Visa: Key Takeaways From The Deutsche Bank 2015 Technology Brokers Conference

Summary

• Visa's Global Head of Innovation and Strategic Partnerships, Jim McCarthy, recently presented at the Deutsche Bank 2015 Technology Brokers Conference.
• McCarthy gave excellent color as to the company's focus on launching Visa Checkout, on the competitive landscape, and on how Visa is handling partner concerns over its new tech expansion.
• I give analysis on all of the key takeaways plus my thoughts on Visa's equity as it currently trades.

Visa's (NYSE:V) Global Head of Innovation and Strategic Partnerships, Jim McCarthy, recently presented at the Deutsche Bank 2015 Technology Brokers Conference. McCarthy, whose company is one of the world's largest payment technology companies, touched on several marquee areas of wonder in what was hosted as an informal Q&A presentation. McCarthy presented without the assistance of prepared deck slides, instead simply taking Q&A on a wide variety of topics.

I believe the commentary given comes at a very important time for Visa as well as the rest of the payments/payment technology space, as it comes in both in the early innings of what could be the next big transitional shift for the space and at a time when Visa, in particular, might be turned to as a defensive stock in a low/no-growth GDP environment. I've opined recently that Visa, very uniquely to multinationals, has been able to somehow carry on with healthy operations despite facing a slew of headwinds. Some of these headwinds the company has no control over and will not have control over moving forward - these include a negative FX impact, the noted global GDP concerns, a growing more volatile global FX environment, growing fiercer competition, etc. Again, though, in the face of these, Visa has remained a steady name that has continued to grow T12M from an operational and an equity standpoint.

McCarthy, being the Global Head of Innovation and Strategic Partnerships, will have ample say and influence on the long-term future of Visa as a company. His opinion weights heavily into the total strategy at Visa in general and will be a large determining variable in how successful the company remains as it takes the "new normal" of payment processing/payment tech head on.

The following is my analysis of the conference presentation and my key takeaways.

Adoption of Tokenization…

"Apple Pay specifically, I just think broadly the tokens are exceeding our expectations, just broadly… you usually talk about years, if not decades for things to kind of ripple through the network in any large degree… mass adoption on a broad scale not only from a domestic perspective, but internationally in this concept, I think, is really one of the fastest movements I've ever seen in the payments ecosystem."

So as much as Visa naysayers will say this is a bad thing or a secular headwind for Visa, it just isn't. This is a good thing. Overall, tokenization adoption is the rising tide that's going to lift all boats and you better believe there's enough water to lift many, many boats really, really high. Visa, being so large, well-funded, having an in-place global infrastructure, and having such brand recognition and integrity, will be optimally positioned to be a front runner for this technical change. I think that the fears of commoditization and fragmenting are overblown (and really they're just a whisper right now but I can see them growing louder in time), as really the entire space Visa participates in can theoretically fall victim to commoditization and pricing deflation and it hasn't. There still needs to exist an infrastructure that can handle volume, security needs, transactional flow needs (think chargebacks, etc.) and that isn't built overnight. Visa will have an incumbent advantage here and that should lead the smart, well-executing folks at Visa to securing yet another defensible leadership position.

Visa Checkout…

"So while we look and feel and act like a card, it will actually be domain restricted to Visa Checkout, so that if it's compromised in any way we know that we can replace the credential. So again, we are really pleased because what we've seen is not only the adoption from consumers and merchants, but what we are seeing is higher take rates, higher conversion rates because the real purpose of Visa Checkout was to effectively not only drive a more secure transaction, but also really to drive convenience and drive higher throughput from the merchant. So early results look really positive in terms of driving again higher conversion rates, effectively sales for those merchants that adopted."

Visa Checkout is something I'm really, really excited about in terms of what it can do for the equity. I think that Visa Checkout is the non-tech obsessed, non-cutting edge payment option for those that still do a lot of online shopping - a huge category of older demographic Visa customers that need to be serviced. Visa Checkout is the happy medium between new payment tech and swiping your trusted Visa card - users can "one and done" physical card form filling while also feeling safer about the transactions in general. That means more usage as well as a preferential sway to Visa as a transaction provider. If it's already plugged into the shopping cart, so to speak, why wouldn't it get used more? Not to mention, Visa in the early going has been able to build into the Visa Checkout network quite a bit of incentive for consumers to use it - I'm pointing specifically at discounts for consumers utilizing the solution. That matters for adoption and overall transactional volume and both have been seeing steadily increasing metrics since launch.

