Industry Dominating Visa Faces Hurdle In Dodd-Frank

| About: Visa Inc. (V)

By all measures Visa (NYSE:V) dominates its credit/debit processing competitors. One look at the chart below from the 2012 annual report and it shows.

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Visa has more than two times the number of cards and processes almost two times the number of transactions than its closest competitor MasterCard (NYSE:MA). What is also clear is that both American Express (NYSE:AXP) and Discover Financial Services (NYSE:DFS) are still small - the two combine only make up about 5% of the total transactions and cards.

The company is also highly optimistic about payments through mobile devices and expects half of payment transactions to be completed through this medium by 2020. The company plans to invest approximately $643 million to develop the infrastructure for mobile payments systems.

Impressive Earnings

For the last three months of 2012, profits for the payments processing company grew by 25% with more use of credit cards and debit cards by consumers. The company's revenues from data processing, international transactions and services climbed from a year earlier in the fourth quarter. For the quarter, Visa posted a net income of $1.3 billion, or $1.93 per share against $1.03 billion, or $1.49 per share, a year earlier. Revenue increased by 12% to $2.85 billion for the same period.

Total transaction processes through the Visa network amounted to $14.2 billion during this quarter, which was up 4% from last year. Though U.S. debit card transactions declined by 4%, debit and credit card transactions overseas improved 21%.

At the time of earnings announcement, Visa also revealed its plan to expand a program to buy back its stock. In the quarter, Visa spent $1.3 billion to buy back 9 million shares. The company's total buyback authorization until Dec. 31 amounted to $1.1 billion, to which it added $1.75 billion for a total of just under $3 billion.

Philippines a Good Opportunity

Visa International expects double-digit growth levels in 2013 due to continuing positive prospects in the credit, debit and prepaid markets in the Philippines. According to the company, there is a huge potential for prepaid cards in the country as Filipinos have been used to similar transactions in telecommunications. In 2012, debit and prepaid spending recorded a 25% increase compared to 2011.

Out of the total cardable opportunity of $1.4 billion for prepaid cards, around 56% is accounted for in Asia Pacific, with the bulk of that coming from Filipino workers abroad sending money home, contributing around 28% of the prepaid market. Additionally, the growing e-commerce business in the country, which grew by 25% last year, will help Visa post double-digit growth.

Visa Europe Reveals Debit Card Growth

Visa Europe reported record revenue last year with the bulk of it being contributed by debit cards. The independently owned European arm of Visa posted €1.1 billion in revenue for its fiscal year ending September 30. The revenue was 10.8% higher than the €1 billion a year earlier.

This marks the first time when the spending on Visa debit cards across Europe exceeded €1tn, which is an increase of 8.8% over the same period last year. The payments technology company revealed that the spending on debit cards in the UK rose 7.1% to £360 billion. The growth was driven by the increased use by consumers of debit cards to pay for lower value items as well as a rise in the number of purchases made online.

Dodd-Frank Bill: A Hurdle

About two-third of all 2011 cashless transactions in the U.S. were made through debit cards, and of these, around two-thirds were processed via the Visa network. However, 2012 figures were slightly affected by the implementation of the Dodd-Frank bill. As per the new amendment, banks with more than $10 billion in assets are now required to use separate payment processing networks for signature-authorized and PIN-authorized debit card transactions.

The rule does more harm to Visa than to competitors like MasterCard, resulting in a decline in debit card transactions processed. The transactions processed were down by 9% in the June quarter and 6% in the September quarter.

Credit Cards to Drive Growth after Dodd-Frank Bill

The fall in numbers by the new amendment were somewhat compensated by an increase in the company's credit card transactions.

Visa earns about 40% of its revenue from the assessment fees charged to banking clients. Since credit card transactions account for higher spending than their debit counterparts, increased use of credit card works well for the company. For the first nine months, dollar volume of the credit card transactions was $1.6 trillion while for debit card transactions it was $1.1 trillion.

The latest amendment has cut into the discount fees that issuing banks charge merchants, which may result in preferential treatment to credit cards over debit cards by the financial institutions. This may lead to a higher volume for Visa's gross dollar volume.


So far this year, credit card companies have seen positive results. According to data released by Visa, U.S. aggregate payments were up 3% year-over-year from Jan. 1 through Feb. 28. The company's credit payments volume increased by 11%, while debit payments volume growth slumped 3%. Visa's cross-border volume growth was up 10% over the 2012 period and processed transaction growth improved by 4% globally.

Visa delivered strong growth through 2012 and the same is expected in the future. Though the Durbin amendment to the Dodd-Frank bill had an adverse impact on Visa's debit transaction volume, the company still accounts for more than half of the cashless transactions in the U.S. Visa promises great returns for investors with a long-term view.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Black Coral Research is a team of writers who provide unique perspective to help inspire investors. This article was written Aman Jain, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Black Coral Research is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.