Visa Inc. (NYSE:V) 2018 Wells Fargo Tech Summit December 4, 2018 4:20 PM ET
Bill Sheedy - Executive Vice President of the Global Strategy Group
Donald Fandetti - Wells Fargo
My name is Don Fandetti. I cover Visa at Wells Fargo. We are very pleased to have today, Bill Sheedy from Visa. Bill is a sort of 25 year veteran of Visa and has run just about every business from Europe to the Americas and currently he heads corporate strategy, M&A and global policy and government relations. So, we appreciate your time.
I’ll go ahead and kick off with a few questions and then we’ll open it up for the audience. We’ve gotten a lot of questions today. So I’ll go ahead and get it off the table and that is the discussion in Europe. There is some, comments out there that bank interchange rates could be reduced for cross border transactions when traveling into Europe and I was just curious, if you could comment on that?
Sure. I think what’s first is, just a level set on what exactly the announcement was from the European Commission. I think everyone knows that when a transaction happens on our system, generally a purchase transaction, we pass interchange from the acquiring financial institution to the issuing financial institution.
We – Visa doesn’t benefit from that flow. We just move the money. For quite some time, interchange has been a topic of regulatory and legislative discussion in Europe and for a number of years, transactions within Europe have been - interchange transactions within Europe have been regulated at 20 basis points on debt and 30 basis points on credit.
For consumer transactions, the only transactions that have not been regulated on the interchange by the European Commission have been cards that issued outside of Europe where those cards travel or go online and then transact with European merchants. So the announcement today was the European, the regulators in Europe are testing – market testing a lower interchange for these cross border transactions for both Visa and MasterCard.
They have to go through their process of market testing. Assuming those market tests are successful, at some point in the future, we would then go into our systems and we would bring down the interchange that would apply on those transactions. It ends up being a relatively small percentage of transactions in Europe. It’s actually even a smaller percentage of transactions.
When you think about it is a thousands of issuers right across the world, where those issuers who are sitting outside of Europe issue cards to non-Europeans who then travel, and then transact in Europe, it’s a relatively small percentage of transactions in our system, but those interchange rates presumably are going to come down to a different level.
They are not going to – they would come down to 20 and 30 basis points for physical world transactions where those cards are swiped or dipped in Europe and as those transactions happen online or card not present, they would be 115 basis points on debt and a 150 basis points on credit. So the number is substantially higher than the typical 20 and 30 basis points that happens on all transactions intra-Europe.
Okay. And I think it as we’ve seen around the world when bank interchange rates are cut, it doesn’t impact necessarily network fees. So, that’s kind of been our base assumption on the situation.
Yes, it’s important to reinforce that we still think the regulation of interchange fees is bad policy and we are heavily invested in helping regulators and governments legislators understand the benefits of a market-based interchange fee structure. But the unfortunate reality is that interchange fees have been regulated in a number of instances over the past 15 or so years. And, as I mentioned in the prior question -- or my answer to the prior question, it isn’t a flow that impacts Visa. We move the money from the acquired to the issuer. We've also been successful, I think in managing our business in a way that it doesn’t have a negative impact on Visa. I want to be clear, we think it’s a negative outcome. But it hasn’t been when it’s happened in other instances, we’ve been successful in managing our business where it hasn’t had an impact on Visa.
Okay. Thank you. So, shifting to another topic, over the years, we have seen big marketplace e-commerce players like Amazon gain market share and just trying to think about what the longer term broader implications are to the networks. Can you talk a bit about your current thinking on what the risk and the opportunities are from those types of companies, whether it’s cross border or all these different issues?
Yes. The way we think about it is, there has been a consolidation of our business on both the issuing and on the merchant side and on the acquiring side. You've had on some levels just taking on the merchant side for a question, because that was your question, we’ve seen a massive expansion of merchant acceptance around the world. There has been a truly impressive deployment of additional terminals and bringing more and new merchants into the system. But while that's happened, you’ve definitely seen whether it's Amazon on the merchant side or some of the larger financial institutions, the big have gotten bigger. And that’s resulted in us thinking about those relationships differently. Amazon has a very successful Visa branded co-brand program. We have a team of people who are dedicated to the Amazon relationship that probably wasn't the case certainly when we went ten years ago. We didn’t think about managing our relationships on the merchant side in quite the same way. And the nature of our partnership, it’s not just about Amazon as a merchant, it’s helping them grow their business as a marketplace. We have an important initiative with them on commercial transactions, where we are help facilitating the flow of incremental enhanced sort of SKU level data and partnering with them on token and other initiatives to try to improve the security of the payment system.
