Visa Inc. (NYSE:V) Credit Suisse 26th Annual Technology Conference November 30, 2022 2:20 PM ET
Vasant Prabhu - Chief Financial Officer
Conference Call Participants
Tim Chiodo - Payments Processors and Fintech Analyst, Credit Suisse
Moshe Orenbuch - Consumer Finance Analyst, Credit Suisse
We’ll get started here in just 10, 20 seconds or so if everyone can take their seat. Okay. Welcome, everyone. This is our Wednesday keynote at our 26th Annual Technology Conference here at Phoenician in Arizona. We have the pleasure of having with us today the team from Visa. We have the CFO, Vasant Prabhu. And I also want to thank and recognize Jennifer Como, Head of Investor Relations, who's also joined us here in Arizona.
And with that, I want to turn it over to my colleague, Moshe Orenbuch. Moshe is the consumer finance analyst here at Credit Suisse. For those of you that I haven't met, my name is Tim Chiodo. I'm the payments processors and FinTech analyst.
Q - Moshe Orenbuch
Great. Thanks, Tim. And Tim and I co-cover Visa, along with a few other stocks, and this is a great pleasure for all of us. So Vasant, you did put out -- Visa put out an 8-K about trends through pre-Thanksgiving. I don't know if you want to maybe perhaps add a little bit of color to that in terms of any trends that you've seen that you'd like to call out, whether there's the cross-border continuation of the recovery. And you had made some comments about foreign exchange impacts in there, if there's any kind of additions or clarifications you'd like to add to that 8-K?
Yeah. I mean, the simplest way to describe the trends through the 21st is there was no change. It's been remarkable for the past nine months or 10 months. The index to 2019, which is the way we've tended to look at things, because it's a clean look and takes out all the noise, spending in the US and even globally has been remarkably stable in aggregate terms.
It's in the mid-40s percent growth over 2019. And for the first three weeks, it was, I think, 47%. Debit is growing at a very healthy clip, 57% over that time frame. Credit was up, I believe, 38%, 39%. So clearly, debit has sustained that above trend growth rate since the -- through COVID even as credit has recovered. E-commerce stayed strong, it was up 9% year-over-year. And I believe it's, again, 60% over 2019.
The cross-border business continued to recover. So I'd say the easiest description of what we saw through the first three weeks of November was remarkable stability and really no change in trend. And in case you're wondering why we put it out when we did is because it's the cleanest comparison to 2019 and to last year because of how Thanksgiving falls in various years.
So we thought that was a clean comparison and maybe the best thing to do. Now we've had Thanksgiving week. Last year, Thanksgiving was a day later than it was this year. So between the 21st and the 27th, you can compare to last year, but you can't compare to 2019 because 2019 was a late Thanksgiving. It was 28th and 29th and you had to go in December before you really got a clean comparison.
But if you look at the last week, 21 to 27, and compare it to last year, again, it's very stable. Really no change in trend.
All right, great. Thank you, Vasant. Thank you, Moshe. We're going to move on to an important topic for Visa's growth algorithm, which is Visa Direct. So a couple of things we want to hit on. Sure, we want to hit on the sizing and the growth, but we also want to bring to life the mechanics.
So let's first hit the sizing in the growth and then we'll move to mechanics. At least on our estimates and Vasant, not asking you to confirm these or anything, but we've published that we think Visa Direct is now, sort of, mid to high single-digit portion of your overall volumes, which is quite impressive given the product didn't exist about a decade ago.
And in terms of the growth, you've most recently said, sort of, mid-30s growth on a transaction basis ex-Russia. Maybe you could just talk a little bit about the context of the drivers of that growth and how it's become such a big part of your business in such a short time?
Yes. I think, it's very important to give you a little bit of what Visa Direct really is and why it's so important. If you go back to our history, as you know, we did one thing for a very, very long time, which is to enable consumers to pay businesses or consumers to pay merchants, call it C2B. And that made us most of what we are today.
And what that did was money moved one way in our network. It moved from you, the consumer to a business. On one side were consumers. On the other side were businesses. Five years or six years ago, we made some changes to our network to allow the money to move both ways. So it can not only go from you to someone else, but it can also come to you. That's like saying, a car that could only go on drive can now do drive and reverse, which has a massive increase in capability.
The other thing we did was we said money should be able to move from any node in our network to any node. Why should it only go from you to a merchant, why can't it go from you to me or from one business to another business? So that was another massive change in capability.
