Visa’s Earnings: Global Growth Contends With Regulatory Headwinds
Visa (NYSE:V) is expected to report earnings for the third fiscal quarter of 2013 on Wednesday, July 24. [1] The payment solutions company has been riding on the global economic recovery and a worldwide shift to plastic leading to solid double digit revenue growth for the last five years. Visa reported a 15% year-on-year increase in revenues for the first quarter of 2013, driven by a 7% increase in global payment volume.
Visa earns revenues from its banking clients, which issue cards bearing the Visa logo. Assessment fees are charged as a percentage of the GDV of transactions processed for a client while data processing fees are charged on the basis of the total number of transactions processed for a client. The company also charges cross-border fees for transactions where the issuer or cardholder’s bank and the acquirer or merchant’s bank are based in different countries.
The European Union’s recently revealed plan to limit interchange fees will not affect Visa since Visa Europe is a wholly separate company to Visa Inc. [2]
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U.S. Remains The Biggest Market
Nearly half of Visa’s revenues come from the U.S. The company has around 12,000 issuer clients in the U.S. with long term contracts with over 600 financial institutions. Visa has a high level of merchant acceptance in the country with over 88 acceptance locations per 1,000 urban households and accounts for 22% of the personal consumption expenditures (PCE) in the country. [3]
However, the company’s growth in the country has been somewhat hindered by the implementation of the Durbin amendment to the Dodd-Frank bill which requires banks with more than $10 billion in assets to use separate payment processing networks for signature authorized and PIN authorized debit card transaction. [4] Transactions on debit cards account for 42% of Visa’s nominal payments volume in the U.S.
Visa dominates the market with three out of four debit cards in the U.S. carrying the famous Visa logo. Due to its market position, Visa has been adversely affected by the bill with a 4% decline in debit volume through the first three months of the year. In contrast, its closest competitor, MasterCard (NYSE:MA), reported a 6% increase in debit card gross dollar volume (GDV) for the same period. We expect the growth rate to normalize in the long term as debit regulations are adapted by the market. The company reported a 15% transaction growth in April driven by market adaptation of the debit regulations. For more on Visa’s U.S. operations, read Visa’s U.S. Business Is Booming On These Trends
Growth Prospects Remain Strong Outside The U.S.
Visa reported a 20% increase in transactions processed outside the U.S. for the second fiscal quarter of 2014 with payments volume increasing 9%. This led to a 25% in revenues from transaction fees and a 10% increase in assessment fees. The company also observed a 10% increase in global cross-border volume, on a constant dollar basis, leading to a 13% increase in international transaction revenue. Visa is focusing on developing markets like India, China, Mexico, Brazil, Russia, Indonesia, South Africa and the UAE for growth. The total PCE from these markets is around $10 trillion with paper based transactions accounting for 62% of the PCE. PCE growth has been over 10% for the last four years in these economies.
With its global position and reputation, Visa will be looking to gain market share in these emerging markets. For more on growth prospects, read our series : The Potential For Credit Card Growth Outside The U.S. – Part 1 and The Potential For Credit Card Growth Outside The U.S. – Part 2
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Notes:- Visa Investor Relations [↩]
- EU Plans Limit on Credit-Card Fees, Wall Street Journal, July 17, 2013 [↩]
- investor meeting for 2013 [↩]
- The Durbin Amendment Explained [↩]