Visa (V) is at the centre of a mobile payments explosion which is taking place around it. Rather than being negatively exposed to disruption from mobile payment trends, it is my view that Visa will be a long-term beneficiary of these moves. This will help drive additional payment volume, revenue, and growth not currently captured in the stock price.
The growth in mobile payment volumes will have two discrete components. The first and more important of these is the increasing acceleration of Mobile Point of Sale (MPOS) deployment. The second component is the deployment of mobile payment solutions and mobile wallets.
Mobile Point of Sale Solutions
The deployment of Mobile Point of Sales solutions represents a unique opportunity for the credit card networks to address payment volume that they would otherwise be unable to capture. Mobile Point of Sale terminals enable credit card payment acceptance by smaller merchants who had historically not accepted credit card payments as a result of merchant acquirer reluctance to install them given high cost and lengthy payback period.
The point of sale terminal plays a critical role in a credit card transaction. It's the device that captures the credit card payment and allows the payment to be routed for processing. A traditional payment acceptance terminal has a cost of upward of $300. Merchant acquirers were typically reluctant to install these credit card processing facilities with smaller merchants given the high cost of the device. The smaller purchase volumes typically done at these merchants meant lengthy payback periods for merchant acquirers to recoup their investment. As a result, credit card deployment at small merchants has historically been very low, irrespective of a merchant desire to accept credit card payments.
Mobile Point of Sale terminals are now less than 1/3 of the cost of a traditional point of sale terminal. This means that merchant acquirers can now better justify the case to deploy these point of sale terminals to the smallest of merchants to facilitate credit card acceptance.
What does this mean for Visa? Estimates suggest that there are close to 7M establishments that accept Visa payment cards today in the US. The total number of merchants in the US is closer to 27M, meaning that there is an addressable market of close to 20M merchants who could accept credit card payment if the economics makes sense but who currently don't.
There are a number of MPOS vendors attacking the space. Intuit, PayPal, and of course Square are all aggressively attempting to drive their MPOS solutions into the smaller merchants. The good news for Visa is that virtually all of these merchants are leveraging the existing credit card infrastructure and payment rails in their MPOS solutions. Practically, this means most of the payments that are processed via the MPOS solutions will go over the rails of credit card networks, including the Visa network.
Admittedly, the average size of payment volume from some of the smaller, long tail merchants will be much smaller than that of Visa's current merchant base. The average small business has a turnover of about $1.3M. Even so, assuming that even 50% of these 27M merchants are now addressable because of these MPOS solutions, that could represent a significant increase in Visa's revenues over the next five years.
The scale of the opportunity is further magnified when one looks at international opportunities available to Visa in developing markets. With an abundance of smaller scale merchants in rapidly developing markets of Asia and South America, the ability to drive significant payment volume amongst these smaller merchants is far more significant.
It was likely with this in mind that Visa recently decided to make an investment in Square and launch its own MPOS solution, which it has started to roll out in markets such as Thailand and Malaysia. Mobile Point of Sale allows Visa to accelerate the rate of penetration in international markets significantly.
Attaching a point of sale reader to a tablet or mobile phone can be done much faster and with less hassle than a traditional terminal. This should allow Visa to scale up payment volumes and revenues internationally much faster than currently assumed by analysts.
There is some concern that Visa could be displaced by an alternate payment mechanism offered by one of these MPOS vendors. Such a vendor would need to essentially create an instrument that would run over their own payment rail, or via ACH.
The amount of investment to set up a new payment mechanism is fairly material and not something that any of the existing MPOS vendors would be in a position to do. Further, such a scheme would need to find consumer acceptance and need to drive consumers to use this alternate payment mechanism in scale. To do this will take a vendor significant investment, the ability to withstand significant initial losses, and also provide a compelling consumer value proposition.
Mobile Wallet Solutions
Mobile payments made with a smart phone device will also have a favorable impact on credit card networks. Irrespective of whether these payments occur using NFC (Near Field Communications) technology or not, the fundamental infrastructure for payment processing will still be the payment rails of the existing credit card networks of Visa and MasterCard (MA). It's important to note that none of the in-progress mobile payment initiatives contemplate a new payment rail and merely contemplate enabling an existing physical credit card as an electronic credit card on the mobile device.
To that end, none of the emerging mobile payment initiatives threaten the dominance of payment infrastructure of Visa and MasterCard in any material way. Rather they are actually helping enable it.
In my view, the emerging set of mobile wallet solutions is less of a net new opportunity for Visa and MasterCard. To a large extent, all that mobile payment solutions (whether they are NFC-based or otherwise) are doing is facilitating the linkage of existing credit cards into a mobile wallet. They are not facilitating new credit card volume in the way that the MPOS opportunity is doing for the credit card networks.
Implications for Visa stock
Developments in mobile point of sale present a tremendous opportunity for Visa and MasterCard to address almost 20M merchants in the US that do not accept credit cards today. While the volume generated by these merchants will be smaller, this will be net new volume that will be processed over credit card payment rails within the next five years, presenting a significant growth opportunity for Visa currently not captured in the share price.
More significantly, the development of MPOS will allow Visa to accelerate the capture of payment volume from merchants internationally, particularly in the rapidly growing regions of Asia and South America where a greater volume of smaller, more informal merchant networks exists. These are merchants who would traditionally not accept credit cards.
Mobile wallets will largely help facilitate the addition of existing credit card instruments to the mobile phone and merely transfer spend from physical credit card to the mobile device rather than create net new spend for the credit card networks.