And what it really did was to take our ability to serve use cases away from just consumers paying businesses to do P2P, person-to-person or businesses paying you, the consumer, B2C or all versions of B2B, as well as governments paying consumers. So what Visa Direct is really is not a product, it's a capability.
And think about Visa Direct as the platform that allows us to take our business from B2C -- C2B, which was its origin to these extraordinary number of use cases across all these dimensions, P2P, et cetera. And what does Visa Direct offer that nobody else can, right? What it offers is an ability to do P2P or B2C or G2C on a scale nobody else can offer.
We have a network with more end points than any other network. We have done things to expand our network where we think we can get to 7 billion endpoints around the world. Some of them are card credentials. Some of them are bank accounts. Some of them are wallets. So it's a network with more nodes by an order of magnitude than anything else anybody can offer.
The second thing it has is global scale. There are lots of other networks, but many of them are national. Nobody goes as many places as we do on a global basis.
Third is its real time, with reliability that's unmatched. There is no network that is up as much as our network is Six Nines, security, fraud prevention, unmatched, the ability to get your money back if you made a mistake and a guarantee that you're protected from fraud as well as reversing transactions. So I can go on and on.
So it has all these capabilities that no other network can offer, and that's why it's so unique and which is why Visa Direct is going to be a critical part of our future. And think of it not as a product, but a platform and a platform that enables a whole range of new flows that we never used to be able to serve before.
Excellent. Thank you, Vasant. We agree, it's been an important part of our research in terms of the growth algorithm for Visa. So that was great in terms of the context, the growth, the sizing. Why don't we hit a little bit on the mechanics? So, let's say, I am a government or an insurance company, and I want to use Visa Direct. Who do I call? Do I call my bank, a merchant acquirer? Do I call Visa? How do I get set up?
Yes. You can do it in all those different ways, and I can give you a few examples. But I also believe in the long run, one of those ways or two of the ways will probably dominate. So, let's say, you're an insurance company that wants to enable getting new money, right.
I mean, you may have seen those ads. Somebody is in an auto accident, and they're all very angry, very upset, and then they upload a picture to the insurance company and a minute later they get their money and they're dancing with joy. Well, we enable that with Visa Direct, right. We allow the insurance company to send the money to your debit credential instantaneously, so that you can get your advance, or $1,000, or whatever you advance you're due, right away.
So, in that case, the insurance company can do it one of two ways. They can either go to their treasury bank and say, instead of cutting a check, I want you to have the capability where I can send the money in real time to their debit credential and their bank can set it up that way. So that's one way.
The other possibility is that, there are intermediaries who are creating businesses that will go to insurance companies and say, hey, we'll enable you to send payments to consumers in many different ways. And we would be the way that they -- we would be the ones who power them.
So I'll take another example, let's say, you're in the gig economy and you're selling a service. Let's say you're sitting in Poland and you're doing development for people around the world, the tech development, and you're doing projects and you need to be paid. Visa Direct can do that for you.
In this case, you could go to your acquirer who is now enabling your payments, and say, I want you to set this up so that I can get paid right away on my debit credential. And what's good about that is that, they could have a single account where money is coming in and money is going out, so that they don't have to keep money in an account that's pre-funded to pay for their bills. The money comes in, the money goes out in one account, and it can all be netted and so on. You can have a settlement account, so to speak.
A third way, which I think will become the predominant way, is partners of ours, and we have 500 partners right now already in Visa Direct, are creating businesses. Take Toast, right, Toast is creating a business serving restaurants, and they offer a wide variety of services. But within Toast are ways in which restaurants can do payments to their workers, can hand out tips, et cetera. Visa Direct powers that.
So we could be behind the scenes where you work with an intermediary. We do that for cross-border remittances. And the intermediary then comes to you and offers a full service. And we are the ones who power it behind the scenes. So it's many different ways. I believe the partner model is the one that's going to be the predominant one. These people will come in and create businesses like payroll businesses or whatever, and we will help them scale.
Great. Vasant, last one on Visa Direct, and I'm going to turn back to Moshe for A2A payments. But, we talked about this a little bit on the last earnings call. So pricing, what kind of yields can Visa earn on this, and we talked about it being very use case-based, right? You gave the example of the remittance use case is a very -- maybe on the higher end of that pricing spectrum and peer-to-peer being maybe on the lower end. Maybe just talk about maybe some other use cases? And really, how does Visa think about pricing this offering?
Yes. Like all pricing, right, it's -- pricing is a function of the value you create and the alternatives people have and what your cost is to deliver the service. It's those three things that always play. And because these use cases are so different, the value you create is very different as well as the alternatives they may have are very different.