So, yes, sure, when more of your business consolidates with a bigger and bigger client, you can absolutely think about that as a risk.
But, I think the way that we think of that is if you’ve got a bigger customer, invariably their needs are going to be more diverse. We’ve got to put more resources against it and as you do with all of your customers, issuing, acquiring, processing what have you, if we are properly invested, we think that we are a great option for Amazon and I think that as they’ve done business with us in the U.S. and around the world, it’s been to our mutual benefit. Their customers are benefited, Amazon is benefited and we need to earn that business just like any other company does.
That makes sense. So, another topic that I think it’s going to be interesting in the U.S. market is contactless cards, J.P. Morgan and some of the other big banks are rolling our contactless. So, obviously it makes a – for a better customer experience, but what does it mean to Visa in the United States. What’s been your experience in other markets in terms of volume, uplift, et cetera and how do you expect that to play out in the U.S.?
Yes, Visa has had a tremendously positive experience with contactless around the world. It has transformed our business and I don’t use that word lightly, it has transformed our business in markets like the UK, Australia. It’s made a very significant impact in a short period of time in Canada and there is many other smaller markets where it’s the majority of our activity in a relatively short period of time.
The contactless expectations in the U.S. are really high impart because, when you go back to 2015, 2016, there was a massive shift in the United States to deploy MV and with that deployment, we accomplished what was probably the most difficult and most important objective which is plumbing the point-of-sale for contactless.
The thesis that we’ve got, again informed by what we’ve seen in these other markets is, once you get a consumer and a merchant coming together with a much more convenient, fast, simple, point-of-sale experience of just tapping, you more successfully penetrate the cash transactions that continue to in a frustrating way, sort of linger even in a market like the U.S.
We’ve got trillions of cash in the U.S. We’ve got 17 or so trillion around the world and when we think about opportunities to penetrate cash in developed markets like the U.S. contactless is our best answer. So, small dollar transactions in quick service restaurants, in transit, in parking, in a long list of other merchant segments, we believe those are penetration of those transactions and moving those transactions over our network will be accelerated with contactless.
Likewise, if we create a more valuable convenient experience for consumers and for merchants, we think it can only be good for the brand. So, EMV has been important because we had a counterfeit fraud problem in the U.S. that is largely addressed. But, I think what’s going to come from that investment that towards EMV that address that counterfeit fraud problem and concerns we all had around the payment system and security is going to be a much more convenient experience for U.S. consumers.
And it’s like so many other things in our business. There is a chicken and egg aspect of running a two-sided market and running a payments network. The merchant side is largely there and with the issuers you’ve heard, J.P. Morgan and others demonstrated their commitment to reissuing their cards and getting the consumers wallet enabled then we all need to come together and drive consumer awareness and we are confident that once we do that, it will have really positive impacts for us in the U.S. and it’s not speculative. We’ve seen it in our other markets.
Okay, that’s helpful. So, I’ll maybe ask one more question and then we will open it up. So, I think this statistic is correct that Visa Direct, as Visa and MasterCard try to expand into new payment flows, Visa Direct’s volumes or transactions are essentially doubling. And I was just curious if, as you look out, do you see some of these new payment flows that are away from your traditional card payments, consumer, commercial business, materializing into something impactful whether it’s Visa Direct or B2B. And one I thing I worry about B2B as it’s such a fragmented market. And so, I wonder if we are all getting a little ahead of ourselves on the potential upside opportunity, if you could comment on those?
Yes, I do think, as we think about our network and we think about our business, going back to the origins of the company, we want to be able to participate in the flow of commerce, electronic commerce whenever and wherever. And the company has historically been really successful in building a franchise of 40 plus million merchants and over 3 billion cards and the vast majority of the transactions of our network were with consumers presenting their payment credentials to merchants in the exchange for goods.
But we all know, when you look across the broader economy, the core consumer economy with things like bill payment or the broader employer to employee economy, - the economy on B2B and economy driven by governments, there are massive flows of commerce that currently are happening outside of our network t hat we believe with programs like Visa Direct which not just as a transaction flow over the network, but enables for the real-time posting of transactions pushed into an account, which was a multi-year effort to be able to enable our financial institutions globally to get there and we are almost complete in that journey.
