The Buck Stops Here

A week before the Christmas holiday, two articles related to the performance marketing space appeared but received relatively little fanfare. We read them and might have forwarded them on to a few friends at most, but it wasn’t until thinking about the space today that brought the potential significance of the articles to light. They deal not with any government body, dealing instead with a different type of authority. The answer to whom we speak could easily read like a riddle, and their role in our day to day lives has us easily overlooking the role they play in business. They are enabler and as such, rarely, if ever, do we hear of them acting as a regulator; yet, they, like Google who controls internet traffic, control something every company must have to stay in business. We speak of money, and a company that plays a key role in the flow of money is Visa, the company merchants love to hate but without whom the majority don’t dare operate.

The payment network leader has a great brand and sits in a unique position. As consumers, we all know of Visa, even though we know little about them. They get to make money on every transaction run through their network. They market to consumers so that more transactions occur, but as users we don’t ever directly deal with them. It’s not that different from the way many phone manufactures operate. They will spend money to promote their device, but (outside of Google’s choosing to buck the system) you don’t get the phone from them. You get it from a provider. In Visa’s case, that means a bank, and when most people think of their Visa card, they think of not just Visa but the issuing bank to whom they pay that Visa bill. The same goes for any problems, i.e., if you have an issue with your bill, you don’t call up Visa; you call up your bank. And, as ones who make money when people spend money, we have heard very little in the way of their playing the consumer advocate. Until now that is. The news that came out has Visa in a much more proactive role than we might expect, and it directly involves our industry, because our industry’s actions are what is under fire.

We could spend endless time arguing about the terminology used in the articles, namely the non-stop use of the word scammers, but that doesn’t change what has already happened – Visa cutting merchants. The 100 cuts represent a drop in the bucket of the millions that they service, but it sets a very scary precedent. This comes at the same time as another announcement, one with Visa, the FTC, and the BBB partnering to "Educate Consumers about Online Scams." This scrutiny of certain performance marketing tactics follows steps taken by companies within the ecosystem, e.g., new rules by Facebook, Google, and Yahoo. While we long expected increased scrutiny from others, we did not anticipate it to move this far up the funnel. In fact, it can’t move any higher up. It’s one thing to have a suit against an affiliate, network, or even product manufacturer. It’s something completely different to shut off access to their funds. The system grinds to a halt. That makes the 100 already targeted very significant with the impacts having already been felt by those in our space.

When a shut down occurs like this one with Visa, who really loses? It’s a ripple effect.

• Affiliate – as any significant affiliate gets paid weekly, their loss is really opportunity cost. Outside of the handful of ultra large arbitragers, the affiliates have their ability to buy new ads taken away. The largest of buyers will have prepaid for media in expectation of continuing to run what they are and could have rather significant capital at risk. If anything, this exposes the benefits of being an affiliate.
• Network – unlike affiliates, networks often do the reverse for the advertisers. Some have managed to receive frequent payments but most will have extended credit to their largest advertisers. In a good scenario, they are getting paid monthly yet paying out money weekly. A cut like this means they have serious capital at risk. 
• Merchant / Advertiser – It might seem like they don’t have much to lose, but higher risk merchants look less like Amazon who gets their money right away and more like a ringtone company. Not only do they pay a bounty based on expected future earnings months out, they also often have significant amounts of money on hold from credit card companies like Visa. Getting shut down could mean a huge loss.

Think about a scenario where a network had made $10 million per month off of a now banned continuity advertiser. That is $10 million in receivables now at risk because their advertiser no longer has money. If they come to some agreement to split the risk, they are still out $5 million that they already paid to affiliates for the past month of activity. It’s a huge amount, because that is $5 million that must come from profit, which now equates to, at the very least, $20 million in new / existing revenue to cover that gap. It’s more than enough, on a smaller scale, to drive a network out of business or to the brink of going out of business.

Fortunately, the biggest and most savvy of the players see this type of an event as a cost of doing business and don’t let the overwhelming profit go to their head. They will make sure to have reserve funds set aside for such an eventuality, just as the better merchants will have back up accounts waiting. But, it is still an enormous shock to the ecosystem. It’s the most effective move on the part of those wanting to make an impact, and absolutely exposes the reliance we have on credit card offers. Such a shock, like a cold frost, will take some time to fully recover. It will expose weaknesses in the system and make companies stronger operationally when they emerge. Not necessarily the way we would have wanted to start the New Year, though.