monthsincreased 19 percent from the same period a year earlier, and the average operating margin was

64 percent. That compares with MasterCard’s 12 percent gain in profit and 59 percentoperating margin (/quote/MA:US).

While Visa’s margins have helped its shares gain 377 percent (/quote/V:US) since thecompany’s 2008 initial public offering, compared with a 36 percent increase for the Dow JonesIndustrial Average, the stock has slipped 5.7 percent this year, making it one of the worstperformers (/quote/INDU:IND) in the index.

Investors pulled back after the company cut its global revenue growth forecast for the 12 monthsended in September to between 9 percent and 10 percent, the smallest increase since 2009,citing geopolitical risks and a strengthening U.S. dollar. In the fiscal year that ended in September2013, Scharf’s first as CEO, for which he was awarded a $10.5 million pay package, netoperating revenue increased 13 percent.

‘Doing Differently’

Scharf, who has a bachelor’s degree in social and behavioral sciences from Johns HopkinsUniversity in Baltimore and a Master of Business Administration from New York University’s SternSchool of Business, has built a career on corporate turnarounds. In 1987, his father, then astockbroker, helped get his resume in front of Dimon, who hired Scharf as an assistant atCommercial Credit Corp., a consumer finance firm where Dimon was chief financial officerandSanford “Sandy” Weill (http://search.bloomberg.com/search?q=Sanford%20%E2%80%9CSandy%E2%80%9D%20Weill&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja) was CEO.

Dimon, who says he likes that Scharf “isn’t a bulls-- tter,” recalls how he’d send him to failingcompanies to run the numbers, relying on his intellect and attention to detail. “He would alwaysbe pointing out things we could be doing differently,” says Dimon, whose bank(/quote/JPM:US) is the biggest U.S. issuer of Visa credit cards.

Scharf remained loyal to Dimon for 25 years, following him to Citigroup Inc. to help build whatwould become the largest U.S. bank and then to Bank One Corp. in Chicago, a regional lenderlater acquired by JPMorgan. There, he rose to chief of the retail bank and helped arrange thetakeover of the biggest failed U.S. lender, Washington Mutual Inc., during the 2008 financialcrisis.

Wal-Mart Lawsuit

Since joining Visa in November 2012, Scharf has been shaking up the company’s culture. Foryears, Visa had focused on the interests of its clients, the biggest banks, viewing newtechnologies as threats to its model and fighting with retailers over swipe fees.

Visa President Ryan McInerney was hired to streamline the company's management. Photographer: IanAllen/Bloomberg Markets

“It was deeply embedded in the culture that we would only talk to the traditional players,” Scharfsays over a croque-monsieur at Sag Harbor’s American Hotel. “When I got to the company, Ilearned there are a number of merchants out there that don’t just not like us; they hate us.”

Those tensions have fueled lawsuits, most recently in March, when Wal-Mart sued Visa for $5billion for allegedly conspiring with banks to fix transaction fees, a case Visa says it’s working toresolve. Target and Wal-Mart are among retailers developing their own payments networksdesigned to give them more control of processing costs. Visa and MasterCard also are adjustingto new regulations, such as the 2010 Dodd-Frank Act, which cut the average debit-card swipefee by almost half to about 24 cents.

Management Overhaul

Scharf, who had been a Visa board member, was tapped by directors in 2012 to replace retiringCEO Joseph Saunders (http://search.bloomberg.com/search?q=Joseph%20Saunders&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja). He began by overhauling management, hiring RyanMcInerney (http://search.bloomberg.com/search?

q=Ryan%20McInerney&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja), who had worked with him at JPMorgan, as president, andRamon Martin (http://search.bloomberg.com/search?q=Ramon%20Martin&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja) from AmEx to lead Visa’s first team dedicated to merchantservices. He modified roles for others, putting then–Chief Legal Officer Ellen Richey(http://search.bloomberg.com/search?q=Ellen%20Richey&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja) in charge of risk and Jim McCarthy(http://search.bloomberg.com/search?q=Jim%20McCarthy&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja), head of innovation, in a role working with technologycompanies and startups. Scharf fired outside consultants and retooled struggling projects suchas V.me, a system designed to make online purchases easier that hadn’t caught on withmerchants.

