As technology advances at a rapid pace, credit card security in America lags surprisingly behind the times. Massive data breaches in recent years appear to have given credit card companies the push they needed to roll out their amped up security features.
Source: flickr.com
Revenue Generation
As a payment processing network, Visa (NYSE: NYSE:V) has situated itself in a position that not only earns high profits no matter the state of the economy, but they also do not depend on a niche market segment. Visa generates most of its income from a fee levied on every credit card transaction. Researchers at Bloomberg found that "The U.S. government estimates that payment card companies collect as much as $50 billion in swipe fees a year from U.S. merchants." Coupled with other services provided by the network giant and the new partnerships Visa has pursued, revenues show no sign of slowing down.
Lawsuits
Both Visa and MasterCard (MA) have been dealing with lawsuits stemming from these fees for nearly 10 years. In 2013, a judge granted approval for merchants to pass the fees on to customers, as well as a $5.7 billion payout to settle the class action lawsuit against Visa and MasterCard.
However, unhappy with this result, many merchants have challenged the settlement and dropped out of the class action suit (causing the settlement amount to drop from $7.2 billion to $5.7 billion) to file their own individually. These companies continue to urge the U.S. Courts not to approve the deal, but no decision has been made official.
Fighting Fraud
Despite this lawsuit, Visa has worked with its merchants on ways to decrease credit card fraud. As a response to the massive credit card fraud potential in the U.S., new Visa cards contain a microchip embedded in the card.
Instituted by Visa Europe earlier this year, Visa will follow suit by issuing these new microchipped cards to replace the current magnetic strip technology that credit cards have relied on for 50 years. This changeover will take time, so new cards will have both the chip and the magnetic strip to ensure acceptability from merchants who still lack the capability to read the new card format.
These new chip embedded cards assign a unique code to each transaction. Nearly impossible to duplicate, these codes stand as the 1st barrier against fraudsters. Secondly, the chip cards require a pin rather than a signature from the cardholder. This should significantly decrease credit card fraud since signatures, if checked at all, hardly ever prevent a transaction.
Source: flickr.com
These new security measures should improve America's fraud statistics as evidenced by the fact that most of the world has already implemented this chip technology, yet the U.S.A. accounts for nearly 50% of global credit card fraud, while it accounts for just 25% of global credit card transactions.
Visa and other payment processors stand behind the banks and support the notion to change to this more secure form of payment. In its most recent estimate (from 2012), the American Bankers Association put a $1.24 trillion price tag on bank account fraud.
Based on rules defined by Visa, issuers and acquirers typically bear the responsibility for fraudulent charges. Since the old magnetic strip cards left banks on the hook for any credit card fraud, they welcome any method of slashing that number. Therefore, the new chip technology leaves merchants on the hook for any credit card fraud originating from their store, if the magnetic strip of a card is used for payment.
This liability switch from bank to merchant aims to speed up the rate at which merchants update their systems to accept these new, more secure chip cards. The liability switch went live on October 1st, despite a majority of U.S. merchants still only accepting payment via magnetic strips. Visa's support on this issue adds to a strong relationship with the banks it partners with. These relationships with financial institutions help Visa keep its title as the world's largest payment processing network.
Other Advances
A bit behind on the microchip technology, Visa currently has numerous strategies underway to keep up with consumers' increasing dependence on technology. Well on its way to reaching its goal of hiring 2,000 technology professionals by 2017, this will help Visa's new strategy of using in house talent rather than depending on outsiders.
To further milk the creative genius from these new technology experts, Visa encourages staff to use 10% of their time to work on pet projects. So far, roughly 80% of these projects have found their way into operations.
Visa has also invested heavily in blockchain technology. Many companies within the financial sector have invested manpower and money to study this faster, more secure way of processing and clearing a variety of transactions.
Visa has many projects and partnerships designed to ease online and mobile payments. For example, Visa Checkout stores customer information so they do not have to re-enter sensitive information for each online purchase. Visa payWave allows customers to scan barcodes in store with their smartphone and pay for it using their smartphone, so customers do not need to stand in any lines. Visa's Token service allows for fast, secure mobile payments through Apple Pay, Android Pay, and Samsung Pay by replacing account numbers with other values called tokens when transmitting sensitive information.
Figure 1 Source: hungliaonline.com
Visa has other projects designed to help small-scale merchants. In September, Visa launched a new pilot project that allows merchants to accept credit cards using only software on smartphones, unlike other mobile point-of-sale companies that require add-ons.
Analysts' Opinion
Visa has pulled in higher revenues YoY, and shows no sign of breaking that trend with 2015's Q3 revenues $363 million higher than 2014's Q3 revenues. In its most recent quarter, the company had an impressive earnings surprise of 25.42%. Visa stands out among competitors with an EPS of $2.42, $1.63 higher than the industry average. Visa's long-term forecasted growth of 17.74% and forecasted 12-month forward PEG ratio of 1.55 indicate growth and positive returns for investors. Of the analysts reviewing this stock, 15 see this information as a strong signal to buy, and 4 strongly recommend a buy. Furthermore, March's 4:1 stock split makes Visa a feasible purchase for more investors.
Source: NASDAQ
While the price per share hovers around $72, it still sits well below analysts' median price target of $82 per share.
Conclusion
As a payment-processing network, Visa earns revenue every time somebody swipes their credit card to make a purchase. The frequency of this occurrence and the abnormally small effect economic conditions have on these swipes makes Visa a strong company. As they begin to introduce new microchipped credit cards to America, credit card fraud rates are expected to decline. While the fraud does not directly impact Visa's financials, it certainly boosts consumer confidence, which has a significant effect on brand loyalty (an aspect that does affect Visa).
The company is a little late with the microchipped cards, but they have since invested heavily in technological advancements to keep up with the changing tastes of consumers. Analysts forecast a positive future for Visa. For these reasons, the I Know First algorithm is bullish on this stock in the long term, with a bullish algorithmic forecast to support this fundamental analysis of Visa stock.
