How Has Visa Achieved Double Digit Growth And Is It Sustainable?

by Trefis Team
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Strong business operations and global brand positioning have allowed Visa (NYSE:V) to deliver annual revenue growth of over 15% for each of the last six years. For the December quarter of 2013, the company reported a 9% increase in net income and an 11% growth in revenues, despite FX headwinds from its Asia Pacific, Latin America and Canada operations. In this article, we take a look at Visa’s sources of revenues, with a focus on transaction volume.

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What Does Visa Do?

Visa’s clients are primarily banks and financial institutions, known as issuers, who issue cards bearing the Visa logo to their customers. These cards are then used to purchase goods or services from a merchant via an electronic transaction. Transaction information is transferred via Visa’s network to the issuer bank and to the merchant’s bank, known as the acquirer, for authorization. After authorization, the acquirer sends a clearing file containing final transaction data which is processed for the final settlement between the issuer and the acquirer. Apart from this authorization, clearing and settlement process, Visa also provides fraud and risk management services including real time transaction monitoring and encryption. Value added services like account level processing, loyalty reports and dispute resolution are also offered by Visa.

So How Does It Make Money?

To understand the answer, one must delve deeper into the cardholder-merchant-bank relationship. When a credit card is used by a consumer, he or she is issued a credit loan, the risk of which is borne by the issuer. The issuer earns interest from the cardholder on the loan and also charges a card fee for the use of its card. The interest rate and the fee are decided by the issuer. The merchant is charged a merchant discount fee by the acquirer. On purchase transactions, acquirers are required to pay an interchange reimbursement fee to the issuer bank.

Unlike American Express (NYSE:AXP), which issues its own propriety cards and operates a closed-loop network, Visa does not earn any of the aforementioned fees. Instead, it charges data processing fees and service fees from its financial clients. Due to its non-involvement in the lending process, Visa also escapes exposure to credit risk that companies like AmEx and Discover Financial (NYSE:DFS) face.

Data Processing Fees

Data processing fees, or transaction fees, are charged for providing authorization, clearing, settlement, maintenance and network access services. Since these services are provided on a transaction to transaction basis, Visa charges them as a percentage of the total transactions processed for a client. The transaction fee has steadily increased from $0.06 per transaction in 2008 to $0.08 per transaction, while the transaction volume has also grown at a double digit rate. This growth rate has been helped by increased international penetration. The number of Visa cards in force worldwide has grown from 1.6 billion in 2007 to around 2.2 billion while the annual number of transactions per card has gone up from 21 to 27 in the same period.

A lot of this growth has come from the Asia Pacific region, which now accounts for a third of the total Visa cards in circulation. The number of Visa cards went from 670 million at the end of 2012 to 710 million at the end of the September quarter of 2013.  However, the number of transactions per card from the region is still quite low; Visa processes 1.6 monthly transactions per card in the Asia Pacific region while the figure is 5.3 per card in the U.S. and 4.8 per card in Canada. The U.S. also accounts for one third of Visa’s total cards, with the number growing from 693 million at the end of 2012 to 713 million currently.

Turning to the type of card used, 35% of Visa’s cards are credit cards, of which 65% are in the U.S. The number of transactions per card is around 3.5 per month, with similar distribution in and outside the U.S. For debit cards, however, the story is quite different, 70% of Visa’s debit cards are in force outside the U.S. The number of monthly transactions per debit card is just 0.9 outside the U.S. but more than 6 in the country.

The Takeaway

Increased penetration is the key to sustained growth in the coming years. There around 2 Visa cards per person in the U.S. but the penetration in Asia Pacific is just 17%. [1] Although the potential in China is huge, Visa faces tough competition from the incumbent card processor, China UnionPay (CUP), and it will be tough for the company to make inroads into the country. Excluding China, the penetration in Asia Pacific is still less than 25%. We expect this to increase as countries like India adapt to electronic payment methods. More than 60% of transactions in the country are still cash based, but this is likely to decrease in the coming years. [2]

Mobile phones present a potential medium for expansion in India; around 70% of the population currently owns a mobile phone. [3] Mobile phones are emerging as a means of extending financial services in lieu of traditional banking services, with transactions involving SMS based payments, direct mobile billing using PIN and one time password (OTP) authentication and mobile web payments. [4] Visa is looking to expand via this medium and recently introduced a new service allowing clients to host Visa payWave-enabled accounts via a virtual cloud. [5] The service will leverage the Host Card Emulation (HCE) feature on android phones to emulate a payment card on a mobile phone.

Taking these trends into account, we expect the total number of Visa card accounts to increase at a high single digit rate through the decade, with the number of transactions per card also growing with economic development in Asia Pacific and Latin American countries.

In our next article, we will take a look at service fees, which are earned on the basis of the gross dollar volume of the transactions processed by Visa. We will also analyze the expenses borne by the company.

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  1. United States Census Bureau and World Bank []
  2. Investor meeting for 2013 []
  3. List of countries by number of mobile phones in use []
  4. Global mobile payment transaction volume from 2011 to 2016 (in billion U.S. dollars) []
  5. Visa to Enable Secure, Cloud-Based Mobile Payments, Press Release, February 19, 2014 []
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