Visa Chief Risk Officer Ellen Richey oversees the company's efforts to keep credit-card data safe.Photographer: Ian Allen/Bloomberg Markets

In November 2013, Scharf invited two Visa antagonists to a leadership meeting in Half Moon Bay,California: Michael Cook (http://search.bloomberg.com/search?q=Michael%20Cook&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja), assistant treasurer at Wal-Mart, and John Donahoe(http://search.bloomberg.com/search?q=John%20Donahoe&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja), CEO of EBay Inc. (/quote/EBAY:US), whose PayPal unitis one of Visa’s biggest competitors and clients. In front of more than 100 Visa employees, Cooktalked about how the network’s rules made Visa frustrating to work with, and Donahoe describedhow PayPal’s creative culture allowed employees to recognize opportunities to make onlinepayments easier.

Best Frenemies

“Everyone is a frenemy in the payments world,” says Donahoe, who recalls how during his firstdinner with Scharf, at a restaurant above a grocery store in San Mateo, California, he wasstunned when Scharf suggested their firms meet quarterly. “He understands that of coursetechnology is going to change our payments over time, but he wants to embrace that andinnovate around that, rather than protect the past.”

Donahoe said Sept. 30 that EBay plans to spin off PayPal as a separate public company. Thedeal could make PayPal a tougher competitor to Visa while boosting payments volume on Visa’snetwork, according to analysts including Keefe, Bruyette & Woods Inc.’s Sanjay Sakhrani(http://search.bloomberg.com/search?q=Sanjay%20Sakhrani&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja).

“In more cases than not, PayPal is enabling transactions on the networks, so it really benefits thenetworks if PayPal has a more focused strategy,” Sakhrani says.

China UnionPay

Scharf’s management style is understated. He used to unwind by building furniture in a woodshedin his Scarsdale, New York, backyard before moving to an apartment and now relaxes bypracticing acoustic and electric guitar.

“He is more reserved; he’s not so much an extrovert,” says Gordon Smith(http://search.bloomberg.com/search?q=Gordon%20Smith&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja), CEO of JPMorgan’s consumer bank, whose office was nextto Scharf’s for about six years. “Because he’s quieter, it takes a while to get to know him.”

Now, Scharf is applying his methodical approach to addressing the challenges Visa faces outsidethe U.S.

In China, Shanghai-based payments processor China UnionPay Co., founded by the StateCouncil and central bank, dominates in the world’s second-largest economy. UnionPay had thehighest percentage increase in purchase transactions among global networks last year, accordingto the Nilson Report, an industry newsletter that tracks network data.

MasterCard Edge

Earlier this year, as tensions between Russia and the U.S. intensified, Visa and MasterCardstopped processing payments at some banks after the U.S. imposed sanctions, prompting lawsrestricting foreign networks.

MasterCard CEO Ajay Banga (http://search.bloomberg.com/search?q=Ajay%20Banga&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja), who worked in a different business at Citigroup than Scharfin the late 1990s, faces similar challenges. Still, some investors say the smaller firm is betterpositioned in overseas markets.

The majority of non-U.S. transactions are made with cash, presenting an opportunity for the cardcompanies to benefit from the shift to electronic payments. Volume is growing faster onMasterCard’s network than on Visa’s in Asia and Latin America. In Europe, Scharf can’t competewith Purchase, New York–based MasterCard because a separate company owned by bankshandles Visa’s European transactions.

Global Growth

“If you want to invest in a global business, you can’t do that with Visa because they don’t haveEurope,” says Tom Russo (http://search.bloomberg.com/search?q=Tom%20Russo&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja), whose Lancaster, Pennsylvania–based Gardner Russo &Gardner manages more than $9 billion in assets, including shares of Visa and MasterCard.“There’s a belief that MasterCard is potentially better suited for the great global growth.”

