Visa Keeps Charging Forward

Visa Inc. (V) is charging forward despite a global economic recession as consumers continue the migration from cash to plastic. Unlike the issuing banks that rely on interest and fees, Visa relies only on transaction volume to generate revenues. And despite rising defaults on its cards, transactions have been consistently rising for the largest credit card network.

The Outlook for Credit Cards

Most of the growth in the credit card industry is due to two factors: (1) The migration from cash to plastic and (2) the increase in consumer spending over time. As a result, Visa was forced to lower its outlook for net annual revenue growth to a high single-digit percentage from the low end of a prior 11 to 15 percent. The company remains quite profitable because of the migration, but is growing slower because of slower consumer spending.

Visa’s total transaction volume increased 8 percent in January while new efforts to boost the bottom line helped it report higher-than-expected results. The company implemented cost-cutting programs that will save $300 million in 2009 while increasing the fees that they charge to issuing banks in order to offset the slower growth due to the consumer spending part of the equation.

An Expansion Abroad

Emerging markets also represent a key area of growth for credit card companies. Visa operates in more than 170 countries and boasts unsurpassed acceptance of its cards around the world and also owns one of the world’s largest global ATM networks. The company will rely on cash to plastic migration to drive growth in these emerging markets and offset slowdowns in developing countries.

Visa also recently introduced its first global advertising campaign, entitled “More People Go with Visa”, that highlights the superior value Visa delivers versus cash and checks. These benefits include increased security, more control and more convenience. The company believes that this campaign will both lower costs and help improve the company’s image around the world.

Looking Ahead

Visa faces headwinds for at least one of its two key growth drivers. The global economic slowdown has put pressure on consumer spending and may reduce transaction volume to single digit growth for the near future. However, the continuing migration to plastic, effective cost-cutting measures, increasing fees charged to banks and strong growth in emerging markets should help boost earnings going forward.

Disclosure: No position.