How Will Visa Benefit From The Mobile Phone Revolution?

by Trefis Team
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Quick Take

  • Mobile phone payment technology could double Visa’s annual number of transactions processed and the gross dollar volume of these transactions during our forecast period.
  • Mobile phones are rapidly emerging as a means of extending financial services, particularly in developing countries.
  • Nearly 85% of the world’s population currently owns a mobile phone, and we expect this penetration to increase to about 90% in the coming years.
  • Even if 30% of the mobile phone owners adopt Visa’s payment network, the annual number of processed transactions could surpass $1 trillion.

Mobile phones have revolutionized our everyday lives. The evolution of mobile payment technology is the next big step highlighted by the recent Mobile World Congress which took place in Barcelona, Spain. Both major payment network providers, Visa (NYSE:V) and MasterCard (NYSE:MA) have been making advances to position themselves to capitalize on this emerging trend. Visa has an initiative called Visa Ready Partners Program, which allows mobile manufacturers, network operators and other partners to access Visa’s network and licenses. [1] The company also recently announced a collaboration with Samsung to accelerate the development of near field communication (NFC) mobile payment technology.

Visa makes its money from its banking clients. Around 40% of its $13 billion revenues are earned from assessment fees charged as a percentage of the gross dollar value of transactions processed for a client while another 30% are earned from data processing fees charged on the basis of the total number of transactions processed for a client. Clearly, the number of transactions and the gross dollar volume of transaction are the two most important metrics for Visa. In this article, we will try to quantify the impact of the mobile phone revolution on Visa.

Our price estimate of Visa’s stock is $150, in line with the current market price.

See our full analysis of Visa here

Where Does Visa Currently Stand?

There are currently around 2.1 billion Visa cards in circulation around the world. Visa processes nearly 26 transactions per card annually, leading to a total of 54 billion transactions processed per year. Visa charges an average data processing fee of $0.8 per transaction. The average gross dollar volume per transaction is around $73, leading to an annual payment volume of $4 trillion. Visa charges an average assessment fee of 0.13% of the dollar volume of the transactions.

The Mobile Potential

Mobile phones have taken the world by storm since the initial prototype was first developed by Motorola. [2] While the total population of the world is around 7 billion, [3] the total number of mobile phones is close to 6 billion. [4] This would mean that nearly 85% of the world’s populace currently owns a mobile phone. This figure is a little skewed by the fact that some people might own more than one mobile phone and so the actual penetration might be a little less than 85%.

Developed countries like the U.S., the U.K. and Germany have a penetration of over a 100% while Hong Kong and Saudi Arabia have a penetration approaching 200%. On the other hand, the mobile phone penetration in developing countries like India and China is close to 70%. [4] Herein lies the potential for expansion as both of these countries have a huge reservoir of human resource with population of over a billion.

Mobile phones are emerging as a means of extending financial services in lieu of an underdeveloped banking system with transactions involving SMS-based payments, direct mobile billing using PIN and one time password (OTP) authentication and mobile web payments. The global volume of money spent using mobile phones was around $106 billion in 2011, rising to $171 billion in 2012, and is expected to grow to about $617 billion by 2016. [5]

Our Forecast

The United States Census Bureau expects the global population to rise to around 7.5 billion by 2019. Assuming an increase in global mobile penetration to around 90%, there would be around 6.7 billion mobile phones in the world. Given the rapid developments in mobile phone payment technology and Visa’s position as a global leader, we can safely estimate that around 30% of these mobile phones will have Visa accounts. Adding to the present number of Visa cards or more aptly termed, Visa payment accounts of 2.1 billion, we would arrive at a figure of 4.1 billion Visa payment accounts by 2019.

However, we must consider that some of the mobile phone accounts would merely be replacing plastic cards. Accounting for this cannibalization effect, we arrive at a figure of 3.8 billion Visa payment accounts around the world by 2019. Assuming a slight decline in the number of transactions per card from 25.7 per year to 25.4 per year, the number of transactions processed by Visa would approach a trillion by 2019.

For Gross Dollar Volumes

We expect an increase in gross dollar volume per transaction to around $85, this would lead to a gross payment volume of around $8.3 trillion by 2019.

Other Scenarios

Should the gross dollar volume per transaction remain at the present value of $73, Visa would reach a payment volume of $7.1 trillion by 2019. On the other hand, a 100% global mobile penetration, of which 40% adopt Visa payment accounts would lead to 3 billion mobile accounts by the end of our forecast period. You can gauge the effects of these scenarios and other changes in forecasts on our price estimate by modifying the interactive charts above.

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Notes:
  1. VISA Inc (V) Offers New Mobile Payments Partner Program, Feb, 2013 []
  2. Martin Cooper-The Inventer of the Cell Phone []
  3. International Data Base, United States Census Bureau []
  4. List of countries by number of mobile phones in use [] []
  5. Global mobile payment transaction volume from 2011 to 2016 (in billion U.S. dollars) []
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