Visa Upside & Downside Scenarios for $86 Valuation

Visa (NYSE:V) is the largest global electronic payment solutions company in the world and makes money by providing information and resources to complete transactions between the customer, merchant and their respective banks. It collects a fee based on the number and dollar value of the transactions that it processes. The two most important divisions for Visa are transaction fees and assessments which constitutes 29% and 26% respectively of the $86 Trefis price estimate for Visa, which is just about 5% ahead of the market price. Visa mainly competes with MasterCard (NYSE:MA), American Express (NYSE:AXP), Discover Financial (NYSE:DFS) and Capital One (NYSE:COF).

Here we highlight three most important drivers for Visa’s business and the upside/downside risks posed for Visa’s stock based on these drivers.

1. Number of Transactions Processed: It represent the total number of transactions handled by the Visa Secure Network. This number includes both credit and debit transactions made on Visa branded products. We expect it to increase to 87 billion by the end of our forecast period from 47.6 billion currently.
2. Authorization and Settlement Fee per Transaction: Authorization and settlement fees are charged to issuers and acquirers for the authorization process that Visa performs for each transactions. We expect this fees to decline gradually to 3.7 cents per transaction from 4.7 cents charged currently for each transaction.
3. Payments Volume It represents the total dollar volume of purchases made by Visa cards worldwide. We expect a moderate increase of around 10% in the payments volume over the forecast period.

25% Upside Scenario | $108 Trefis Price Estimate for Visa

Strong Growth in Transaction Volumes (+10%)

The booming middle class population in China and India provides a tremendous growth potential for card payment business but the Chinese market is inaccessible for foreign card networks as only China’s UnionPay is allowed to handle card payments in China. If China decides to open up its market, we may witness a steep rise in transaction volumes for Visa which can reach 120 billion by 2017. This presents a 10% upside to our price estimate for Visa.

Stable Authorization & Settlement Fee per Transaction (+10%)

The plastic money market is becoming more competitive by the day. With China’s UnionPay expanding into the western markets and India launching its own payment network – RuPay, there will be pressure on Visa to reduce its authorization and  settlement fee per transaction in order to stay competitive. However, the payment industry could choose to refrain from slashing the authorization & settlement fee to make up for the lost revenues due to the 21-cent cap on the debit card swipe fees imposed by the Federal Reserve under the Dodd-Frank financial reforms. This presents a 10% upside to our price estimate for Visa.

Strong Growth in Payment Volumes (+5%)

From 2006 to 2010, the payments volume grew at a compound annual rate of 10.7%, and we conservatively estimate it to increase at a rate of 6.5% over the Trefis forecast period. However, considering the stellar growth in mobile payments in recent years and a shift towards electronic payments from traditional cash could result in sustained high growth rate in payment volumes and this would add another 5% to our price estimate for Visa.

15% Downside Scenario | $73 Trefis Price Estimate for Visa

Slow Growth in Transaction Volumes (-10%) and Payment Volumes (-5%)

A number of factors could hamper the growth of Visa’s transaction and payment volumes such as 1) sluggish economic recovery 2) higher competition 3) and the possibility of linking mobile payments directly with bank accounts or Paypal instead of card networks. This will result in slower than estimated growth in Visa’s transaction and payment volumes causing our price estimate for Visa to drop by almost 15%.

See our full analysis of Visa