Visa 2007 Annual Report Download - page 23

Table of Contents
Our customers are generally required to be financial institutions or other deposit-taking institutions organized under local banking laws or wholly-
owned by such institutions. Certain of our customers participate in the full range of functions, such as soliciting cardholders and issuing cards, soliciting and
signing merchants and acquiring merchant transactions. These financial institutions may also sponsor other financial institutions for more limited participation
in our network.
Rulemaking and Enforcement
In general, our customers are granted licenses to use our brands and to access our transaction processing systems. Our customers are obligated to honor
our rules and standards through agreements with, and in certain cases non-equity membership interests in, our subsidiaries. These rules and standards govern
their use of our branded programs and their participation in our transaction processing system. Variations on such rules and standards may exist throughout
the world in order to meet the needs of specific geographies. We require our customers to comply with these rules, which relate to such matters as the use of
our brands and trademarks, the standards, design and features of payment cards and programs, merchant acquiring activities, including acceptance standards
applicable to merchants, use of agents, disputes between members, risk management, guaranteed settlement, customer financial failures and allocation of
losses among customers.
We establish dispute management procedures between customers relating to specific transactions. For example, after a transaction is presented to an
issuer, the issuer may determine that the transaction is invalid for a variety of reasons, including fraud. If the issuer believes there is a defect in a transaction,
the issuer may return, or charge back, the transaction to the acquirer. We enforce rules relating to chargebacks and maintain a dispute resolution process with
respect to chargeback disputes.
Credit Risk Management
We indemnify our customers for any settlement loss suffered due to the failure of a customer to fund its daily settlement obligations. In certain
instances we indemnify customers even in situations in which a transaction is not processed by our system. No material loss related to settlement risk has been
incurred in recent years.
To manage our exposure in the event our customers fail to fund their settlement obligations, we have a credit risk policy with a formalized set of credit
standards and risk control measures. Customers with significant settlement exposure are evaluated regularly to assess risk. In certain instances, we may
require a customer to post collateral or provide other guarantees. If a customer becomes unable or unwilling to meet its obligations, we are able to draw upon
such collateral or guarantee in order to minimize any potential loss. We may also apply other risk control measures, such as blocking the authorization and
settlement of transactions, limiting the use of certain types of agents, prohibiting initiation of acquiring relationships with certain high risk merchants or
suspending or terminating a customer's rights to participate in our payments network. The exposure to settlement losses is accounted for as a settlement risk
guarantee. The fair value of the settlement risk guarantee is estimated using a proprietary model. Key inputs to the model include the probability of customers
becoming insolvent, statistically derived loss factors based on historical experience and estimated settlement exposures at period end.
Payment System Integrity
The integrity of our payments system is affected by fraudulent activity and other illegal uses of our products. Fraud is most often committed in
connection with lost, stolen or counterfeit cards or stolen account information resulting from security breaches of systems that store cardholder or account
data, including systems operated by merchants, financial institutions and other third-party data processors. Fraud is also more likely to occur in association
with transactions where the card is not present at the point of sale, such as electronic commerce, mail order and telephone order transactions. Security and
cardholder authentication for these remote channels are particularly critical issues facing our customers and merchants that engage in these forms of
commerce, where a signed cardholder sales receipt is generally unavailable.
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