Within its industry, Visa maintains a secure hold on the market, with a 50.6 percent share, which is more than double its next closest rival, American Express, with 22.9 percent. Visa also has 328 million credit cards in circulation within the United States as of 2016, which is more than MasterCard, with 192 million, American Express, with 57.6 million and Discover, with 58 million, combined. There is a lack of potential usurpers in the market due to the high barriers to entry as a result of costs like infrastructure, getting the proper software and building an extensive merchant network that requires a large amount of capital.
Visa has also done a great job of maintaining its market lead by actively working alongside peers who utilize the Visa network. In July of 2016, Visa and PayPal announced a partnership that allows Visa debit customers to move money instantly through PayPal accounts while PayPal received incentives for the increased Visa card spending volumes. Visa also collaborates alongside IBM’s Watson through their Internet of Things (IoT) platform to reach thousands of IoT client companies. New options such as Apple Pay and Google Pay work on top of existing Visa networks and therefore, are simply not competition.
Unlike competitors such as American Express and Discover Financial Services, Visa is purely a payment facilitator and not a lender. While this difference may seem insignificant, it means that Visa is not exposed to the rising delinquency rates from “double dipping,” or collecting interest. on loaned interest, if the US or global economy falters. Because it is the transaction middleman, Visa can withstand recessions better than its peers due to the lack of lending risks. As a payment processor, Visa’s business appears to be far more stable.
Visa can be expected to continue to grow and Visa’s CFO claims that many governments are very interested in taking cash out of their economy. There is no doubt that a cashless future will provide speed, certainty, security, reliability and cost savings through the use of the Visa network rather than check or wire transfer. It is primed to be the leading credit card network for years to come.
Currently, Visa is in a perfect position. With regulations banning Visa in China recently lifted, Visa seems poised to target every corner of the world. While Visa relies on developed nations for the bulk of its revenue and profit, it operates in more than 200 countries worldwide. This diversification is beneficial in that Visa can somewhat circumvent the negative effects of a recession in the United States or any major developed country by leaning on the purchasing-dollar growth in emerging-market countries, which could be unaffected by a global slowdown.
In addition, Visa is a multi-platform company. While plastic cards are what Visa best known for, its services can also be seen on tablets, laptops and phones. Visa invested heavily in next-generation technology to appeal to a younger generation and this investment already seems to be paying off. Visa also continues to expand, as seen in its relatively recent buyout of Visa Europe. By expanding into Europe, Visa increased merchant reach by 40 billion, boosting its cards in worldwide circulation to around 3 billion and bringing its global payments volume to about $6.8 trillion annually. In addition, Visa’s recently released analysis of foreign travelers’ spending during the group stage of the 2018 FIFA World Cup found that roughly one in every five of the purchases with Visa used contactless payment technology, boding well for the future of Visa’s investment in the area. In the stadium themselves, the share of contactless payments was 54 percent.
Digital research firm eMarketer estimates that mobile payment apps that do not use a traditional financial institution — dubbed peer-to-peer payments systems — will process $120 billion in transactions this year, up 55 percent from the prior year. That figure is forecast to double by 2021. According to the Nilson Report, merchants paid card issuers $43.4 billion in Visa credit card interchange fees in 2017, up from $25.9 billion in 2012. This increase is largely due to the ongoing shift in consumers using cards to make more of their purchases and the introduction of more high-cost cards with generous reward programs.
This current economic environment has been beneficial to Visa as the relatively low interest rate has kept the federal funds target rate low and below its historic average, encouraging consumers to use their credit cards. As long as the Federal Reserve continues to keep interest rates relatively low, Visa will benefit. There are also other events that will provide a tailwind for Visa. The U.S. Supreme Court decision in favor of big card companies will help Visa continue to charge high fees and hinder upstart payment companies who might pose a threat to Visa.
Like every other company, Visa also has problems. While Visa seemingly has an impenetrable moat, blockchain disruptions loom. As of now, it’s hard to judge the exact nature of a potential threat to Visa from Bitcoin and other digital currencies, but given the astronomical rise in Bitcoin, Ethereum and other cryptocurrencies over the past year, Visa stock owners would be wise to take this into account. Blockchain-based payment systems offer several advantages over credit cards such as better security from hacks and lower marginal transaction costs. While it currently is not a threat due to the lack of credible oversight, regulation and slow transaction processing, blockchain technology could prove to be the future in a cashless world.
Despite potential road bumps in the future, Visa seems prepared to fully take advantage of a cashless future.