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How Visa Became The Most Popular Card In The U.S. - YouTube
Channel: CNBC
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$6.7 trillion. That is how much
Americans spent using their
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debit or credit cards in 2019.
More than 60% of those purchases
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were made using cards from Visa,
a company that has long
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dominated the payment card
industry.
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Not only are the majority of all
payment card transactions in the
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United States on Visa cards, but
there's been lots of litigation
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over time, including from the
Department of Justice, and the
[31]
Department of Justice has had
very clear legal decisions that
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show Visa has, quote, market
power, which is the legal term
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as a matter of law, so there's
no doubt about this Visa is
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dominant.
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As payment cards become more
essential in our daily lives.
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Visa has quickly grown to become
one of the most valuable
[53]
companies in America. As of
October 2021, Visa was valued at
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over $480 billion and reported
net revenue of 21 point 8
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billion for 2020. Shares of the
company have also seen an over
[68]
170% gain in the past five
years.
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Really good way to think about
Visa's revenue stream is for
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every $100 spent on a Visa card
anywhere in the world, they make
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about a quarter of that meaning
25 cents, an actual quarter,
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every time you buy a pair of
shoes, that's $100, they get 25
[88]
cents of that. As the network
has scaled that's very high
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incremental margins, and so the
profitability of the business
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naturally goes up.
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But Visa's success hasn't always
been great news for merchants
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who have no choice but to rely
on them for payment.
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If I can ask Visa for one thing,
it would be for relief in the
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swipe fee arena. We are paying
way too much. You're making way
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too much money off of us. And
you know the lack of competition
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that you have, with all of your
issuing banks, charging the same
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swipe fees across all markets
across the country. It's really
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unfair. We don't do business
that way. Other industries don't
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do business that way so I don't
know how you can get away with
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it.
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So how exactly does Visa make
money? And why does it dominate
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the payment card industry.
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The Bank of America launched
Visa as the nation's first
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licensed credit card for middle
class consumers and small to
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medium size merchants in 1958.
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Today, the computer is changing
our world the way we do
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business.
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By 1970, Bank of America gave up
its direct control over the
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card, passing the control to a
group of issuer banks that
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continue to manage, promote and
develop the new network in the
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United States. The company grew
quickly after, expanding
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internationally by 1974 and
introducing its first debit card
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in 1975.
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Every month British shoppers
signed for one and a half
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billion pounds worth of goods on
a credit card.
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In 2007, Visa completed its
corporate restructuring with the
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formation of Visa Inc, and went
public in 2008, raising $17.9
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billion in one of the largest US
public offerings to date.
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Visa was set up to be dominant.
They started actually as an
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association of 1000s of banks
across the country. So all these
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banks came together and
established Visa to have this
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national credit card. But of
course they had a dominant
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position because it was
virtually all the banks.
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There are still Class B shares
of Visa's stock which are
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actually owned still by those
original banks.
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Today, Visa has grown to become
one of the world's largest
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payment processing networks,
saying it has over 3.4 billion
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cards in the market across over
200 countries and territories.
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Visa generated over $4 trillion
in purchase volume in the United
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States, according to the
February 2021 Nelson report. In
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comparison, MasterCard has over
2.3 billion cards in the market
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with a purchase volume of
roughly 1.7 trillion.
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Visa does have a huge number of
cards out there more than
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MasterCard, without question.
Discover cards a little bit
[259]
anomalous, they have more cards
than they have transactions. But
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visa cards in both credit and
debit are the most frequent ones
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and Visa dominates the
transaction counts in both
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markets.
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And it's a profitable business
since going public, Visa has
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rarely had a decline in revenue,
and its shares have continued to
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outperform the S&P 500 excluding
just three years, and although
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the year isn't over yet 2021 is
on track to see Visa
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underperformed the S&P 500. In
one of those years, 2020, Visa
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still reported net revenue of
$21.8 billion with operating
[300]
expenses at 7.8 billion, its
total net income for the fiscal
[305]
year came to roughly 10 point 7
billion.
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Their profit margins are huge,
the numbers I've seen over time,
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but then, gosh, 30 40% profit
margins where to give you a
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sense in the retail industry,
profit margins tend to be in the
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two, three, maybe 4% range.
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So as a business, the reason
it's so profitable is because
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it's a primarily fixed cost
business is once you've got that
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infrastructure all in place,
each incremental transaction
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that's flowing through that
ecosystem comes in at extremely
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high incremental margins,
because it's just this massive
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capacity network. And so, as
Visa has scaled their
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profitability has gone up
dramatically for that reason.
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So how exactly does Visa make
money? Contrary to popular
[360]
belief, Visa doesn't make any
profit from credit card interest
[364]
fees. Instead, those fees are
charged by the card issuer. In
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most cases, banks, allowing Visa
to face none of the risks that
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come with lending money.
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So Visa does not have direct
relationships with individual
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consumers, the banks do the
banks issue the cards and so you
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may get your card, or I may get
my card from Bank of America, or
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Wells Fargo or Citibank or any
number of these other banks,
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including local banks. But while
many people think of those as
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Visa cards, they're really not,
they're the bank's cards that
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happen to have Visa on them. And
Visa is the network on those
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cards.
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Visa's business model relies
heavily on what is known as the
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four party model. When you use a
Visa card to make a purchase,
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there are usually four entities
that come into play you the
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customer making the purchase,
the bank that holds the
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customers money, the merchant
selling the product, and Visa
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that works as a middleman
connecting all three of those
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entities together.
