VALUATION HIGHLIGHTS

1. Transaction Fees constitute 40% of the Trefis price estimate for Visa's stock.
2. Assessment Fees constitute 36% of the Trefis price estimate for Visa's stock.
3. International Fees constitute 18% of the Trefis price estimate for Visa's stock.

WHAT HAS CHANGED?

Visa suffered in FY 2020 with its net revenues shrinking by 5% to $21.8 billion, due to economic slowdown and Covid-19 crisis.

Latest Earnings

In Q4 2020, Visa reported net revenues of $5.1 billion which was 17% less than the previous year. This could be attributed to a 38% drop in international transaction revenues followed by a 135 drop in services revenues.

Impact of coronavirus outbreak

Due to the possible impact that the outbreak and a broader economic slowdown could have on consumer spending and the global payments processing industry, Visa stock has suffered in the recent months. The company derives around 27% of its revenues from International transactions; travel bans and widespread panic due to Coronavirus outbreak could severely impact this revenue stream. Further, lower consumer spending would result in lower transaction volume leading to lower data processing fees, which contributes around 35% of the company’s revenues. While the company’s net result for the Q3 and Q4 FY 2020 saw some negative growth, we believe Visa’s Q1 FY 2021 results will confirm this reality with a decrease in transaction volume.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below we look at the key drivers for Visa which present upside or downside to our price estimate for the company's stock.

• Transaction Volumes: Emerging markets like China and India have seen tremendous growth in cashless payments over the past few years. In 2010, the U.S. communicated to WTO about market access restrictions imposed by China. As a result, in 2012 the Dispute Settlement Body adopted the Panel report on China - Certain Measures Affecting Electronic Payment Services (WT/DS413/R). In 2013, China presented a status report on WTO recommendations, buying time to build a regulatory framework and work with the U.S. to resolve the dispute. In 2015, China agreed to open the card market to foreign businesses. The Chinese market has been inaccessible to foreign players due to the lack of defined regulatory framework but, with the latest announcement by the People's Bank of China in 2018, which allows qualified enterprises to apply for payment license, large players could get access in coming years. The opening up of the Chinese market could provide a significant upside to our price estimate for Visa.


• Total Number of Cards In Circulation: In the past few years, the total number of cards in circulation has grown between 5% and 6%. We forecast the growth rate to start declining over the rest of the forecast period, as cash usage declines and digital payments through mobile phones become more commonplace. However, this decline is likely to be offset by increased spending per Visa issued card. If the growth rate exceeds our expectations and instead is 10%, there could be a 13% upside to our stock price. However, if it shoots below that and is 3% instead, there could be a 6.5% downside to our stock price.
  

BUSINESS SUMMARY

Visa is the largest global electronic payment solutions company in the world. It provides a wide range of products and services to support the credit, debit and related card solutions for institutions in over 200 countries. The company generates revenue by charging fees on transactions and payments volume. Visa processed more than 124 billion transactions and $8.06 trillion of payments volume in 2018.

SOURCES OF VALUE

Visa charges its customers for providing transaction processing and other services, generally on a per-transaction or percentage of transaction basis. Accordingly, the company's revenues are largely impacted by the number of transactions it processes and the gross dollar volume purchases made using its cards

Visa's revenues primarily come from the following sources:

Transaction Processing Fees (Data processing fees)

Data processing revenues are earned for authorizing, clearing, settling, processing transactions and other maintenance and support services that facilitate transactions between Visa's customers. Data processing revenues are based on information gathered from VisaNet, its global processing platform, which provides transaction processing services by linking issuers and acquirers.

International Transaction Fees

International transaction fees are assessed to customers on transactions where the card holder’s country is different from the merchant’s country. International transaction revenues are generally driven by cross-border payment volumes, which include single currency transactions, and currency conversion activities for transactions involving more than one currency.

Assessment Fees

Assessment revenues are earned from customers for their participation in card programs carrying the Visa brand. Service revenues are assessed based on a pricing methodology applied to the payment volume.

Other Fees

Other revenues consist primarily of optional services or product enhancements, such as extended cardholder protection, concierge services, cardholder services and fees for licensing.

KEY TRENDS

Rapid growth in electronic, cashless payment solutions

The global market for cashless payment solutions such as credit and debit card transactions has grown rapidly, particularly in emerging markets. Africa has the largest percentage of people using mobile banking. Similarly, Americans are the highest non-cash users. A research by MasterCard indicated that in 2014, non-cash penetration was around 44% of total Personal Consumption Expenditure. This indicates that consumers are spending a significant amount through cards rather than with either cash or checks. The trend is only expected to continue into the future. Outside of the U.S. non-cash penetration is much lower but the use of cards is expected to increase at a higher rate in emerging markets than the mature markets.

Opportunity in mobile payments

Visa has begun offering more services that will enable payment of bills from mobile devices. Mobile phone payments are gaining rapid popularity, coinciding with the surge in smartphone sales. An increasing number of smartphones manufactured now utilize near-field communication (NFC) chips, which facilitate mobile payments. Mobile payments was at $450 billion in 2015 and is expected to cross $1 trillion by 2019 as an increasing number of phones incorporate near-field communication (NFC) chips to facilitate mobile payments.