Why You May Not Judge Visa Inc (NYSE:V) Harshly

Visa Inc (NYSE:V) has built a business model that defies many odds, which is why the company has remained profitable even in the most unfavorable economic situations. However, pressures have never been far from the surface. Slowdown in consumer spending and rise of payment processing alternatives are just some of the threats to Visa’s business. Does Visa deserve your attention?

A solid business model

Visa generates revenue every time a credit card that it backs is used in a transaction. However, a cut from credit card transactions is only one of Visa’s revenue sources. As a payments processing network, Visa provides a number of other services that generate revenue. Visa has a solid business model that ensures a steady revenue stream no matter the economic condition. Visa’s consistent revenue growth is captured in the chart below.


The rise of e-commerce and mobile payment

Visa Inc (NYSE:V) is expanding its digital offering to compete more effectively with alternative payments providers such as PayPal Holdings Inc (NASDAQ:PYPL). The company has Visa Checkout as its play in the cardless transaction space.

The rise of e-commerce is expected to foster discretionary buying, mostly supported by credit transactions, which can be through credit cards or cardless credit methods. Because credit transactions fetch more fees for Visa than debit card transactions, the company is poised to benefit enormously from the rise of e-commerce and associated discretionary buying habits. But there is more for Visa in the expanding e-commerce/mobile commerce trends.

Mobile commerce:

According to a Visa survey, Asia-Pacific is witnessing a rapid rise of mobile commerce. Vendors in the region are more likely to bill through mobile channels while consumers are increasingly researching and completing purchases on mobile. Visa e-Commerce Monitor Survey 2015 noted a 22% spike in mobile payments in Asia-Pacific over the previous year.The commerce trend in Asia-Pacific is shaping up to be lucrative for payment processors, and as a market leader, Visa has everything to gain from the trend.

Asia-Pacific is only part of the mobile story. Visa is already making deals to expand its mobile related income, because it knows that the future of transactions is going mobile. Towards that end, the company recently announced a deal with Chevron Corporation (NYSE:CVX) to allow customers to pay for gas at the latter’s California filling stations through mobile devices. The mobile payment service that Visa and Chevron have rolling out uses NFC technology, which is more convenient and secure than scanning QR codes.

Cleverly, Visa is not pushing for card exclusivity at the Chevron stations. The mobile payment technology will support payments based on cards backed by rivals. The idea, Visa said, is to foster growth of mobile payment at gas stations. Visa hopes to leverage its market leadership to benefit from an expanded market, which is why it is not working to stifle competition at the gas station in advance. Gas purchases mean so much to Visa. About 5% of the company’s purchase volume in the U.S. is related to gas.

Global mobile transactions are on the rise. IDC estimates that global mobile payments volume will reach $1 trillion by 2017, rising from less than $500 billion this year.


Underpenetrated global market

Visa Inc (NYSE:V) already operates in some 200 countries, but the company sees room for deeper international penetration. For example, penetration of card payments and other forms of electronic payments remain significantly low in many international markets. Perhaps that can be seen from the fact that Visa’s international revenues have been expanding faster in recent years than in the U.S.

The untapped opportunities in the global market present significant incremental growth opportunities for Visa.There could actually be far greater growth opportunities for Visa outside the U.S. than previously anticipated.  China is showing indications that it could open up its domestic payment processing market to foreign providers. Visa has shown interest in entering China’s domestic payment processing market when an opportunity presents itself. China is a key international market and deeper penetration in the country’s payments market is good news.

Visa Europe acquisition

Visa wants to own Visa Europe and it is already engaging the owners of the entity in talks that could result in a buyout deal. If everything goes smoothly, a deal could be reached by the end of this month. There are multiple reasons Visa is interested in acquiring Visa Europe, but there are two chief reasons for the move.

Visa Europe is already a revenue/profit generating business whose acquisition would be immediately accretive to Visa’s earnings. That is one major reason Visa is interested in the business. The other reason is that Visa hopes to achieve cost synergies from the consolidation move, and that too should impact the company’s bottom-line post acquisition.

Visa Europe, owned by a group of European banks, pays about $225 million in royalty fees to Visa.

Healthy balance sheet

Visa Inc (NYSE:V) boasts a healthy balance sheet with no debt. With the Visa Europe acquisition in view, Visa could take debt to fund the deal with excess cash possibly making its way back into the pockets of shareholders through buybacks and dividends.

Visa had more than $4.7 billion in cash and short-term investments at the end of the last quarter.

Pain points for Visa

Regulation/litigation risks

Regulations in the financial/payment services industry are subject to constant changes that can result in business disruptions, thus hurting growth. For the most part, Visa Inc (NYSE:V) has, in the past, bore the brunt of regulatory modifications that affect interchange. Although the company doesn’t depend on interchange for its revenue, its partners do, and the impact can be felt by Visa.

On the litigation front, payment processing disputes can be lengthy and costly. The 2011 Interchange suit that millions of merchants brought against payment networks including Visa remains unresolved to-date.

Disruption from new technology

To date, Visa, Mastercard Inc (NYSE:MA) and other traditional payment processing networks have been able to defend their turf against encroachment by new technologies threatening to eat their lunch. However, disruptive technologies keep emerging, thus posing constant threats to Visa and its peers. With the rise of digital currencies and direct credit offerings that enable merchants to lower their transaction costs, there is no guarantee that Visa will weather the storm all the time.


Closely connected to the threat of new technology is competition. The attractive prospects in the financial/payment services industry have seen an influx of new entrants and increased innovation by existing players to widen their market share. As a result, incumbents, such as Visa and Mastercard, are under constant attack and they are at the greatest risk of losing customers.

Pressure of technology upgrade

As a payments conduit, Visa Inc (NYSE:V) deals with sensitive consumer data that, if compromised, can erode the reputation that it has built over the years. As such, the company is under constant pressure to maintain a strong protection wall around its data, but that can be costly too.

Implementation of chip-embedded cards should enable payment processing networks, such as Visa, to eliminate the impact of data breach and fraud.

Bottom line

The advent of mobile payment services, such as Apple Pay and Android Pay, was initially seen as a threat to the traditional payment providers. However, instead of being cut off easily from the consumer payments systems, Visa Inc (NYSE:V) and Mastercard have found a way to stick around. In fact, they are becoming important players in the mobile payment rollout. Visa is driving implementations that would make it impossible for Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) to put it out of tge consumer payment processing business in the future with their new technologies.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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