Channel Strategies On a Massive Scale

Scott Thompson's passion for his job is as pronounced as the Boston accent (and support of the Red Sox) he retains after a number of years in California in financial services technology. As EVP, technology solutions, for Inovant, the information technology and processing services subsidiary of Visa International, Thompson is focused on critical issues such as transaction volume, speed and reliability, security, and support of newer business initiatives such as recurring and commercial payments. Much of this effort is focused on VisaNet, Visa's processing system, which handles more than $1 trillion in annual transaction volume, representing more than 14 billion transactions in the U.S.

Thompson recently spoke with BS&T editorial director Katherine Burger about future growth opportunities for the organization and how banks can leverage the payments channel to expand their customer relationships.

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BS&T: What are the roles and functions of Inovant and VisaNet?

Thompson: Inovant is a majority-owned subsidiary of Visa USA. Other regions have a stake in it. It looks a lot like Visa does-it's an association with ownership by banks, and the ownership level is based on how much business you do with Visa. Globally, there are 1,400 people who build, maintain, enhance, or operate the global systems of VisaNet. It runs in nearly 200 countries. There is a counterpart to the development organization that is responsible for data centers. If you look at a bank's IT organization, Inovant looks a lot like that kind of an organization.

As for VisaNet, in the U.S. it accounts for more than 70 percent of all transaction volume. Here's an interesting way to think about VisaNet. U.S banks have spent a ton of money building out ATMs, branches, online, various distribution channels. They should think of VisaNet as another channel to let banking customers get access to their accounts. This is very important distribution channel and access path for banking customers. It handles 40 billion transactions a year, and 100 million transactions are settled every night. The Visa USA board understands that absolutely, and see VisaNet as a channel for distributing their products. We view what we do as an absolute extension of our member banks' infrastructure; it's a convenience that customers demand.

BS&T: What kinds of projects are you focusing on currently?

Thompson: The biggest next-generation challenge is, how do we bring to life at the point-of-service the services your bank wants to make available to you? We've got to make it happen.

What we do that's a little different from a bank's IT organization is that we have zero tolerance for outages. We could never take a "planned outage," or take a chance that a [telecom] carrier problem could affect our network. A lot of organizations can't afford to have such a high degree of redundancy, but we can't afford not to.

And, we are dealing with tremendous throughput-how quickly customers get through the checkout lines at WalMart, for example, demands that the authorization message gets turned extremely quickly. Operating at our scale, and continuing to grow-managing that is on the forefront. In mid-2003, VisaNet is currently managing an average of 3,700 transactions per second, more than last year's peak season average. We are preparing for a 2003 peak processing rate of 5,200 to 5,300 transactions a second, and more than 100 million transactions on the peak day.

BS&T: What is happening in the area of recurring payments?

Thompson: It's really a different business, a different payment model. We are trying to position Visa as the payment system of choice for insurance companies-taking it [payment frequency] from 16 times a month to 30 times a month. We want to provide access to conduct all of a consumer's payments in life. We are working to make this better and more convenient. We want to make it seamless and easy. This also helps with customer retention.

BS&T: What are some other growth opportunities for VISA USA?

Thompson: Personal consumer expenditures in the U.S. total about $12 trillion. Twelve percent of time they use Visa; all other cards combined account for another 12 percent. The rest of the expenditures are from cash and check. The opportunities for growth are still enormous. About $38 out of every $100 is spent with card or card-related products versus cash and checks, up from $15 a few years ago. Part of this growth is from recurring payments in industry such as insurance, rental properties and utilities. Automatic bill payments are up 28 percent over last year.

Another opportunity is in the commercial payments space. We want to be larger in this. A big part is the information exchange involved in a lot of commercial payments. We carry a tremendous amount of additional detailed information all through our payment system. The next wave on the commercial payments side involves providing an increasing level of detail, and the company that does that best wins the game.

BS&T: What is happening in the area of dispute resolution?

Thompson: Typically, when you have questions about your statements, you have to call the bank, get a form, fill it out, they research and eventually get back to you. But this is society of instant response-if something is wrong with my statement, I want it off right now. So we have made a big-time reinvestment in our back office to allow banks to check on these kinds of questions. With Visa Resolve Online (VROL) the bank might be able to figure out disputes real time, while the customer is on the phone. It's an e-channel between the customer, the bank, and the merchant for disputes. Essentially, it's Web access to real-time dispute data in order to resolve cardholder disputes faster and more efficiently.

Currently, the average transaction for handling disputes costs more than $30 system-wide. Through an e-infrastructure we can take out more than $200 million system-wide. Initial system upgrades were a significant factor in the 21 percent decline of chargebacks in 2002, resulting in approximately $238 million in fewer losses. Long term, it's even more: It approaches $1 billion in savings to banks and merchants over the next five years. We need to wring out the inefficiencies of a back office system built 20 years ago.

BS&T: What are some emerging technology opportunities?

Thompson: One of the big breakthroughs for us has been the full introduction of TCP/IP into the global networks. The benefit of doing that to our organization has been significant.

We're a big IBM TPF (Transaction Processing Facility) shop, and IBM has made strategic decision to reinvest in TPF on behalf of its biggest customers. Now, for the first time, we can look at it as just another big server on the network. There are tremendous benefits for us. Before, with the legacy system, we couldn't share data, or we had to replicate the data. With the next-generation TPF we can share data, and we can call the TPF environment, just as with any Java-based, remote server. In our world, that's an enormous opportunity. It opens up and extends the life of our global TPF systems at least 10 years-plus.

One of the problems we face in terms of emerging technologies, is that with anything we build, from day one it has to scale. We never start slow. It's an interesting challenge, but it means there's not a lot of opportunity to introduce new technology. We want to avoid a lots of one-offs when it comes to technology.

In the area of fraud detection and prevention, we are developing neural network systems that look at every transaction. They "learn" behavior, such as the patterns of crime rings. It's hard to find the first fraudulent action, but we want to find the second one.

BS&T: It sounds like you have a lot of enthusiasm for your job.

Thompson: I have a great job, and a great challenge. My goal is to balance the risk with the business agenda, and make it all happen.

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio