Visa - low-risk grower or tired boomer?

[Sijoittaja-alokas]

https://keskustelut.inderes.fi/t/inderesin-kahvihuone-osa-9/50229/2471?u=sijoittaja-alokas

I tried to make a 3/5 thread opening, but it turned out 2/5. Sources: Visa’s own pages, X, Inderes, and a few investment sites. And I haven’t mentioned AI.

INITIAL CHATTER ABOUT VISA

Visa Inc. is an American multinational financial services corporation headquartered in California. Visa is one of the world’s most well-known payment card companies.

The Birth of the Visa Card

The story of the Visa credit card began back in 1958, when Bank of America launched a paper card called BankAmericard. This was the first general-purpose credit card with a revolving credit feature. At the time, credit cards were a completely new idea, and they allowed customers to make purchases without having to carry large amounts of cash.

In the 1970s, the card became international and combined the services of several banks into a single product. In 1976, the card was renamed Visa.

Development and Expansion

Visa released its first debit card as early as 1975. This allowed customers to make direct bank account payments, but it wasn’t until the 1990s that debit cards became significantly more common and became an important part of Visa’s operations.

Visa’s payment card product range has grown over the years. Today, it includes the online card Visa Electron, chip-based debit cards, and prepaid cards etc., which can be used as reloadable payment cards or gift cards. The company offers virtual cards for online payments, which have no physical card at all.

In 2013, there were a total of 2.1 billion Visa cards in the world, and they were accepted as a means of payment at approximately 24 million points of sale. In Finland, Visa cards entered the market in the early 1980s, when Luottokunta began issuing them through its member banks. Later, major banks like Osuuspankki, Nordea, S-Pankki, and Danske Bank were responsible for issuing the cards.

Current State and Future

In the 2000s, Visa brought a credit feature to its charge cards, and from the beginning of 2005, also actual Visa credit cards. This expansion allowed customers a more flexible way to manage their finances—or ruin them.

The company has continued to develop and innovate in payment methods, aiming to provide its customers with secure and efficient solutions across the world. The company’s goal is to stay at the forefront of technology and meet the needs of a changing world where digital payments and mobile technologies play an increasingly important role.

INVESTOR’S PERSPECTIVE

Visa acts primarily as a payment processor and is not a lender itself. At the heart of the company is VisaNet, which is a global payment processing system. This technology is an important part of Visa’s ability to maintain its position as a market leader and grow its customer base globally. Visa’s business model is divided into three main segments: consumer payments, new flows, and value-added services. Of these, consumer payments are the most significant and continue to grow as cash and check purchases shift to digital equivalent payments.

Visa benefits from significant economies of scale, which allow it to maintain higher margins compared to other competitors. Visa has also shown an ability to innovate and utilize technological solutions, such as collaborations with FinTech companies, which improves the company’s competitiveness. Additionally, Visa has made strategic acquisitions, such as Currencycloud and Tink, which have expanded its service offering.

Risks and Opportunities

While Visa enjoys a strong market position and particularly the brand recognition that comes with it, it faces risks such as a constantly changing regulatory environment and rapid technological development. Competition, especially with FinTech companies, can pose challenges but also offers collaboration opportunities.

Visa’s ability to maintain its brand value and innovate to stay at the forefront of development is crucial for the company’s long-term success. Visa is strategically well-positioned to take advantage of the global shift from cash to digital payments, which makes it interesting in the eyes of an investor.

Visa might be boring, but it’s familiar to everyone. The company is very profitable and isn’t perceived as being particularly risky.

---

A few words about the recently published Q2:

The company reported that quarterly revenue fell short of forecasts. Visa announced third-quarter revenue of $8.9 billion, which was $60 million below the analyst average—so not by a huge amount… but this is rare for Visa, which last narrowly missed forecasts in 2020.

The company’s adjusted net income rose 9% to $4.9 billion, or $2.42 per share, while the forecast was $2.43. Global card usage grew by 4.9% and in the US, where Visa gets about 40% of its revenue, growth was 5.1%. The Fed is close to cutting interest rates, suggesting economic resilience.

Here is a tweet about Q2 that explains everything better than I can.

https://x.com/TheRayMyers/status/1815858112525427065

[Rene3]

In Finland, it feels like everyone pays by card, but that is not actually the case, even though payment volumes are on the rise. Nearly half of monetary transactions in the EU area still occur in cash

I believe that success in cooperating with financial institutions in emerging markets will play a decisive role in Visa’s growth trajectory compared to local competitors. Over the last five years, revenue generated in the U.S. has remained at around 45% of the company’s total revenue, so international growth has not outpaced the domestic market in the medium term.

By the way, this stock is also suitable for dividend investors. The 5-year dividend CAGR is approximately 15%, and the company still only pays out 23% of its free cash flow. Few people see such rapid pay growth year after year.

[Sijoittaja-alokas]

Visa has deployed AI and machine learning to combat various scams and frauds. Visa blocked $40 billion worth of fraud from October 2022 to September 2023, which is nearly double the amount compared to the previous year.

The company processes about 300 billion transactions annually, each of which is evaluated using AI through some sort of risk scoring.

As AI evolves, criminals are also leveraging it accordingly. Generative AI enables more convincing scams, such as deepfake videos and voice cloning, leading to unprecedented losses for consumers. These frauds are expected to become more prevalent and cause significant losses in the future. The company has invested $10 billion in technology to reduce fraud and enhance network security.

https://www.cnbc.com/2024/07/26/ai-and-machine-learning-helped-visa-combat-40-billion-in-fraud-activity.html

[Iltsu]

@Sijoittaja-alokas since you have a way with words, wouldn’t Mastercard fit into this same mix? There’s no point in these two having their own threads. In other words, you could post those charts from X here

Mastercard:

Next event
2024 Q2 Interim Report	July 31

3 days|

Here is a discussion about Visa in English

[Bjorninen]

Someone wrote a few things about Visa a few months ago over in the quality companies thread. Sharing it here as well, in case anyone happens to be interested:

https://keskustelut.inderes.fi/t/globaalit-laatuyhtiot/43190/72?u=samik

[Sijoittaja-alokas]

The tweet shows how Visa has significantly grown its revenue and free cash flow in recent years. The company has a strong market position and high profitability, but of course, this comes as no surprise to anyone who has followed the company even slightly.

The company is, however, exposed to economic cycles and regulatory risk – well, this isn’t new either. According to the tweet, Visa’s current share price is quite reasonable, but future growth is uncertain.

https://x.com/ZeevyInvesting/status/1827295685928013843

[Sijoittaja-alokas]

Maybe it’s easier to compare when Masa and Visa are in the same tweet.

https://x.com/ZeevyInvesting/status/1828089626797498792

[Sijoittaja-alokas]

This could fit in some “general thread”, but it naturally fits in the company thread too.

https://x.com/dividendology/status/1837559167110074538

[niko_naakka]

I swapped a couple of memes for Visa yesterday to keep the portfolio calm

the biggest decliner in the portfolio today

https://www.investing.com/news/stock-market-news/us-accuses-visa-of-monopolizing-debit-card-swipes-3630605

[Laatuohjaus]

I decided to write a general summary of the lawsuit in question, seasoned with my own observations and thoughts, to see if it might spark more discussion.

The case concerns US Debit transactions, where market shares are Visa >60% and MA <25%. This is Visa’s most important source of revenue globally, accounting for nearly 20% of 2022 revenue, and the profitability is reported to be staggering (83% Operating margin). I guess this says something about the depth of the moat .

The grounds for the monopoly accusations are the ability to control pricing and eliminate competition. Visa benefits from the alleged monopoly by charging higher fees compared to a situation where it would face free competition. The Department of Justice is thus acting on behalf of the American consumer, who ultimately pays the costs through higher prices for services or products purchased.

