Most current mobile-payment approaches—including the mobile wallet Visa announced this week—are still based on the payment-card accounts Visa currently makes its money from. But eventually someone will come up with a better way and leapfrog over the card companies. Then Visa will be stuck with a large, expensive network for real-time transaction processing. That could explain why Visa wants to use its new service to follow cardholders around from one retailer to another. And this all comes as Apple and Google face increasing heat for tracking the locations of their smartphones' users.
This approach might seem like a stretch for the world's biggest payment card brand, but it's one of the latest signs that even Visa knows interchange can't last forever. Need another clue? Consider Visa's investment in Square and some of the theories about its reasoning.
Visa's mobile coupon service, which Gap stores have been piloting since November 2010, works like this: Customers who have signed up for the program are sent offers via a mobile-phone text message immediately after they use their card in certain ways, such as at a store within a particular ZIP code or during a specific time. They then redeem that offer at Gap by showing a Gap associate the text message.
That hardly sounds exciting or unusual, except spotting transactions within a particular ZIP code means Visa has to be able to identify the location where a transaction took place, and do it in real time. That means as soon as a customer uses a card, Visa calculates the location and knows where that customer is.
It's not exactly what retailers say they'd like, which is to know when a particular customer enters the store. With that information, the retailer can send an offer when the customer arrives, rather than after the customer has already checked out. But that's based on the assumption it's the retailer that has to keep track of the customer—and the retailer's tracking capability largely ends at the store's doors.
Visa, on the other hand, can watch every transaction with the customer's card, looking for opportunities to send an appropriate mobile coupon. As soon as Visa spots a customer charging a purchase in any store that's close by a Gap, Visa can send a Gap mobile coupon to the customer. That can happen before the customer walks into the Gap store—and it may even push the customer toward the store.
By using POS transactions to track a customer's location, Visa's approach is more limited than location using cell towers or Wi-Fi signals. It only starts working when a customer uses the card. But Visa doesn't have to deal with the nightmarish issues that have haunted retailers toying with mobile, especially the interactions with mobile carriers.
And unlike Apple and Google, Visa doesn't have to let customers turn off the service. Visa can cite card-transaction authentication as justification for knowing where each transaction is made. The card brand actually has a fundamental business reason for tracking its customers. Realistically, the coupon program is a side effect. This approach is really a way of following customers around—or leading them from one retailer to the next.
Visa says it plans to expand the service, now that it has worked the bugs out with Gap. And why not? The hard part is tracking the customers who have signed up for the program. Sending mobile coupons is trivial—and better still, a text message doesn't require a smartphone. Adding more retailers just means having to decide which retailers' offers to text to a customer or possibly calculating where the customer is likely to go next.
Visa is also in a position to offer Google-like services, such as restaurant recommendations—except that Visa knows everywhere a cardholder eats using the card, what restaurants a cardholder has stopped eating at and how much the cardholder likes to spend, so it has much more complete data for making suggestions.
And Visa is even in a position to offer non-retail services to cardholders, like sending reminders to head for the airport when a customer has bought a plane ticket using the card—but not sending a reminder if the customer already appears to be at the airport.
What about other location-related services? If Visa can stalk card-using customers just as effectively as Apple or Google when they're out shopping (but without leaving a lot of location data on a smartphone, the way Apple and Google do), how long will it be before Visa starts identifying the shopping patterns of consumers and selling that information to retailers?
That's a long way from interchange. But it may be Visa's unavoidable future. Market leaders tend to stick too long with the business model that took them to the top. Visa has been spreading investments around in the mobile-payments space (for example, with Square, Ecrio and Monitise), but it's pretty clear that—like everyone else—Visa doesn't know what will eventually gut its interchange business.
Retailers love the idea of a serious competitor that will force interchange rates down. It hasn't come along yet. But Visa certainly believes that, sooner or later, it will.
The irony is, the card company may not have to wait. If it can make enough from location-based services, Visa might actually be able to squeeze out competition by reducing interchange rates in exchange for services that retailers actually appreciate. If that happens, Visa will have gutted its own interchange business.