QUOTE AND NEWS
SeekingAlpha  Sep 20  Comment 
By J. M. Manness: Europay, MasterCard (NYSE:MA), and Visa (NYSE:V) formed EMVCo which ...exists to facilitate worldwide interoperability and acceptance of secure payment transactions. It accomplishes this by managing and evolving the EMV®1...
Benzinga  Sep 19  Comment 
Visa Inc (NYSE: V) continues to tread water below resistance, despite the positive market conditions. If Visa can’t participate now, what will happen when the market falters? Here is a recap of Benzinga's September 2 report on...
SeekingAlpha  Sep 19  Comment 
By John Wideman: Visa (NYSE:V) is a financial services company that facilitates non-cash transactions by providing the network to link merchants with financial institutions providing credit. It is important to note that Visa does not provide the...
Forbes  Sep 19  Comment 
Alibaba's looming offering looks likely to beat out Visa and Facebook as the biggest IPO in U.S. history
Financial Times  Sep 18  Comment 
Mobile payments group’s wobbles highlight the challenges facing a clutch of high-profile UK tech groups which are losing investor confidence after initially sparking investor excitement
Forbes  Sep 18  Comment 
As the battle heats up among tech companies to define the burgeoning space, Visa plans to build out its internal mobile payments capabilities.
Forbes  Sep 18  Comment 
Alibaba's looming offering looks likely to beat out Visa and Facebook as the biggest IPO in U.S. history
DailyFinance  Sep 18  Comment 
Longstanding partners in the mobile sector Visa Inc. (NYSE:V) and Monitise plc entered into an alliance agreement in 2009. At the same time, Visa began investing in Monitise. Given the maturation of Monitise as a company, Visa...
Forbes  Sep 17  Comment 
Alibaba's looming offering looks likely to beat out Visa and Facebook as the biggest IPO in U.S. history
Financial Times  Sep 17  Comment 
Talented young designers have flocked to the UK in spite of its manufacturing decline. But will visa and cost of living issues kill the trend?




 
TOP CONTRIBUTORS

Visa (NYSE: V) operates the world's largest retail electronic payment network in the world, and has the largest Credit Card Network in terms of branded credit and debit cards in circulation, transactions, and total volume.[1] Visa earns its revenues by providing the information and resources to complete transactions amongst the customer, the merchant and their respective banks, collecting a fee based on the number and dollar value of transactions that it processes. Visa does not actually extend credit to its customers; rather, its member banks such as Capital One Financial (COF), Bank of America (BAC), or Wells Fargo (WFC) extend the credit. As of July 30, 2009 there were more than 1.7 billion Visa branded cards in the global market.[2]

As a large player in the credit card industry, Visa is subject to extensive regulation by national governments, especially in the United States. For instance, Visa was forced to pay American Express Company (AXP) $2.25 billion in a settlement over anti-trust infringement in late 2007.[3] In October 2008, Visa agreed to settle a similar $6.0 billion suit with Discover Financial Services (DFS).[4] Moreover, American Express also gained the right to provide transaction services to banks that were previously locked into exclusive agreements with Visa and Mastercard. In addition to the Credit Card Reform Bill that was passed in May of 2009, it may be subject to further government regulation. On October 8, 2009, Congress heard testimony regarding interchange fees, which would potentially move forward legislation to make these fees more transparent.[5]

For the first quarter of Visa's fiscal 2010 (Visa's fiscal year ends on September 30), Visa reported a net income of $763 million, up from its year ago earnings of only $574 million.[6] They built their net income on net revenues of $2 billion while decreasing their operating expenses by 4%.

For the fourth quarter of Visa's fiscal 2009 (ended September 30, 2009) Visa reported a net income of $514 million, a large turnaround from its 2008 net loss of $356 million for the same period.[7] Visa also announced a share repurchase plan of $1 billion, showing signs that declining credit and debit card use trends are stabling.[8]

Beginning February 22, 2010, the Credit Card Accountability, Responsibility and Disclosure Act will take full effect. The bill was signed into law on May 22, 2009 by Obama, and made sweeping reforms to the credit card industry. Included in the bill are requirements for more disclosure about interest rates, the inability of most people under the age of 21 to obtain cards, caps on service fees within the first year, and well defined grace periods.[9] How these changes affect the current credit card landscape and which companies are able to better adapt to the new rules remains to be seen.