For me, the lawsuit is primarily evidence of the superiority of network effects and the increase in barriers to entry as scale grows. The natural goal of every business relying on network effects should be a monopoly, if it simultaneously creates maximum value for all parties?

Network effects of the business model

The material explains the emergence of network effects well.

History and current state

The ”The Durbin Amendment,” which came into effect in 2012, aimed to increase competition and set regulations for pricing. However, the pricing restriction mainly led to an increase in switching costs and further bolstered Visa’s and Mastercard’s “front of card” position. It did, however, have a significant impact on the generated revenue: “The cap on interchange rates has significantly reduced debit revenue; the average interchange rate for regulated issuers declined by 55 percent for signature transactions and by 28 percent for PIN transactions.”

Efforts were made to increase competition by mandating the following: cards had to operate on two independent “networks” (Networks). The solution was ”front of card” and ”back of card” networks, which, as the names suggest, are on different sides of the physical card. However, the card is branded according to the ”front of card” network logo (in practice, Visa or MA). The ”back of card” network / provider isn’t necessarily immediately clear from the card. Thus, brand and trust capital become a competitive advantage when a consumer chooses, for example, which network to use to complete a payment. Following the legislative change, Visa’s market share fell from the previous year’s 63% → 56% in 2012. However, through measures presented later, the company crushed the budding competition and regained market share.

”Back of card” refers to so-called “PIN Networks,” which historically have required the use of a PIN. Although an alternative network can be found on the card, it probably doesn’t work everywhere or for all transactions. These cards lack the scale that is Visa’s most important competitive advantage. All parties must be members of the network for payment to be possible (buyer, merchant, and the bank used by both).

The scale of network effects brings value to all parties through its ease, reliability, and efficiency. The incentive to invest in an alternative network only comes through regulation, as long as Visa’s pricing is considered reasonable by the network members (value received > price).

However, PIN Networks have developed their technology, and today there are some forms of payment available without using a PIN. Also, the networks have likely grown, improving usability.

Visa and Mastercard also provide the following services and features that “PIN Networks” cannot offer on the same scale: "credential that can be used at merchants that are members of the network (brand trust capital), payment guarantees, dispute capabilities, chargeback capability, and fraud protection".

Visa’s ”abuses” to strengthen its position

Visa’s position is primarily threatened by regulation (such as the aforementioned ”The Durbin Amendment”) and new technologies, i.e., disruption.

Firstly, barriers to entry are naturally high due to network effects. Merchants feel forced to be part of Visa’s network or they lose customers to a competitor that accepts Visa cards.
Merchants view Visa and Mastercard as must-haves, accepting both networks to maximize their ability to make a sale with whichever debit cards their customers present. This feature of the market for debit transactions increases the power that Visa is able to exercise over merchants

Visa bypasses regulation by entering into agreements that include, for example, volume-based discounts and exclusivity rights. Would this be perfectly normal practice in other industries and in a market economy in general? Visa thus buys itself exclusivity by sharing part of the profit generated by the network with its members. Scale economies shared?

Visa’s routing contracts cover more than 180 of its largest merchants and acquirers, and effectively insulates at least 75% of Visa’s debit volume from competition—which means that Visa has foreclosed nearly half of total U.S. debit volume. Agreements most recently renewed in 2022.

Visa commits and even forces merchants to use its own network.
which in turn requires nearly all merchants to route at least the non-contestable transactions to Visa penalize those who would switch to a different debit network or to companies that could develop alternative debit products. Visa both charges punitively expensive rack rates (listed pricing for network fees and interchange), which are divorced from Visa’s incremental costs, to merchants or acquirers that refuse to sign routing agreements and includes harsh penalties in its contracts with merchants and acquirers who do sign its agreements but fail to achieve the exclusivity requirements

Visa’s strong position and role extend beyond its own network, affecting others as well.
Debit networks also set the rules for transactions flowing through the network. As the largest debit card network in the United States, Visa leverages its intermediary role not only to set rules for transactions on its own network but also to influence the rules for all other debit networks.

Disruption. Visa’s response to disruption has been to partner with practically all parties. Everyone is treated as a Visa partner rather than a competitor. This keeps the network relevant, everyone gets to benefit from it, and most importantly, its value grows with its size. The former CFO commented as follows: “[E]verybody is a friend and partner. Nobody is a competitor.” As Visa’s former CFO went on to say, “The only issue is to figure out how to make it worth their while to partner with us. And so far, we’ve managed to do that, whether it’s with wallets, whether it’s with large tech companies, whether it’s with large merchants. And as long as we keep doing that and keep our network valuable for everyone, things should be fine.”

In practice, many platforms currently operate on Visa’s ”rails” and network. Visa pays a portion of its revenue to the platforms so that they use Visa and do not introduce or create competing alternatives. In my opinion, this is a normal partnership that a competitor with a thicker wallet and/or a better network could easily disrupt (due to network effects, they just don’t happen to exist and can’t emerge ).

The following graph illustrates the chosen strategy in terms of the number of partnerships.

Possible consequences and summaryAccording to the Department of Justice, without intervention, Visa will continue to insulate itself from competition in a sector central to the economy and commerce, at the expense of the American consumer. It presumably needs to be proven that competition would actually lower pricing, which may be challenging. Will the process become a long struggle that is eventually settled? Partly a political stunt, perhaps? However, the lawsuit illustrates the intent to lower the costs of payments. The biggest risk is future regulation regarding, for example, the agreements made by Visa, which the outcome of this case will presumably also influence.

I’m still amused by how Visa specifically has been singled out with these arguments.
Banks are the biggest beneficiaries and charge many times more for a single transaction. Of course, banks don’t have a monopoly, but even so, price competition doesn’t seem to materialize there either?

In my opinion, everything culminates in this chicken-and-egg problem and the power of network effects. Could this be a natural monopoly, where a few players are able to satisfy the market’s needs by providing the best network, while charging a reasonable price relative to the value created?

The current ecosystem benefits all parties (though there is naturally a tug-of-war over the level of costs). Especially banks, as can be seen, so I don’t believe there is a desire for it to be significantly changed. Banks possess significant lobbying power.

All in all, another good test for the value of network effects. Historically, many attempts have been made to take down Visa from practically every direction, without success! Is it different this time?

Sources:
https://www.justice.gov/opa/media/1370421/dl
https://www.checkout.com/blog/what-is-pinless-debit
https://investorrelations.discover.com/newsroom/press-releases/press-release-details/2012/Despite-New-Regulation-Debit-Continues-To-Grow/default.aspx

[Housumies]

Thanks @Laatuohjaus for the great summary. It looks like Joseph Carlson also made a video on the topic. If you aren’t familiar with the channel or the guy, Joseph is a quality investor who creates videos for his two YouTube channels, focusing mainly on his investment style, portfolios, and the companies he follows and related news. It’s the only investment YouTube channel I follow; in my opinion, the content is mostly high quality and not clickbait trash. Here is the link to the video:

Visa Is Being Sued By The DOJ

Joseph goes over this lawsuit for the first 15 minutes of the video; I recommend watching it. However, here are Joseph’s arguments in a nutshell:

• Visa is not a monopoly because it has to compete mainly against Mastercard, but also others. Visa has lost market share to Mastercard in recent years, and Mastercard is growing faster than Visa.
• “Exclusivity agreement” contracts are standard practice in other industries.
• The assumption that if Visa’s “transaction” fees were eliminated, the benefit would go directly to the consumer is subjective. According to research, merchants would keep that benefit for themselves.
• Visa’s payment network is reliable and secure. The same cannot be said for all competitors.
• Bulk discounts for large customers are standard practice in other industries.
• The DOJ’s arguments overall seem weak.
• Situations like these, where a company is accused of a monopoly position, have generally made the company stronger. Visa faced a similar “anti-trust lawsuit” in 2011 and has still performed excellently.
• These kinds of scary situations for excellent companies are usually a good buying opportunity.

[Sijoittaja-alokas]

Here is an interesting overview of the sector, including Visa and Mastercard.

https://x.com/QCompounding/status/1841144542478655724

[Sijoittaja-alokas]

Here’s a pretty good info package on Visa, though of course, you can’t fit a huge amount of information into a single image. Nothing particularly new as such if you’re already familiar with the company.

https://x.com/QCompounding/status/1842898333695725667

[Housumies]

Visa released its Q3 results yesterday: https://cdn.prod.nntech.io/fundamentals-file-proxy/quartr/report/2d8a6e4aaffd86197e9ae6ff00ac835d.pdf

In my view, there were no surprises in the report. Good performance continues.

[Laatuohjaus]

Typically strong performance as usual. Some other highlights:

• New flows and Value Added Services (VAS) grew +22%. This is where the greatest potential for faster revenue growth lies, and it is also where acquisitions are focused. Roughly, Mastercard’s VAS share of revenue is nearing 40%, whereas Visa’s is around 25%.

• Excess capital is being returned to shareholders at an accelerating pace. The dividend was raised by +13.5%, and during the past year, ~3% of the share count was retired through share buybacks.

It was also noteworthy that before the earnings release, the WSJ reported that Visa plans to lay off 1,400 employees (~4.8% of the total workforce).

https://www.reuters.com/business/finance/visa-lay-off-around-1400-employees-contractors-wsj-reports-2024-10-29/

“About 1,000 of the cuts are expected to eliminate technology positions”. This is certainly partly “normal” restructuring. It is interesting, however, that personnel costs account for about half of the current cost structure. AI could offer Visa significant potential to improve profitability by increasing employee productivity or even partially replacing it entirely.

A related highlight: May 2024 interview with Barron’s, Dev Kantesaria said “All our companies [including Visa, Mastercard, Moody’s, S&P Global, Fair Isaac, Intuit] can meaningfully grow their margins from where they are today. AI will accelerate that trend because labour is the most expensive line item for most of the businesses we own. AI is slowly replacing labour. You could imagine if you had 100 analysts at Moody’s working in a certain area of ratings, you might only need 50 five to seven years from now, or maybe only 10. The bulk of the work could be automated and interpreted by AI. Operating margins could be 20% higher than the margins we were targeting before. You could see margins of 70-75% someday.”

In my opinion, it is reasonable to expect 12-13% EPS growth going forward as well, not just for next year but further into the future. Let’s also save the guidance to the thread.

[Sijoittaja-alokas]

Here is Investing visuals’ fresh updated overview of Visa.

https://x.com/ZeevyInvesting/status/1857430859479196040

---

Over the past 16 years, the company has achieved strong results; revenue has grown by 11% per year (CAGR), and earnings per share by 25%. The tweet also mentions the power of the company’s “economies of scale”.

https://x.com/Restructuring__/status/1857200415508398454

[Sijoittaja-alokas]

Here’s a fresh look at Visa.

Quite familiar stuff and nothing groundbreaking if you’ve followed the company somewhat.

https://x.com/Quality_stocksA/status/1865855395509436859

[Sijoittaja-alokas]

Over the past five years, Mastercard has grown its cardholder base faster than Visa and American Express.

This faster growth is due to Mastercard’s stronger emphasis on emerging markets compared to its competitors. Additionally, Mastercard has been more successful in leveraging new revenue streams and offering value-added services, which also explains the company’s higher valuation relative to Visa. At least according to the tweets below.

https://x.com/finchat_io/status/1877732193705038172

[Sijoittaja-alokas]

Visa has continuously increased its average “take rate,” i.e., its share of transactions.

This means that the company gets an increasingly larger share from each transaction without significant “resistance” from customers or merchants.

https://x.com/finchat_io/status/1880767142792253535

[Sijoittaja-alokas]

Good times have been had and good times are expected.

https://x.com/Quality_stocksA/status/1883190467434590441