Visa (V) is expected to announce earnings for the December quarter Wednesday, February 6. The card processing company delivered strong growth through 2012, with revenues in the September quarter up 15% from the prior year, and we expect similar results this quarter. The Durbin amendment to the Dodd-Frank bill has had an adverse effect on Visa’s debit transaction volume, but the company still accounts for more than half of the cashless transactions in the U.S. (The Nilson report, December 2012).
Our $151 price estimate for Visa is in-line with the current market price.
Dominance In The Market
Visa has around 2 billion cards in circulation, nearly twice as much as its closest competitor, MasterCard (MA). The company earns 30% of its revenue through transaction fees, charging its banking clients around $0.07 per transaction for authorization, clearing and settlement services. Visa reported 77.6 billion transactions processed in 2011, compared to 39.8 billion by MasterCard and 5.3 billion by American Express (AXP).
Around two-third of all cashless transactions in the U.S. in 2011 were through debit cards, of which nearly two-thirds were processed via the Visa network. The 2012 figures were affected by the implementation of the Dodd-Frank bill, which requires banks with more than $10 billion in assets to use separate payment processing networks for signature authorized and PIN authorized debit card transactions. This rule meant that Visa lost market share to competitors like MasterCard, resulting in a decline in debit card transactions processed, which fell by 9% in the June quarter and 6% in the September quarter. We expect a similar decline in this quarter, but this downtrend will wear off once the market adapts to the new regulations.
The fall in debit numbers was mitigated by an increase in credit card transactions, which jumped 9% over the prior year’s figure in the last quarter. This increase led to a 14% year-on-year increase in data processing revenues.
Credit Cards Better For Visa
Visa earns nearly 40% of its revenues through assessment fees charged from banking clients based as a percentage of the dollar volume of domestic transactions processed for the client. In this respect, increased use of credit cards holds well for Visa, as credit card transactions account for higher spending than their debit counterparts. The dollar volume of credit card transactions through the first nine months of 2012 was $1.6 trillion, whereas that of debit card transactions was $1.1 trillion. The Durbin amendment has cut into the discount fees that banks issuing Visa’s debit cards charge from merchants, and we believe that this might lead to financial institutions giving preference to credit cards over debit cards. We expect a high growth rate for Visa’s gross dollar volume.
Visa estimates that over 30% of consumer spending across the globe is still carried out through cash and checks, accounting for over $10 trillion in gross dollar volume. Visa is currently looking to tap into hitherto unexplored markets by capitalizing on the mobile payments revolution. Mobile phones are quite popular in the developing nations of Asia and Africa, while the banking system is not as developed as the western world. According to information from Statista, there are about 1.3 billion active credit and debit accounts worldwide, with more than 5 billion mobile phone accounts. Asia has around 85 million mobile accounts, while Africa has about 58 million mobile accounts. We believe that Visa will be able to expand in these markets in the next few years. Please read our article: Will Visa And MasterCard Be Able To Capitalize On Mobile Wallet Technology? for more details on this exciting field.
Disclosure: No positions.