Company Overview

Headquartered in San Francisco, Visa operates the world's largest retail electronic payments network. In particular, Visa provides financial institutions with a platform to process consumer credit cards, debit cards, prepaid cards, and other forms of electronic payment methods.

Visa makes money from card service fees, data processing fees, and international transaction fees. Visa operates a four-party payment system consisting of a card-holder who purchases a good or service from a merchant using one of Visa's cards. The merchant is paid the value of the good, minus the cost of the transaction by the merchant's bank (the acquiring bank). The merchant's bank is then paid back by the card-holder's bank (or the issuing bank), which in turn charges the customer the cost of the good. [10] Visa does not earn revenues from interest charged on balances, late fees, or other fees.

Visa grew tremendously between 2005 and 2009, as its net income grew from $360 million in 2005 to $2.35 billion in 2009.[11] Since Visa does not actually lend money to its customers, it was not as directly impacted by the credit crunch and 2008 Financial Crisis as holding and lending banks. Instead, it acts as an intermediary between the customer and merchant and their respective banks, giving Visa some protection against credit default. However, the company's earnings still depend heavily on the both the number and value of transactions conducted by consumers, and as such is still vulnerable to falling consumer spending.

Business and Financial Metrics

In 2009, Visa's operating revenue increased to $6.91 billion from its 2008 level of $6.26 billion, while its operating income increased from $1.23 billion to $3.54 billion.[11] The 10% increase in operating revenues are mainly due to higher prices that Visa its customers for services and data processing.[12] However, the main reason Visa was able to increase its operating income by such a large amount was because it was able to reduce its operating expenses from $5.03 billion in 2008 to only $3.37 billion in 2009.[13] The company attributed this large decline in expenses to the lack of litigation, reduction in workforce, and decreased advertising expenses.[13] As a result of slight revenue growth and significant declines in expenses, Visa's net income in 2009 was $2.35 billion, nearly three times higher than its 2008 net income of $804 million.[11]

For the fourth quarter of Visa's fiscal 2009 (ended September 30, 2009) Visa reported a net income of $514 million, a large turnaround from its 2008 net loss of $356 million for the same period.[7] Visa also announced a share repurchase plan of $1 billion, showing signs that declining credit and debit card use trends are stabling.[8]

Visa Financials (In Millions) 2005[11] 2006[11] 2007[11] 2008[11] 2009[11]
Total Operating Revenue2,6652,9483,5906,2636,911
Total Operating Expense2,2122,2185,0395,0313,373
Operating Income453730-1,4491,2323538
Net Income360455-1,0768042353
  • Note: Visa's fiscal year ends September 30 of each year.
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Visa's Revenue Breakdown by Fees.[12]

Business Segments

Visa earns its revenues from a number of sources: i) Service Revenue, ii) Data Processing Revenue, iii) International Transaction Revenue, iv) Other Revenues, and v) Volume and Support Incentives.

Service Revenue (45.9% of 2009 total revenues)

Visa's Service Revenue segment makes up the largest proportion of Visa's revenue, and are earned from customers for their participation in card programs that carry the Visa brand.[14] The primary fees generated from this segment would come from banks and other financial institutions that use Visa's mark and brand. In 2009, Visa earned $3.17 billion from this segment.[12]

Data Processing Revenue (35.2%)

Visa controls a large data base of information and passes information from a merchants bank to a customers bank. This information transaction includes when the merchant requests approval from the customers bank, transferring the value of the transaction between the banks, fees for using debit services, and other similar data processing.[15] In other words, Visa earns a fee for providing authorization, clearing, settlement, transaction processing services or any other service that helps the transaction go through.[14] Visa earned $2.43 billion in revenues from this segment in 2009, making it the second largest source of revenues for Visa.[12]

