The Potential For Credit Card Growth Outside The U.S. – Part 1

July 3rd, 2013 by Trefis Team
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V: Visa logo
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Visa

Visa (NYSE:V) is a global payment processing company operating in over 200 countries across the globe. Improving economic conditions and a general shift from cash and paper based transactions to electronic forms has helped the company’s performance in the last few years. Visa’s stock has gained nearly 20% since the turn of the year, buoyed by positive results in the first quarter of the year. The company reported a 15% increase in gross revenues for the first three months of 2013.

Although the U.S. accounts for 55% of Visa’s operating revenues, the company will be looking for growth in emerging markets, particularly in Asia and Latin America in the coming years. Personal consumption expenditures (PCE) have been growing at an average compound annual growth rate of 10% in developing markets including India, China, Mexico, Brazil, Russia, Indonesia, South Africa and UAE. The total PCE from these emerging markets is around $10 trillion with paper based transactions accounting for 62% of the PCE. In contrast, electronic payment solutions account for more than 60% of the PCE in the U.S. [1]

In this article, we will be focusing on Visa’s growth prospects in developing economies. For a discussion on Visa’s operations in the U.S., please read our article: Visa’s U.S. Business Is Booming On These Trends

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Our $150 price estimate for Visa is at a discount of 15% to the current market price.

See Our Full Analysis for : Visa | MasterCard| American Express | Discover Financial

India And China

India and China are two of the fastest growing markets with $1 trillion and $1.3 trillion in PCE respectively. [2] The Chinese market is dominated by China UnionPay (CUP) which has expanded rapidly in the country, allowing for high penetration. Electronic payments account for 62% of the personal expenditures in the country.  The Chinese government has backed UnionPay by demanding every merchant and ATM across the country to accept UnionPay cards and requiring all cards issued in China to work with UnionPay.  These regulations restricted both payment giants, Visa and MasterCard (NYSE:MA), from expanding in an economy which they entered more than 20 years ago. [3]

In contrast, electronic penetration is very low in India, with 92% of personal consumption transactions still carried out through cash and checks. [1] This provides an opportunity for Visa to expand, especially given the country’s vast human resources and the growth observed in the last few years. India’s real gross domestic product (GDP) growth rate was around 8.4% from 2009 through 2011, and despite a slowdown, was still a respectable 6.5% in 2012. Gross national per capita disposable income has been growing at a CAGR of 15% for the last three years. [4]

PCE as a percentage of GDP is roughly 50% in the country, but we can expect higher expenditures as disposable income continues to grow. [5] The GDP is expected to grow at an average rate of 4.7% till 2018 [6] Should PCE as a percentage of GDP expand to about 60%, India can generate around $1.6 trillion in personal expenditures by the end of the decade.

Electronic payment solutions are gaining popularity in the country. The Indian railway network is one of the largest in the world and has successfully adopted eCommerce payment solutions, generating over 2.3 million transactions per month. [2] Mobile penetration in the country is around 70%, and 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. [7] [8]

We can expect electronic penetration to expand rapidly in this decade from 8% of PCE to around 25% of PCE by 2019. This would present a $400 billion gross dollar volume opportunity on which Visa could capitalize. The company’s global network and lack of domestic competition (unlike China) will allow it to gain market share. Even if the market is split in half with its biggest international competitor MasterCard, Visa can still generate $200 billion in GDV from India by the end of the decade.

Visa charges an average assessment fee of 0.13% of the GDV processed for its banking and financial clients, which issue cards bearing the famous Visa logo. Applying this rate, we expect Visa to generate more than $250 million in revenues from India by the end of the decade.

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Notes:
  1. Visa Investor meeting for 2013 [↩] [↩]
  2. Ref: 1 [↩] [↩]
  3. WTO China UnionPay Ruling Paves Way for Visa, MasterCard, China Briefing, 6th September, 2012 [↩]
  4. Indian Economy, DABUR INDIA LIMITED, UBS India CEO/CFO Forum [↩]
  5. Figures for GDP growth are taken from the World Bank’s website [↩]
  6. Comparison of Base Scenario with Optimistic and Pessimistic Scenarios, 2013 – 2025 (January 2013) [↩]
  7. List of countries by number of mobile phones in use [↩]
  8. Global mobile payment transaction volume from 2011 to 2016 (in billion U.S. dollars) [↩]