So if you take remittances, for example, the old way of doing remittances through agents, was an incredibly expensive way of doing business and was very, very expensive in terms of what the consumer paid. We can do it for a lot less. And in that case, we're competing with something that's a high-cost alternative. And it's a service we can offer that is superior to that at a lower cost while still being a very attractive yield. P2P is another service maybe that comes in at a different yield because of the nature of the service. So it has to be use case specific.
The other thing is you have to think differently about yields in this business than you do in our core business. You could -- in our core business on a typical transaction we will probably get two sets of fees, setting aside value-added services. We'll get a fee that's a percentage of the value of the transaction. That's our service fee. And then we'll get a fee per transaction, a $0.01 per transaction for processing it. And you add those together and you could say, okay, for that transaction, you made this many cents or dollars.
In the Visa Direct space, you could have an ad valorem fee, but very often, it will just be a $1 per transaction, because it could be like a cross-border transaction in remittances, that's fairly large, unlike a typical payment transaction, which could be quite small. But when you translate it on a dollar per transaction basis, it's quite lucrative.
And you compare that to a typical dollar per transaction you get in your core business, where the transaction may be, let's say, $20, and you make x basis points on it -- he wants to answer all the questions. And then you make a transaction fee. You add them together. You could make more per transaction on many of these transactions than you do in your core business. So, they can be -- this can be a very lucrative business, but you also have to think differently about how you price the business.
So moving on to account-to-account payments. This is an area that, we get a lot of questions about from investors. It's an area, obviously that has grown faster outside the US than in the US, but it has been in the news about banks kind of thinking about and considering this area. I think investors generally understand that there are significant benefits to the card based systems that wouldn't automatically transfer into account-to-account payments.
But clearly, there's going to be a move in that direction. Maybe if you could just talk a little bit about the areas in which you think account-to-account payments will be -- will become larger and what Visa is doing to participate in those payment flows?
Yes. Look, account-to-account payments have been around a long time. And you have to look at it in the context of what is the -- what are all the -- what is the value we offer versus a typical account-to-account transaction.
First of all, we don't view account-to-account payments as necessarily competitive because for a long time now, we've advocated a network of networks approach to our business, which is -- one of the things Visa Direct does is it's network agnostic. We will get your money where it needs to go and it may be on our network, it may not be on our network, but it will have the Visa brand on it and the Visa service package and the Visa service package is all the things I mentioned. It's the low fraud, it's the high reliability, it's the dispute resolution capabilities and so on, that many account-to-account rails, if not most, don't offer.
So, we view account-to-account transfers as very much things we would do, and we would use account-to-account rails. I would argue that, while there are people who ask us questions like you did about account-to-account payments, and are they going to be a competitor, I would argue that in the last five or six years, we've taken more business that used to be on account-to-account rails and actually brought them onto our rails.
So, if you look at person-to-person payments, five or six years ago, they were all account to account. Today, the vast majority of them are on some version of our rails. So that's a business that's moved out there, in fact. If you look at what some of what we talked about earlier, like insurance payments or payroll payments, they were being done with bank transfers before.
Now, they're done on our rails. So I think what people, I think, are not realizing is that, if anything, our new flows businesses have begun to take a lot of volume away from account-to-account rails, whereas accountable account rails have had a very hard time being relevant in our core business, which is merchant payments. And why is that?
For lots of reasons. First, it's habit, right? We're all used to paying a certain way and where we are -- it's convenient. We don't -- we as consumers don't pay for it. It takes something for me to change a habit when I'm quite happy with it. And every year, we make it easier for you to pay a merchant, right? You can tap your phone now, you can tap your card, there's e-commerce. You don't have to do anything. It's card on file. We make it -- we take the friction out of it every year.
In addition, many of our issuers choose to give your rewards. So if someone wants you to change a habit, they have to, first of all, make it not only interesting for you in that want to change a habit, but also economically has to be relevant to you, if somebody is giving you 2% on every transaction.
So, it's been hard for account-to-account rails to come into the consumer payment space for lots of reasons, whereas we've made a lot of headway getting into what used to be traditionally account-to-account payments. And we now have Tink, which is open banking. We have Earthport, which allows us to get access to bank accounts around the world. We have YellowPepper, that's an alias directory that allows us to connect to any more of payment. But most important of all, we view our business is getting your money where it needs to go, and we are not focused on having it just beyond our rails.