International Transaction Revenue (27.7%)

International transaction revenues are earned on transactions where the cardholder's issuing bank resides in one country, but the merchant's bank is in another. Obviously, this occurs most commonly when citizens from one country visit another and make purchases or withdraws funds while abroad. These revenues are generally driven by cross border transaction volume in which a currency conversion must be made.[14] For 2009, Visa earned $1.9 billion in revenues from international transactions.[12]

Other Revenues (9.0%)

Other revenues come from extra services customers can purchase or use at an extra charge. Included within other revenues are extended cardholder protection, concierge services, and exclusive services in Visa Europe as well as fees for licensing and registration.[14] Other revenues make up the smallest portion of Visa's revenues, as it earned just $625 million from this segment in 2009.[12]

Volume and Support Incentives (-17.9%)

Volume and support incentives are programs that are designed to increase payments volume by, among other strategies, increasing general acceptance of Visa products.[14] Visa has contracts with financial institutions, merchants, and other business partners with respect to these incentives, and it accounts for these as reductions of operating revenues. Because they are accounted for as reductions in revenue rather than an expense, this segment will always earn a negative revenue. In 2009, these incentives cost Visa $1.2 billion.[12]

Key Trends and Forces

Impact of credit card reform bill

On May 22, 2009, President Obama signed into law a wide the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, a wide ranging credit card reform bill set to fully take effect in February 2010.[16] However, the first stages of the reform take effect as early as August 20, 2009.[17] Included in this bill are restrictions on interest rate increases, a 45 day notice before changing interest rates, restrictions on fees that can be charged, requirements for more disclosure, and limits on ability of those under the age of 21 to obtain cards, among others.[18] Banks have warned that the new legislation will increase rates, decrease credit extended, and increase the use of annual fees for cards.[19] Less credit likely means less transactions, transaction amounts, and thus a negative impact on earnings.

Economic Weakness lowers consumer spending and the volume of transactions

Consumer spending plummeted in the third quarter of 2008 in the sharpest fall in 25 years, possibly since before World War II. The GDP shrank by .5% as economy deals with the economic turmoil.[20] The shrinking of sales hurt Visa since it depends on both the number and value of transactions carried out using its network. Service fees fell from $792 million in the second quarter to $749 million in the third quarter. Although the number transactions still rose by 13% in the third quarter 2008 as opposed to the third quarter 2007, analyst expects transactions to fall in 2009.[21][22]

Disappearance of 2 trillion in credit poses threat to Visa

According to Meredit Whitney, an analyst at Oppenheimer and Co. major banks like, Citigroup (C), Bank of America (BAC) and J P Morgan Chase (JPM), may cut up to $2 trillion in credit lines through 2009.[23] While this figure may or may not be accurate, reductions in credit lines would have a negative impact on consumer spending, and thus the number and value of the transactions that Visa is able to charge fees on.

Credit Cards replace paper transactions, and are used more frequently and for smaller purchases

The consumer sector is moving away from paper-based approaches towards electronic payments. There is little doubt that the use of payment cards has risen drastically in the United States and internationally. This provides Visa with a strong continued growth in volume of transactions. Its total number of transactions rose from 44.0 billion in 2007 to 50.3 billion in 2008 to 56.7 billion in 2009.[24][25][26] In 2007, credit and debit card payments made up 56% of all purchases, as many small transactions around $5 are also now done with credit cards.[27] Further facilitating this shift, many stores no longer require a signature for purchases under a certain amount, such as $20.

