With total consumer spending reaching almost $51 trillion and expected to keep growing over the next couple of years to over $64 trillion by 2025, we could comfortably state this is a massive industry. Some companies established themselves as the true leaders within this industry. There is even political action to make the space (credit cards) more competitive and easier to enter for newcomers. Credit cards and debit cards are the most used form of digital payment (57% in the U.S.) and are replacing the use of cash (25% in the U.S.). Other fast-growing ways of payment are fully digital by the likes of FinTech companies, thanks to the growth of e-commerce (remaining 17%). It is important to know that paying with, for example, Apple pay, is still using your credit/debit card. Adoption of mobile wallets rose to a historic high in of 46% in 2020.
The industry is practically a duopoly. One of the two dominant players in this space is Visa Inc (NYSE:V). Visa processed a total of 164.8 billion transactions during 2021, with a total payment volume of $10.4 trillion. I believe the incredibly strong moat of Visa within the payment processing industry will support its growth over the coming years. With total transactions expected to grow and Visa exploring possibilities in other spaces while gaining market share, growth seems certain. I believe the transition from cash to digital payments is a huge tailwind for Visa. Its strong moat and position make it a value play in a fast-growing industry.
Visa is part of my 28-stock personal portfolio. In this article, I will show you why I own Visa, and why I recently bought more of the stock.
Visa is an American company operating in the financial services industry. The company is headquartered in San Francisco, California. Visa facilitates electronic funds transfers all over the world, primarily through Visa-branded credit cards and debit cards.
Visa was founded in 1958 by Bank of America (BAC). It was launched as the first consumer credit card program in the U.S. In 1974 the company expanded internationally and in 2007 the company we know now as Visa Inc. was formed. Nowadays, Visa operates in more than 200 countries and territories worldwide. Visa is being used and accepted by 14,900 financial institutions and has 3.9 billion credit cards, debit cards, and prepaid cards working worldwide. That means that on average about half the population has a Visa-branded card, which is just an insane moat. As mentioned before, Visa processed a total of 164.8 billion transactions in 2021 with a total payment volume of $10.4 trillion. It will be no surprise that, according to Kantar Branz, Visa is ranked 7th in global brand value with a brand worth of $191 billion. Visa has a market cap of $384 billion and has a total of 123,500 employees working in 123 locations around the world.
So, what does Visa exactly do?
Visa offers a comprehensive set of payment products and services. Visa-branded credit, debit, commercial, prepaid, mobile, and money transfer products are a leading choice of cardholders and financial institutions in 200 countries and territories. VisaNet also makes it possible for us to deliver the latest innovations for an increasingly mobile society, providing consumers with mobile financial services, such as mobile payments, money transfer and top-up services.
In simple words, this means Visa is the middleman between financial institutions and merchants. Visa earns its money by keeping a percentage of the payment amount from the merchant in exchange for using Visa’s broad international payment network. But why would you, as a merchant, choose to support a payment system which takes such a large percentage of your sales transactions? Well, merchants don’t really have a choice. It is a vicious cycle that supports the great moat for Visa.
As I mentioned before, a lot of financial institutions use Visa’s payment network and use their credit cards, because it has a strong proven track record. If you were a merchant and you would not support Visa payments, you would lose your customers because all those billions of Visa cards would not be able to be used in your store and therefore people would go to the competition where they can pay with their Visa card. Merchants are forced to support Visa cards to not lose traffic in their stores. A lot of merchants support Visa, and that gives financial institutions another reason to make use of Visa.
Visa also offers additional services, which brings me to the next subject. Visa works and reports in 4 different segments.
- Service Revenue: This segment mainly consists of the revenue it earned from providing services to support client usage of Visa’s payment services. This segment provides about 34% of the total gross revenue for the company.
- Data Processing Revenue: data processing revenue includes revenue generated as a result of the company’s clearing, settlement, authorization, value-added, network access, and other similar services. This segment accounts for approximately 38% of total gross revenue.
- International Transaction Revenue: International transactions are the best transactions for Visa because these carry the highest profit margin. It is exactly this segment that took a big hit during 2020 and the covid induced lockdowns. Revenue from this segment dropped by 50%. This segment accounted for about 23% of revenue and is recovering rapidly from covid.
- Other revenue: Visa earns additional revenue from license fees, value-added services, and more. These are grouped together as other and account for about 5% of Visa revenues.
Besides growing its total processed transactions and volume every year (except for 2020) Visa is also investing heavily in new growth areas. During Q1 of this year, Visa announced that it had acquired Tink. Tink is an open banking platform that enables banks, FinTech companies, and startups to develop data-driven financial services. Visa paid €1.8 billion for Tink.
Of course, it is also important to note that Visa was one of the first companies which suspended all operations in Russia in response to the invasion of Ukraine.
Visa’s credit network is its biggest business and strongest moat of all. In 2020 Visa was the largest credit card network by a far margin. The company had a market share of 53.99% and was therefore bigger than its main rival Mastercard Incorporated (MA).
2021 was all about recovery for Visa. We do have to say that Visa did not drop a lot in revenue during 2020, dominated by lockdowns and covid. This is mainly because digital transactions got a huge boost thanks to a rising e-commerce market and people turning away from cash for hygiene reasons. Still, Visa did see a loss of growth during the year, mainly because people did undertake fewer activities and stopped traveling. This was a huge hit for Visa’s cross-border transaction numbers. During 2021, Visa grew its net revenues to $24.1 billion and GAAP net income of $12.3 billion. Yes, Visa has incredible margins. These numbers are up 10% and 13% YoY, respectively. Total payments volume bounced back by 18% to $10.4 trillion. Also, Visa returned $11.5 billion back to its shareholders in the form of dividends and share buybacks.
2021 was a strong year for Visa, and the company returned to its solid growth. You can see above; I mention net revenues. This is an important metric since Visa actually earned $32.5 billion from its services but needs to pay financial institution clients and strategic partners to grow payment volume and increase Visa acceptance. In 2021, Visa spend $8.4 billion on these client incentives.
Now, we fast forward to July 26th, when Visa reported its third quarter 2022 results. This quarter was dominated by high inflation, rising interest rates, and fears of a recession. Yet Visa did not see any impact on its business. Visa even saw an acceleration compared to 2021. Visa reported net revenues of $7.3 billion, showing 19% growth YoY. GAAP net income grew even faster, with 32% growth YoY and coming in at $3.4 billion. EPS rose by 33% to $1.98 per share. The main drivers for this growth were cross-border volume and processed transaction growth. With traveling bouncing back this year, it is no surprise that cross-border volume was a growth driver and a strong tailwind for margins.
Total payment volume grew by 12% and…