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WIKI ANALYSIS
Visa (NYSE: V) operates the 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. There are more than 1.7 billion Visa branded cards in the global market.[2] In 2010, Visa's operating revenue reached $8.1 billion, and its net income was $3 billion.[3]
Visa recently received news that the Federal Reserve missed a deadline for issuing final rules that would put restrictions on debit interchange fees that banks and debit card companies are able charge to merchants.[4] Industry analysts generally see this as a positive for Visa and its competitors such as Mastercard (MA), as it may signal that the Federal Reserve is weighing other scenarios that may be less extreme or detrimental than the initial proposals.
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. [5] Visa does not earn revenues from interest charged on balances, late fees, or other fees.
Business and Financial Metrics
In 2010, Visa's operating revenue increased to $8.1 billion from its 2009 operating revenues of $6.9 billion.[3] As a result, Visa's net income increased from $2.4 billion in 2009 to $3.0 billion in 2010.[3]
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
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.[6] The primary fees generated from this segment would come from banks and other financial institutions that use Visa's mark and brand.
Data Processing Revenue
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.[7] 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.[6]
International Transaction Revenue
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.[6]
Other Revenues
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.[6]
Volume and Support Incentives
Volume and support incentives are programs that are designed to increase payments volume by, among other strategies, increasing general acceptance of Visa products.[6] 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.
Key Trends and Forces
Visa has teamed up with Wells Fargo (WFC) to pilot test mobile payments system
Visa announced that it has teamed up with Wells Fargo to pilot test a mobile payments system using smartphones such as the iPhone and Blackberry. The pilot will be conducted by 200 employees of Wells Fargo in San Francisco, where both Visa and Wells Fargo are headquartered.[8] This announcement came shortly after three of the largest telecom carriers (AT&T (T), Verizon Communications (VZ), and T-Mobile announced a joint venture for mobile payments. The upcoming struggle for mobile payments dominance between credit card companies and telecom companies may have huge implications for future earnings as this market begins to develop.
Potential Regulation Limiting Debit Interchange Fees
The Federal Reserve, under orders from Congress released a set of proposed rules that would limit debit card interchange fees at just 12 cents per transaction, significantly lower than the average 44 cents the card companies are currently charging.[9] At 12 cents per transactions, it is expected that the banks and issues will not be able to cover their costs of operations, which could significantly hurt their profitability. Both Visa and its top competitor Mastercard (MA) would be significantly hurt by this regulation, as they would not only lose control over their ability to set their price for interchange fees, but would also have their fee revenue capped at 12 cents per dollar of transaction. Whether these proposed rules ultimately get passed into law or are amended remains to be seen.
Impact of credit card reform bill
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.[10] 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.[11] Banks have warned that the new legislation will increase rates, decrease credit extended, and increase the use of annual fees for cards.[12] Less credit likely means less transactions, transaction amounts, and thus a negative impact on earnings.
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. U.S. consumers spent more using their credit cards more than with either cash or checks, and this trend has continued. This provides Visa with a strong continued growth in volume of transactions. Further facilitating this shift, many stores no longer require a signature for purchases under a certain amount, such as $20. These trends will continue to drive demand for the services that Visa offers.
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).[13]
- 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.[14] Visa also competes against Mastercard's Maestro - a global online debit card service.[15]
- American Express Company (AXP): American Express focuses on being the credit and debit card company 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.[16]
- 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.[17]
Notes
- ↑ V 10-K 2009 Item 1 Pg. 4
- ↑ Visa's Net Jumps 73% Even as Spending Falls. Jay Miller and Kevin Kingsbury. The Wall Street Journal.
- ↑ 3.0 3.1 3.2 V 10-K 2010 Item 6 Pg. 39
- ↑ Visa, BlackRock: Financial Winners. Dan Freed. TheStreet.
- ↑ V 10-K 2008 Item 1, "Transaction Processing Services" p.8
- ↑ 6.0 6.1 6.2 6.3 6.4 V 10-K 2009 Item 7 Pg. 37
- ↑ V 10-K 2008, "Data Processing Fees" p.57
- ↑ Wells Fargo, Visa Test Mobile Payments. Aparajita Saha-Bubna. The Wall Street Journal.
- ↑ Rep. Barney Frank critical of Fed debit card fee rule. David Clarke. Reuters.
- ↑ Obama signs sweeping credit card reform bill. John Poirier. Reuters.
- ↑ Key provisions of credit card reform bill. MSNBC.
- ↑ Credit-Card Fees Curbed. Sudeep Reddy. The Wall Street Journal.
- ↑ V 10-K 2009 Item 1 Pg. 13
- ↑ 2006 MA 10-k, Item 1, pg. 4
- ↑ Reuters Business "Mastercard Inc" - Full Description
- ↑ "Visa Agrees to Pay Amex $2.1 Billion to Settle Suit," The New York Times
- ↑ Google Finance "Discover Financial Services" - Summary
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