Competition

Visa competes against companies in the general purpose payment card industry, as well as against all other forms of payment. As the largest processor of retail payments the world, Visa is the largest by far compared to its rivals. It accounts for 60% of the debit-card transactions in the U.S. market - a four-to-one advantage over rival Mastercard (MA). Visa also has 41.7% more total volume than its closest competitor, 47.3% more in total transactions, and 736 million more cards than its closest competitor.[24]

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Visa has significantly more in total transactions than its competitors.[24]
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Visa not only dominates the market in terms of total transactions, but it also has a large advantage in terms of total volume.[24]
  • Mastercard (MA): Mastercard has a strong brand loyalty and name recognition through its "Priceless®” marketing campaign. It has also experienced rapid growth as it has pushed to switch from paper to a fully electronic system.[28] Visa also competes against Mastercard's Maestro - a global online debit card service.[29] Mastercard has pushed to advertise and replaced Visa as the Rugby World Cup sponsor in 2011.[30]
  • American Express Company (AXP): American Express focuses on being the credit and debit cards for small business and merchants. It has also filed legal suits against Visa and Mastercard for violating anti-trust laws. Visa settled the suit for $2.1B.[31]
  • Discover Financial Services (DFS): Discover is substantially smaller than Visa and competes with it almost exclusively in the US. Visa also competes against Discover's PULSE, a network that increases the compatibility of debit cards and ATMs in the network.[32]

Notes

  1. V 10-K 2009 Item 1 Pg. 4
  2. Visa's Net Jumps 73% Even as Spending Falls. Jay Miller and Kevin Kingsbury. The Wall Street Journal.
  3. CNBC News "Visa to Settle Antitrust Suit For Record $2.25 Billion" 7 Nov 2007
  4. New York Times - Business "Discover, Visa And MasterCard Settle Antitrust Suit" 15 Oct 2008
  5. Laurie Kulikowski Visa, Mastercard Shares in Rally Mode. TheStreet.com
  6. Visa quarterly net income jumps 75%. Alistair Barr. Marketwatch.
  7. 7.0 7.1 Visa Q4 profit beats estimates, stock up. Juan Lagorio. Reuters.
  8. 8.0 8.1 Visa Net Hints at Turnaround. Aparajita Saha-Bubna. Barrons.
  9. Credit cards then and now: A look at how the new law changes the rules. Candice Choi and Eileen AJ Connelly. The LA Times.
  10. V 10-K 2008 Item 1, "Transaction Processing Services" p.8
  11. 11.0 11.1 11.2 11.3 11.4 11.5 11.6 11.7 V 10-K 2009 Item 6 Pg. 32
  12. 12.0 12.1 12.2 12.3 12.4 12.5 12.6 V 10-K 2009 Item 7 Pg. 39
  13. 13.0 13.1 V 10-K 2009 Item 7 Pg. 41
  14. 14.0 14.1 14.2 14.3 14.4 V 10-K 2009 Item 7 Pg. 37
  15. V 10-K 2008, "Data Processing Fees" p.57
  16. Obama signs sweeping credit card reform bill. John Poirier. Reuters.
  17. Credit card rules change Thursday. MSN Money.
  18. Key provisions of credit card reform bill. MSNBC.
  19. Credit-Card Fees Curbed. Sudeep Reddy. The Wall Street Journal.
  20. MSNBC Business "Economy, consumer spending shrank in Q3" 23 Dec 2008
  21. V 2008 3Q 10-Q "Consolidated Statements of Operations" p.3
  22. V 2008 2Q 10-Q "Consolidated Statements of Operations" p.3
  23. Columbus Dispatch, 2 Trillion in Credit may be cut, December 18, 2008
  24. 24.0 24.1 24.2 24.3 V 10-K 2009 Item 1 Pg. 13
  25. V 10-K 2007 Item 1, "Industry Overview" p.9
  26. V 10-K 2008 Item 1, "Industry Overview" p.7
  27. Credit Cards"Paper to plastic: Checks and cash losing to debit and credit" 3 Oct 2007
  28. 2006 MA 10-k, Item 1, pg. 4
  29. Reuters Business "Mastercard Inc" - Full Description
  30. Bloomberg "MasterCard Becomes 2011 Rugby World Cup Sponsor, Replaces Visa" 9 Feb 2009
  31. "Visa Agrees to Pay Amex $2.1 Billion to Settle Suit," The New York Times
  32. Google Finance "Discover Financial Services" - Summary
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