Okay. Great. Thank you, Vasant and Moshe. I want to move to the next topic, which is B2B payments via card. So, we want to de-scope this a little bit. When we talk about B2B broadly, we really just want to talk about one smaller sub-segment, which is the B2B AP platforms that are sending a smaller portion of their volumes via card, virtual credit card. And we want to talk about the benefits of using a credit card in that scenario.
So, oftentimes, we think about the ability to attach data to the transaction, which is important for reconciliation. But we also talk about some of the other benefits of using the card networks, whether it's the money goodness, the certainty, the ability to remove check usage, printing, handling, there are plenty of advantages and reasons to use that virtual card.
But the question we often get from investors, including Nik Cremo, who covers Bill.com or Bill, the question is often, what about attaching data to an RTP type of transaction or a FedNow?
And can you attach the same type of data and have the same type of money goodness? What are the differences really in using a virtual card versus a, let's call it, a faster payments rail?
Yeah. I mean, virtual cards are an extraordinary innovation and it tells you how we have, as an industry, found ways to create new capabilities that existing rails don't offer. What makes the virtual card unique? And why is it better than a traditional account-to-account payment in the B2B space.
So first of all, is security, right? It's a single-use PAM, it's a 16-digit number that's used once, and it's gone. Unlike, an alias or even a bank account that you would normally use in a traditional RTP or A2A transaction that sits somewhere, that somebody can access, right? This thing is used for that one transaction. And it disappears. It's incredibly secure.
So that in itself is tremendous value. Then you have other things you can build in there that we do. So, virtual cards can have all kinds of controls on them. So you can have restrictions on the amount or you can have a specified amount, so you don't have the risk that somebody has a fat finger and sends a one-way payment that they can't get back. So you're protected in that way.
In addition to that, you get all the security features you get from being on our network that you often don't get on RTP networks, which, in most cases, have been proven to be less secure than our network. There are -- there's global scope. RTP networks are national in scope. And as you said, a lot of these transactions are very messy to reconcile. And when it's on a virtual card, the reconciliation is very easy.
Now, could they replicate all this on RTP rails? Perhaps, but they haven't done it. It just shows the versatility of our rails, just like we talked about Visa Direct, and how we were able to adapt our rails, virtual cards is another example of how we have been able to adapt our rails and create something that has a lot of value.
Maybe continuing in that idea, talk a little bit about the tokenization process, nearly five billion tokens that have been issued by the networks doubling over the past year. Could you talk a little bit about the benefits that these -- using those network tokens in terms of authorization rates and any other benefits that you would cite?
And maybe talk a little bit about what you have done to encourage that growth in terms of interchange rates and other kind of incentives and kind of that process. Thanks.
Yeah. We've always believed that tokenization was a revolutionary improvement in our network. And we think one day, almost every transaction will be tokenized. And we made extraordinary progress, as you've just described, five billion tokens just in the last three or four years.
In Europe, for example, in the last quarter, I believe the number of transactions that were tokenized increased by over 40%. And now in Europe, one in four transactions, are tokenized. That percentage is actually higher in the U.S. So we have made a lot of headway already, and it's going to keep growing.
The -- we can already see the benefit. So what a token does, of course, is make the transaction far more secure, because now the data that goes with it is encrypted, it's very, very hard for there to be fraud, because the data that's moving around now is not data that you can really recreate.
And so what that does is it gives everybody in our network a greater assurance of security if a token, if a transaction is tokenized. What has meant already is we think that our approval rates for transactions have gone up by three points. What that means is the false negatives, in other words, transactions being turned down for bad reasons, right, have gone down, which means there's just more volume of transactions. And you don't have the dissatisfaction of buying an expensive airline ticket and them telling you, no, because you don't do it normally, and it looked odd and -- but if the transaction is tokenized, it has a higher probability of being approved.
So approval rates have gone up. Fraud is down about 28% or so or more. So we're already seeing the benefits. And this is only where the quarter or so of the transaction is being tokenized. Now in addition to security, there are other benefits of tokenization.
So I'll give you a few. They all have different names, and I won't go through all our internal jargon on the names. But what are some of the capabilities you can get on tokenization? So for example, if a -- because of tokenization, we can offer a service to merchants where they can enroll you as a card on file consumer without having you fill everything in, right?
They can subscribe to a service that issuer is also subscribed to, which allows them through the tokenization process to essentially get all your information. And issuers like it because you're more likely to use a card where you don't have to put everything in, so it could become your top-of-wallet card. That's one service.