Geopolitics explains why one of the fastest-growing divisions at Visa is government relations.Scharf has hired lobbyists in Washington and country managers in places such as Canada andRussia as lawmakers consider changing swipe-fee rules, look for ways to make transactions saferand try to generate more tax revenue. Visa also has partnered with governments in Rwanda andChina to help citizens who don’t have access to traditional banks.

Data Breaches

“It’s ultimately about supporting the financial institutions,” says William Sheedy(http://search.bloomberg.com/search?q=William%20Sheedy&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja), Visa’s head of corporate strategy, mergers and acquisitionsand government relations. “If you can keep the flow of commerce in banks, then the regulatorymonitoring systems that governments have, locally and globally, will work really well.”

Heightened awareness about privacy has spurred Visa to move forward with advances Scharfsays are critical for growth and data security. U.S. retailers and banks have squabbled for yearsover costs, slowing adoption of some security technologies. Data breaches like the ones at HomeDepot Inc. and Target have increased pressure to implement more-secure systems, including chipcards with so-called EMV technology, named for developers Euro-Pay International, MasterCardand Visa.

Twitter Inspiration

“We need to be as relevant, if not more relevant, in the digital world as we have been in thephysical world,” says McInerney, Visa’s 39-year-old president. “We are going to have to partnerwith the types of players in the payments industry that we haven’t historically.”

Visa’s San Francisco outpost is the embodiment of that new attitude. Scharf, who helped find theOne Market Plaza location and design the two-story space, was inspired to build the office aftermeeting with Jack Dorsey (http://search.bloomberg.com/search?q=Jack%20Dorsey&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja), co-founder of Twitter Inc. (/quote/TWTR:US) andpayments company Square, whose offices are nearby. On the July day when Scharf introduced anew version of Visa’s digital wallet, employees were still moving in and dusty scaffolding lined thewalls of what was once the headquarters of the Southern Pacific Railroad.

“The world is changing around us dramatically,” Scharf says. “We have to evolve and change. Ijust come in to work every day and ask, ‘Are we doing enough, fast enough?’”

To contact the reporter on this story: Elizabeth Dexheimer in New York atedexheimer@bloomberg.net (mailto:edexheimer@bloomberg.net)

To contact the editors responsible for this story: Peter Eichenbaum atpeichenbaum@bloomberg.net (mailto:peichenbaum@bloomberg.net) Robert Friedman,David Scheer

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bckrd1 • 13 hours ago

My fear is the push to a cashless society. I am sorry but I like to put my hands on mycash. If BB gets all digital and the only way to do anything is digitally then we have alllost our freedom. Think about it. No money? No food. No money no anything. Theycan shut you down. Don't pay your car payment. The neat GPS in your car tells therepo man where it is. Or they just press a button and shut you down and then pick upthe car. So many ways to have control. All for our own good they say,

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• Reply •

Dave Dickey • a day ago

Visa and MC are oligopolists like the cable and cellphone providers fighting to keeptheir excessive profits in a new century.Hope to see them all fail.

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• Reply •

CashMcCall • a day ago

Cute girl but she says "ah" constantly also shaking her head around. "ah" ..... "ah"...

What happened to MONIF? VISA has an investment there they are trying to sell. IBMmay in fact be embracing MONIF.

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• Reply •

French_Underwood • 21 hours ago> CashMcCall

You r right! She was so annoying with her constant "ah"ssssssssssss that Ialmost could not finish watching this otherwise interesting piece.

Mayor Bloomberg took a swipe at CNBC in NYC the other day and braggedabout how his network has hired more females than CNBC. I say, Bloombergshould hire great candidates as we, the customers, expect the best fromBloomberg. If having Vaginas give them advantages in hiring process@Bloomberg then I am at a major disadvantage!!!

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