Card processing giant Visa (NYSE:V) is expected to report earnings for the second fiscal quarter of 2013 on Wednesday, May 1. The company has done well in navigating the tough global economic environment in the U.S. and Europe, achieving double digit revenue growth even in the years following the financial crisis of 2008. Its stock climbed nearly 50% over the course of 2012. We expect the company to maintain growth through 2013 and the coming years due to the ongoing shift toward cashless transactions globally.
How Does Visa Make Money?
Visa primarily earns income through transaction fees and assessment fees from its banking clients, which issue credit and debit cards carrying the famous Visa logo to consumers. Around 40% of the company’s $13 billion revenues are earned from assessment fees charged as a percentage of the gross dollar value (GDV) 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. The company also charges additional fees for international transactions where the acquirer or the merchant’s bank and the issuer or the cardholder’s bank are based in different countries. These fees account for around 25% of the company’s revenues.
Visa has around 2.1 billion cards in circulation across the world, nearly twice as many as its closest competitor MasterCard (NYSE:MA). The company processes close to 26 transactions per card in a year with an average GDV of $73 per transaction. Visa charges its clients a data processing fee of $0.07 per transaction and assessment fee of 0.12% of the GDV processed for a client, calculated on a quarterly basis.
In 2012, the implementation of the Durbin amendment to the Dodd-Frank bill led to a decline in Visa’s debit transaction volume. The Durbin amendment requires banks with more than $10 billion in assets to use separate payment processing networks for signature authorized and PIN authorized debit card transactions.  Visa was adversely affected by this act as it maintained a near monopoly in the U.S. Almost three quarters of total debit card transactions in the country are processed through Visa. Debit and prepaid volumes processed by Visa dropped by nearly 5% through the calendar year. The decline in debit volumes was offset by continued growth in the credit card domain, which grew by close to 10%. Going forward, we expect debit volumes to regain momentum as the market adapts to the new regulations.
Transactions per card and the average GDV per transaction have been relatively stable for the last four years; however, the company has seen 5% annual growth in the number of cards in circulation. This has been the main driver for revenue growth that the company has maintained for the last few years. Going forward, we expect the mobile phone technology to have a big impact on the payment systems domain.
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  and it also has its own wallet services, V.me. The company announced a collaboration with Samsung to accelerate the development of near field communication (NFC) mobile payment technology during the Mobile World Congress. For more on our forecast regarding the emergence of mobile payment technology, read our article How Will Visa Benefit From The Mobile Phone Revolution?Notes: