The flow of money is central to modern life. Banks and payments companies play extremely important roles in everything from receiving a paycheck to shopping online. This has never been more true than with the advent of COVID-19.
Unfortunately, our payments system has been falling behind. Traditional clearing houses and international transfer systems take days to send money, which is simply too slow for the digital age. Fortunately, Visa (V +0.21%) has been working to improve the system. One of its recent innovations is a peer-to-peer (P2P) payment solution called Visa Direct, which has the promise to send money to anyone in the world faster and cheaper.
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What is Visa Direct?
Visa Direct is a solution that enables individuals, businesses, and governments to instantly send or receive money directly using the Visa network. It sounds simple, but this is a huge innovation; with legacy bank networks, transactions (especially cross-border) can often take days and come with higher cost and elevated security risk.
The secret sauce is that Visa is utilizing its existing global payments network of bank connections and debit cards to "push" money from one bank account to another. This is in contrast to the legacy way of sending money, which involved submitted debit instructions and "pulling" money from an account to be deposited elsewhere. This is a subtle but important distinction.
Push payments can be facilitated faster because the sender is sending both the payment instruction and the money, which speeds up recognition from the banks.
The backbone of Visa Direct is built on the Visanet system -- a global payments network with an API that businesses can use to integrate with Visa's network seamlessly. This API is what enables senders and receivers to connect directly and facilitate the payments quickly and securely.
The best way to understand Visa Direct is to see it in action. Say you run a small business and want to pay out your employees, or you're at a restaurant and want to split the bill. Instead of inputting someone's routing and account numbers and beginning a lengthy transfer process, all you need with Visa Direct is to enter their debit card info, and the money sends almost instantly.
Upgrading with Earthport
Visa Direct was rolled out a few years ago, but it has come a long way. In the early days of the product, Visa Direct was only capable of handling transactions between Visa cards. That changed in mid-2019 when Visa acquired Earthport.
Earthport is a cross-border payments network connecting banks, money transfer service providers, and businesses through the world's largest independent automated clearing house (ACH) network. Stitching this together with Visa's legacy network has given the company significantly more reach to connect users from all around the world. In a great example of a lucrative network effect, in which each new user makes a network better for all the others, this made Visa Direct significantly more useful (and valuable).
Visa Direct is ramping up quickly. The company has disclosed that Visa Direct now reaches 5 billion cards and accounts in more than 200 geographies and 160 currencies -- keeping true to the classic Visa motto, "It's everywhere you want to be."
The power of partnerships
One way Visa is looking to increase the adoption of Visa Direct is through partnerships.
Last month, it was announced that Airbnb will enable hosts to use the Visa Direct tool to gain access to their earnings faster. This is a great demonstration of Visa Direction in action. Immediate cash flow is beneficial and convenient for hosts who otherwise would have to wait multiple days to receive their money via an ACH bank transfer.
And there are many other businesses building solutions on top of Visa Direct. For example, MoneyGram International has integrated Visa Direct for peer-to-peer online transactions in many markets around the world at a much lower cost than legacy cross-border payment methods.
As businesses and consumers learn more about the capability of Visa Direct, expect usage to continue to grow.
Competition in fintech
Visa Direct is certainly an exciting innovation for anyone who needs to send or receive money (basically everyone), but it's not without competition. Mastercard has a rival solution called Mastercard Send, and Square and PayPal also enable payments and money transfers with their digital wallets.
Perhaps banks should feel threatened. All these new fintech solutions enable consumers and businesses to transact directly without the need to call their bank. This also puts downward pressure on any companies that charge high fees for cross-border money transfers. Regardless, Visa Direct is a win for the consumer and should be watched in the coming years.
