The circulation of money is at the heart of modern life. Banks and payment companies play an extremely important role in everything from receiving a paycheck to shopping online. This has never been truer than with the advent of COVID-19.

Unfortunately, our payment system is behind schedule. Traditional clearinghouses and international money transfer systems take days to send money, which is just too slow for the digital age. Fortunately, Visa (NYSE: V) works to improve the system. One of its recent innovations is a peer-to-peer (P2P) payment solution called Visa Direct, which promises 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 allows individuals, businesses and governments to instantly send or receive money directly using the Visa network. It sounds simple, but it’s a huge innovation; with legacy banking networks, transactions (especially cross-border) can often take days and come with a higher cost and higher security risk.

The secret sauce is that Visa is using its existing global payments network of bank connections and debit cards to “push” money from one bank account to another. This contrasts with the traditional way of sending money, which involved submitting debit instructions and “withdrawing” money from an account to be deposited elsewhere. It’s a subtle but important distinction.

Push payments can be facilitated faster because the sender sends both the payment instruction and the money, which speeds up recognition by banks.

The backbone of Visa Direct is the Visanet system, a global payments network with an API that businesses can use to integrate seamlessly with the Visa network. This API is what allows senders and recipients to connect directly and facilitate payments quickly and securely.

The best way to understand Visa Direct is to see it in action. Suppose you are running a small business and you want to pay your employees, or you are in a restaurant and you want to split the bill. Instead of entering someone’s routing and account numbers and starting a lengthy transfer process, all you need with Visa Direct is to enter their debit card information, and the money is sent. almost instantly.

Upgrade with Earthport

Visa Direct was rolled out a few years ago, but it has come a long way. At the start of the product, Visa Direct was only able to process 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. Coupling this with Visa’s legacy network has given the company much greater reach to connect users around the world. In a great example of a lucrative network effect, where each new user improves a network for everyone else, this has made Visa Direct much more useful (and valuable).

Visa Direct is growing rapidly. The company revealed that Visa Direct now reaches 5 billion cards and accounts in more than 200 geographies and 160 currencies, true to Visa’s classic motto, “You are wherever you want to be.”

The power of partnerships

Visa seeks to increase adoption of Visa Direct through partnerships.

Last month it was announced that Airbnb will allow hosts to use the Visa Direct tool for faster access to their earnings. It’s a great demonstration of Visa Direction in action. Immediate cash flow is beneficial and convenient for hosts who would otherwise have to wait several days to receive their money through an ACH wire transfer.

And there are many other companies creating solutions besides Visa Direct. For example, MoneyGram International integrated Visa Direct for peer-to-peer online transactions in many markets around the world at a cost much lower than traditional cross-border payment methods.

As businesses and consumers learn more about Visa Direct’s capabilities, expect usage to continue to grow.

Fintech competition

Visa Direct is certainly an exciting innovation for anyone who needs to send or receive money (basically everyone), but it is not without competition. MasterCard has a competing solution called Mastercard Send, and Square and Pay Pal also allow payments and money transfers with their digital wallets.

Maybe the banks should feel threatened. All of these new fintech solutions allow consumers and businesses to transact directly without having to call their bank. It also puts downward pressure on all companies that charge high fees for cross-border money transfers. Either way, Visa Direct is a victory for the consumer and should be watched for years to come.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.



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