That you have the ability to bring into the fold a whole host of peer-to-peer bill payment, payroll and really a number of different flavored transactions where parties are exchanging value with one another that the current system isn’t working either because it’s expensive or it’s slow or it’s non-electronic, and by opening up our platform to potentially different set of economics, we’ve got a cost structure that can layer that incremental volume on the network at very low cost.
So it can still be exceptionally profitable. But we can say to any parties, whether it’s social networks or traditional financial institutions or Fin-Techs who want to facilitate peer-to-peer commerce and be able to do it locally or globally, why wouldn’t you run those transactions over our network. And when you’ve got a lift driver who wants to get paid and have those transactions posted real-time, we offer tremendous value at low cost in a way that’s driving benefits outside of what we’ve done in the past.
I agree with you that when you look at B2B and broader commercial commerce, there is got to be an element of opportunity there. Because some of that volume is outside of traditional payment networks, because you’ve got known parties transacting with one another who aren’t willing to pay full economics the way that you do in sort of a business to consumer context.
That will come – that is an opportunity. But attendant to that opportunity are data requirements and support within more complex value chains that we are invested against, I think you are going to see bill payment, payroll, peer-to-peer payments, globally and faster payments where consumers are pushing value to any number of third-parties. I think that’s going to be the near-term opportunity for Visa Direct. But we are absolutely compelled by the longer term opportunity for B2B.
Okay, that’s helpful. So, why don’t we turn it over for questions in the audience? I think we have one right here, in the third – fourth row.
Q - Unidentified Analyst
Hi there. So, one thing I am curious about is, your take on block chain. We heard a lot about that in the financial space in terms of handling transactions and whether it provides any advantages over existing database systems or whatever, what’s your take on that? And does that kind of have any strategic priority within Visa either to actually using applications you already know about or at least to explore possibilities?
Yes, so, we are bullish on block chain. We have block chain distributed ledger capabilities coming into our commercial processing environment next year. The – I think the opportunities for block chain are less about the existing volume that we see or we don’t see there being much overlap between the volume that we see and where block chain might take us and more about the – either complex known party transactions where there is a much more rich and important dataset that’s attendant to those transactions that may not need to flow with the transactions, but needs to be referenced.
And then ultimately, when you get to more and more complex forms of emerging transactions whether certain elements of connected car, we do think that some of the volume for incremental activity on the network can be unlocked if we are in a position to be able to support our clients with distributed ledger. And I think that’s going to evolve slowly.
But I think it’s also important that in particular in the B2B realm, the commercial expenditure realm, we need to be prepared to support it and it’s among the things that we feel we have an opportunity just based on the scale, the sophistication of our network, the global interoperability, the redundancy, cyber protection.
If we can layer these capabilities into our network, we think we are pretty strongly positioned to be able to compete. I am not saying that block chain and distributed ledger won’t exist elsewhere. I think it’s going to be lots of test and learn. But at some point, folks wanting to take advantage of those technologies are also going to want to look at the strength of the underlying networks for the flow of those core transactions and I think we are going to have a compelling sale.
Okay, the next question, any others? Okay. I’ll go ahead and continue with my questions. So, I guess, Bill, I’ve covered Visa for a while. Things look great. Volumes are good. The secular theme away from cash and check has contributed quite a bit to your revenue growth. But as I sort of think about over the horizon, is that opportunity still what it used to be in terms of the secular shift? Can you talk a little bit about where we are in that progression? And if you think it’s going to be as important for the company going forward?
Yes, I am happy to. Probably, because I’ve been around Visa for a while and we’re on the roadshow teams taken the company public. The secular shift that we were talking about at the time is pool of cash that exists around the world that we felt compelled. It was ultimately going to be electronified. The expansion of the network as I talked about earlier and just sort of the trends in consumer and merchant behavior.
I’d say, on those core elements, the thesis for the secular shift has gotten stronger. The amount of cash that exists on the planet today has grown. So the resources that we tapped into that fuel our growth as it relates to cash conversion is a greater opportunity that it’s ever been. And I’d say, related to that, adding tailwinds to the secular shift is something that we didn’t have when we were going public is that you’ve got every major government on the planet right now deciding that it wants to move its economies away from cash.
And so, - and in some ways that happens in a complex rapid environment the way that they would, the demonetization in India in other ways there is a thoughtful sort of multi-year agenda around it. But we believe that that has enormous secular tailwinds to us. I think what’s emerged and I think as the times underappreciated is we’ve seen in the digital economy, consumer behavior is shifting more rapidly away from physical world commerce to virtual commerce.
And it’s not just happening in the most developed economies of Western Europe and in North America, it’s happening globally. And consumers are getting more and more comfortable transacting virtually with merchants and with that, when you move from physical world to a virtual, we by definition pick up market share.
But the strength of the network in terms of being able to facilitate cross border commerce and to drive higher and higher authorization rates for merchants operating in those marketplaces, I think represents a really important tailwind as a business. But ultimately, when we think about the secular shift, the dimension that we talked about earlier in this conversation around expanding the number of transactions, the types of transactions over the network.
In terms of just transaction flow manned up being the most important shift, because you are now able to tap into the commercial economy, the government economy, the business to consumer economy. So, look, I am more bullish today about the tailwinds and the secular shift in the thesis for long-term growth, which is, maybe on some level surprising given how much we’ve grown.
But, yes, I think what people often underappreciate, because they look at us relative to other industries, other industries you see share moving across different players within a relatively static industry and the pie that gets defined and it’s growing for payments globally, I think is growing more rapidly than anyone is expecting and that’s at the core of what we mean when we talk about a secular shift.
That’s great. That’s good to hear. This far along, you still see - have that conviction. If I could shift back to Europe quickly, Visa Europe has obviously gone well for the company. The accretion is coming better. I think the conversions are just effectively done at this point. And now, there is this argument will okay, Visa can shift offensive and take more share in credit and cross border. But at the same time if I look at markets like the UK, you’ve got MasterCard has come in and want to deal I think it was with Santander for potentially 10% of the debit market than the UK. So, like, do you really feel and have high conviction that now that Visa Europe is part of the public company that you can be more aggressive and gain share in those markets?
Look, we are very happy with how things have gone with Europe. I think it’s gone better than we expected. You are right, it was important for us to transition hundreds of clients in Europe into – with whom we had direct contracts and move them into a different commercial framework and then we’ve done that successfully.
You will invariably, when you renegotiate a large number of contracts as we have in Europe, you’ll lose some and Santander was a tough loss. But it’s one that didn’t surprise us entirely. Santander globally outside of the UK was almost exclusively MasterCard. So, we were hoping to retain it. We gave it our best shot. But the loss to us was more, I think reflective of a broader global relationship with Santander had with MasterCard have - has with MasterCard.
But when I look at the business in Europe, yes, there is an opportunity for us to invest in credit and commercial and some of elements of digital and innovation that we believe and we know we are underinvested and when Europe was a bank owned association and that definitely represents an opportunity for us.
But, I think similar to my answer to your question around the secular shift, the pie in Europe is growing surprisingly. There is still a lot of volume across European local networks. And the rate of growth in cross border activity in Europe is greater than what we see in most of the other regions around the world. We just brought the European business on to our global technology processing platform which unlocked a whole host of things, token, some of the elements of the Visa Direct strategy.
So, yes, we are heavily invested in Europe. I think that there is good fundamental growth opportunities in Europe independent of share and then we are focused on the areas that I just described to where we feel like there is – there hadn’t been as much focus within the prior Europe organization and we feel like there is an opportunity to grow.
Okay. Interesting that you put it out the Visa Direct having some impact in Europe. When I think of Visa Direct, I tend to default to the U.S. but I guess really is the mix is globally fair to say?
Well, as is the case in a number of instances, you always start in a market and then, you learn and then you globalize. But now, there has been lots of activity with our banks in Europe to unlock the real-time posting of the Visa Direct transactions and we will see some activity in Europe, as well as some of the other regions. So the roadmap for Visa Direct is very global.
Okay. And I know there is the – I was at the TD deal out of Canada sort of leverages a market where maybe Visa is not quite as active on the debit side potentially, but Visa Direct allows you to kind of connect and tap out.
It’s a good example, we are – by a strange regulatory structure we are locked out of a lot of the debit activity in Canada. But we have in TD a wonderful partner. We are – we have a very strong share of their business on credit. They do issue Visa Debit that’s used sort of online and cross border. But what we’ve got in that we are testing with TD and tied to Visa Direct is, we feel it’s really important on the Visa Direct platform and to be able to facilitate some of these new and emerging transactions to be able to touch any account anywhere.
And with partners, we’ve got over 20,000 financial institution partners globally who are connected to these local faster payment systems if we can partner with them, we can ultimately be able to move value to any account on the planet and once we be able to provide that scale and that interoperability benefit, we think that we’ll be able to tap into some real growth potential around real-time payments.
Great, well, Bill, I want to thank you for your time and we appreciate it. Thank you. Take care.