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Visa suffered in FY 2020 with its net revenues shrinking by 5% to $21.8 billion, due to economic slowdown and Covid-19 crisis.
In Q1 2021, Visa reported net revenues of $5.7 billion which was 6% less than the previous year. This could be attributed to a 28% drop in international transaction revenues, partially offset by a 5% y-o-y growth in services segment and a 6% increase in domestic processing revenues. Notably, client incentives as a % of revenues increased from 28.9% in the year-ago period to 32.7% in Q1.
Due to the impact of the Covid-19 outbreak and a broader economic slowdown on consumer spending and the global payments processing industry, Visa's top-line has suffered in the recent quarters. The company derives around 27% of its revenues from International transactions. Travel bans and widespread panic due to Coronavirus outbreak severely impacted this revenue stream in 2020. Further, lower consumer spending negatively impacted the transaction volume, leading to lower data processing fees -- the stream contributes around 35% of the company’s revenues. While the company’s net result for the recent quarters0 saw some negative growth, we believe Visa’s Q2 FY 2021 results will follow the same trend.
Below we look at the key drivers for Visa which present upside or downside to our price estimate for the company's stock.
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.
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:
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 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 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 revenues consist primarily of optional services or product enhancements, such as extended cardholder protection, concierge services, cardholder services and fees for licensing.
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.
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.