Although Visa (NYSE:V) has successfully expanded to many parts of the world, it is still deeply rooted in the U.S. The company charges assessment fees from its banking clients as a percentage of the gross dollar volume (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. Around half of Visa’s revenues and GDV come from the U.S. and the company has been able to maintain double-digit revenue growth from the country through the financial uncertainty prevalent since 2008.
Electronic payment penetration is already quite high in the U.S., a recent study by MasterCard (NYSE:MA) revealed that 80% of the value of the value of consumer spend is cashless in the country. But we expect the improving economy and increased spending by the U.S. populace to drive further growth in Visa’s earnings through the decade.
Our $190 price estimate for Visa is in-line with the current market price.
Is The Economy Improving?
Although several economists are still debating the efficacy of the Fed’s Quantitative Easing program and its effects on the U.S. economy, consumer spending trends in the U.S. have improved over the last few years. Personal consumption expenditures (PCE) as a percentage of actual disposable income in the U.S. (the income available to an individual for spending after paying taxes) dipped from 96% in 2007 to 91% in 2008 and 2009. However, the percentage has recovered to 94% in the last three years. 
To forecast the disposable income, we must look at the growth rate observed in the real disposable income calculated using chained 2005 U.S. dollars.  The per capita real disposable income dropped 3% from 2008 to 2009, but has since been growing at an annual rate of 0.7% in the last few years.
Improved employment is touted as one of the main benefits of the QE3 program. The unemployment rate in the U.S. has recovered from the peak of 10.1% observed during the financial crisis in 2009 and reached a four-year low of 7.3% in August.  An improving job market should lead to higher disposable income in the future.
The U.S. population annual growth rate is around 0.7% to 1%. The total PCE in the country was around $11.2 trillion in 2012. Assuming the per capita disposable income continues to grow at a rate of 0.7% for the next three years followed by higher growth ~1%-1.5% in the next four years, we get actual disposable income of $13 trillion by the end of the decade.
Strong Market Position Will Help Visa
Visa has around 12,000 issuer clients in the U.S. with long term contracts with over 600 financial institutions. According to our analysis, the company’s market share has grown from 16% of the PCE in 2008 to 20% in 2012, as electronic payment penetration in the country has grown. Although the implementation of the Durbin amendment to the Dodd-Frank bill led to a slowdown in growth, particularly in the debit card domain last year, its effects are wearing off as the market normalizes.
The Dodd-Frank bill requires banks with more than $10 billion in assets to use separate payment processing networks for signature authorized and PIN authorized debit card transaction.  Visa’s signature logo is present on nearly three quarters of the debit cards in the U.S. and it lost out as a result of the implementation. Visa reported a 3% decline in debit payment volume for the December quarter followed by nominal growth of 0.3% during the second fiscal quarter of 2013. However, in the June quarter, the company’s U.S. debit volume grew 12.4% through the three months ending June. Debit cards are quite popular in the U.S. Transactions on debit cards account for 42% of Visa’s nominal payments volume in the U.S., as opposed to 22% outside the U.S.
With the debit card growth back on track Visa’s market dominance, the company can reach a market share of 20% by the end of the decade. This will allow the company’s GDV from the country to organically grow from $2 trillion in 2012 to $2.5 trillion by the end of the decade. We expect the company to achieve higher growth in emerging markets, (Please read 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 for more) reducing the contribution from the U.S. to 30%. However, there is a 10% upside to our price estimate for Visa’s stock, should the company’s U.S. GDP increase further than we expect, reaching $3 trillion by 2020.Notes:
- Disposable personal income, U.S. Department of Commerce: Bureau of Economic Analysis [↩]
- Real disposable personal income: Per capita, U.S. Department of Commerce: Bureau of Economic Analysis [↩]
- U.S. Department of Labor, Labor Force Statistics from the Current Population Survey [↩]
- The Durbin Amendment Explained [↩]