Another service is, you may have a card at a card-on-file merchant for a subscription, and it may have expired. But through a service, merchants can subscribe to -- through the process of tokenization, when that card is being used, they can search our database and we can give them the new expiry date and they can just go put that in. So they can get paid, and you don't have to go and update your card and they don't have to lose a payment and go through all the hassle.
There are other services where, because of the use of tokens, we can give them a much -- we can give you a much clearer picture of how your spending is at different merchants, who you may have card-on-file with and give you some sort of like this is how you -- this is what you're spending on at Amazon, and this is what you're spending -- and this is it all together. We can do similar things for issuers to get a better idea of your -- so we can add on a lot of services in addition to the security benefits that make it easier for everybody in our network to use the network.
Excellent. Thank you. Vasant, some, some -- sometimes when we're talking about tokenization and we're trying to explain it to investors, we use the analogy of the Excel VLOOKUP, which I think is an appropriate one.
Okay. Great. Let's move on to our second last topic here as we begin to come to a close. It's very topical, the economic responsiveness of the business. So I think most investors appreciate that the top line is relatively resilient and specifically the large US debit business, we just note that in the last recession, never went worse than positive mid single-digit growth. Debit non-discretionary spend, it was very resilient.
But let's focus a little bit more on the expenses. So oftentimes, we look at the marketing line item, and we see that you were able to defend profitability during the pandemic. And we look at that line item, I guess what we're really trying to get at is how much of that marketing spend is sort of locked in and contracted to events where it's not -- there's not too much wiggle room versus areas that are maybe less contracted and more discretionary?
Yeah. I'll talk more broadly about expenses and also talk about marketing. So first of all, I mean, we gave you what we called our planning assumptions. And we don't view ourselves as economic forecasters and we didn't want to get into the business of predicting if there would be a recession, when there would be a recession, what kind of recession there would be, and so on.
But we did set ourselves up to be prepared if there is a recession. The general view is that there will probably be some kind of a slowdown first quarter, second quarter next calendar year, which would be the second half of this year. If you look at the way we've set ourselves up, our expense growth moderates in the second half anyway, right?
And our revenue growth actually might accelerate if there's no recession because we don't have the Russia comparisons. That's four points by itself. That's hurting us right now. And the dollar got stronger through the year. So unless you're in the camp that says the dollar is going to get even stronger as we go through the year, the comparisons to last year and the exchange rate drag become smaller.
And so without us doing much, our revenue growth actually begins to look better. At the same time, our expense growth moderates because of how we set ourselves up for the year, we said that our expense growth in the second half could be high-end of mid single-digits. So we're setting ourselves up in case there's some kind of slowdown even before there's any kind of recession.
If there's a recession, what might we do we're going to have contingency plans. And it isn't just marketing. There are a few other levers we can pull. On the marketing side, yes, there are some parts of our marketing budget that are spoken for. We have to pay certain franchise fees to the various sponsorships we have.
We may have some events that will still be there that we will do. We have some money in there that we spend on behalf of our clients. And we would still do that if our clients want to do those things, but there's still flexibility there. In addition to that, a big chunk of our spend -- as you know, we don't have variable costs a lot, and we don't have cost of goods sold. So a lot of our spend in any given year is investments in the future.
And that's a balancing act. This is a long-cycle business. If you don't invest today, you won't have the revenue three years down the road. This is not a business where you spend money today and you get the revenue tomorrow. So there's always in our business, a level of investment on future initiatives like Visa Direct and what we're doing with B2B or whatever. And what we can do when times are hard is decide how we want to deal with that investment pool.
What investments can we slow down? What investments can we push out? And are there some things that we should just say we can get to that later. And that gives us some flexibility in our technology spend in what we call professional fees. And then there's always what people do, other companies do, in tough times.
We can hold back some of our hiring in non-essential areas. We can cut back. We hope you don't, but we can, cut back some travel and meetings, all that. So there's some ability to scale back spending. But it's always a balancing act. You don't want to compromise future revenue. We've done it before; we'll do it again. And it will depend on the nature of what we're looking at.
Well said, Vasant. So again, I'm Tim Chiodo. On behalf of all -- everyone at Credit Suisse, all of my colleagues and especially Moshe Orenbuch. We want to sincerely thank you, Vasant for taking the time to join us today. Jennifer Como as well being here in Arizona. And thank you, everyone for joining this keynote at the 26th Annual Technology Conference. Great. Thanks, everyone.
Thank you, everyone. It's one of the best settings I've had in a while for this kind of thing. Thank you. Good to see you.