The other good news for Visa equity longs is Visa is rapidly building out the overall presence of Visa Checkout and has been doing this rather inexpensively via deploying a really, really focused land strategy that centers on huge transactional names first (read: large enterprise). Still, even having an extremely dialed-in focus on the large transaction volume drivers, Visa hasn't forgotten the merchants where you might not use Visa Checkout all that often but that you do visit often for price checking/ancillary online shopping - names like Pizza Hut, Willams Sonoma, Walgreens, etc. Visa cares greatly about visibility, nearly as much as it does about actual triggered usage by volume. Visa understands the power of its brand recognition in driving longer-term adoption as well as throughput for the merchant and wants to leverage being "everywhere you need it to be" as part of its differentiation. Look for Visa to continue to rapidly deploy market saturation for Visa Checkout - look for this to reflect nicely in the financials.

Pushback From Partners…

"So to the extent we look competitive, I would argue it's really our core business trying to get cards to be used more frequently in channels that historically have been difficult because the consumers will have to key enter. So again, it's a bridge to I think the future where consumers can authenticate themselves very easily with a tokenized credential and again help merchants drive more business."

One of the big questions with Visa moving into this "catch-all" space - especially with Visa Checkout - is how does that make partners feel? How does that make banks feel? How does that make Apple (AAPL) feel? According to McCarthy, these concerns are and have been handled in that Visa is explaining to partners that it's simply doing its job. As much as I'd like to take that explanation as the conversation end for this concern, it just isn't. I'm going to listen hard to other tech/banking conference calls and make sure to scour conference transcripts for any mention of annoyance or mention of defensive posturing to what should be taken as a very real threat by companies not named Visa. Not much more analysis can be done with the above excerpt; the hope is that Visa has an ace card in the hole to incent partners to stick with the status quo should something boil to the surface. My guess is, as well as Visa is run, it does. Still, we'll have to watch closely and see how this develops.

Competition On The Way…

"We don't know at this point, although what I'll say is it feels like it's inevitable at some point if you think about the ability to curate, the Safari browser or a chrome browser is an example, or Microsoft coming into this space, if you think about operating systems most of them have browsers as well. So you would think that they would be thinking about this."

This is the other development that we'll have to watch - other, non-traditional competitors entering the space via an incumbent touchpoint like an operating system or a browser. Think how easy Visa Checkout or a service like it could be integrated into an entire operating system or browser owned by, say, Google (GOOG) (GOOGL). Google Chrome has a billion users. How many users are using Windows (MSFT)? That type of scale from a primary touchpoint isn't going to be wasted by enterprises as smart as the two alluded to just now. At least it shouldn't be. But the big question for these type of touchpoint providers is do they have or can they setup the other infrastructure, noted in the "Tokenization" excerpt above, to service the touchpoint at that level of scale? Do they even want to? Or would partnering be a better idea?

Apple, I would say, is going to be the canary in the mine so to speak for attempting to leverage a device or software primary touchpoint into the processing/payment tech space. Of course, Apple is uniquely positioned in that it controls its entire "experience stack" (basically everything from hardware to software via its product ecosystem) - that's going to make its own experience in attempting this that much easier. So, again, we'll have to wait and see how fierce the competition is and exactly how many entrants can qualify before pricing doom and gloom into the equity addition to potentially be had by Visa leading the way into the new tech evolution. Visa guys, keep your fingers crossed because this is a huge opportunity for forward growth.

Summary Thoughts…

All told, I was impressed with McCarthy, but I expected to be impressed, Visa doesn't allow any old fool to make the way up the ranks like McCarthy has. I also found the update on Visa Payments - which somehow gets passed over quite often during earnings calls - to be productive and evidencing of the underlying innovation at the company. I really think this new tech development and this launching forward of the general space will be a good thing for Visa longer term. I'm confident in the company in that the company has never done anything to call confidence into question.

Visa's equity continues to look highly defensive in a time when you pay a premium for something that looks defensive. It also has excellent growth prospects despite the above-noted headwinds - that too deserves a premium. Continue to own Visa longer term.

Good luck everybody.

Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.