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They're a physical network, not
dissimilar from Telecom network
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or an internet style network.
It's just Telecom, might carry
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voice. Internet carries
information. Visa's network
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carries money, right. So it's a
different type of physical
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network that connects about
18,000 banks and other types of
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financial institutions globally.
And every time that you use a
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card, a series of messages have
to run back and forth between
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the cash register or the website
or wherever you're making a
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purchase. Going back to your
bank that issued you that card
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to see whether you are who you
said you are, and whether you
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have the money, right, to do an
authorization and then also to
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go back and kind of clear and
settle the transaction, meaning
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actually move the money from
your bank's bank account over
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into the merchants bank account.
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A majority of Visa's gross
revenue, about 39% comes from
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data processing fees that are
required to complete this
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practice. Roughly 34% consists
of service revenues, a fee that
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Visa charges, card issuers like
banks for working with Visa
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branded payment methods.
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They charge a set of fees
associated with that kind of
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brand network that creates the
trust in the ecosystem, the
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trust that enables it so that
you can just walk into any
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merchant anywhere in the world
and hand them a piece of
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plastic. But if it says Visa on
it, and the merchant takes Visa,
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then the transaction works. And
just imagine if you had a card
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that didn't have that audit
right, it wouldn't work.
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International transaction
revenues take up about 22% of
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the company's gross revenue.
Beyond the three main sources of
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revenue. Visa has also been
continuously investing in other
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types of payment that could
bring more sources of revenue
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for the company in the near
future.
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This is like B2B payments,
business to business payments.
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This is like disbursements.
That's when a business pays
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think like an Uber driver or
Lyft driver or an insurance
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payout, things like that there's
a lot of person to person
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payments to people to
individuals exchanging money. If
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you're really taking a long term
view of Visa like 5 10 20 years,
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increasingly other forms of
payment are going to be an
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increasing part of their
business.
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Visa's success in the payment
processing industry has also led
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to a series of legal cases and
investigations over the years.
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The Department of Justice has
sued Visa multiple times has
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entered into consent decrees
over everything from you know
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Visa used to have rules that
said any bank that issued their
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cards could not issue any cards
from Discover or American
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Express and that was found to be
an antitrust problem. Visa had
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rules tying together credit
cards and debit cards so that
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merchants if you wanted to
accept a credit card had to
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accept a debit card, and vice
versa. Almost it's hard to think
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of other industries that have
had more antitrust litigation
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than this one.
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In December 2019. Visa and
MasterCard agreed to pay $5.5
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billion to settle against
merchants who had accused them
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of charging excessive fees. The
largest ever class action
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settlement of an antitrust case,
according to the co lead counsel
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of the case, Berger Montague.
Visa also notably abandoned its
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$5.3 billion takeover of Plaid.
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Visa and Plaid are terminating
their $5 billion merger.
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After the Department of Justice
filed an antitrust lawsuit on
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the grounds that it would limit
competition in the payment
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industry. Most recently in
August 2021, a federal judge
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certified a class action lawsuit
accusing Visa and MasterCard for
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charging excessive ATM fees to
consumers and operators. Visa
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declined to comment on the
matter. Meanwhile, retailers
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argue that the swipe fees and
incured by Visa are simply too
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high for smaller businesses to
survive.
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I don't think the average
consumer thinks about swipe fees
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when they're using their credit
or debit card. Business owners
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certainly do because for me,
swipe fees are the second
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highest expense line item on my
P&L right after right after
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labor. And right after our
payroll expense ahead of rent.
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In 2009. swipe fees collected by
Visa and MasterCard sat at $25.6
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billion. A decade later, it more
than doubled to $67.6 billion in
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2019, according to the National
Retail Federation. The overall
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processing fees paid by us
merchants to accept all card
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payments totaled $110 billion in
2020.
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It tends to be somewhere in the
range of 10% of what merchants
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pay on a transaction.
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I know a lot of business owners
and it saddens me because so
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many people have come to accept
it as it is what it is. And like
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No, I mean these these prices
are so ridiculous. The amount we
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pay in swipe fees is so high
that we have to do something
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about it, somebody has to do
something about it.
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This is a central part of the
problem with their dominance is
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that this is the banks acting
collectively, and setting prices
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where they should be competing
on price like all other American
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businesses do.
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Meanwhile, those in support
argue that Visa stands on the
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side of merchants rather than
the banks.
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The Visa's business structure is
very balanced. And if anything
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is actually skewed, believe it
or not toward the merchants,
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they actually get the majority
of their revenue from the banks
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and the ecosystem that's
supporting the merchants. So
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they really are pretty agnostic
in the ecosystem like they are
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there to serve as this central
party that facilitates effective
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digital payments kind of
balancing both sides.
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What certain is that visa has
effectively changed the world of
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commerce forever.
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Visa at some level is a victim
of their own success in the
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sense that they're so ubiquitous
and so secure and so easy to use
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that people begin to take it for
granted. For the consumer, it's
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fantastic just enabler of their
of their life. I mean, I just
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always tell people imagine if
you didn't have it, and you
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literally had to pay for
everything either with cash in
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the check what your life would
be like. On the merchant side,
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though the same thing is true. I
mean, cash is expensive for
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merchants, they have to have
cash drawers, they have to have
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armored trucks, they have to
have managerial level people
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that count the cash and make
sure that there's not theft at
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the end of every shift. There's
always of course debate and
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griping about the kind of cost
of taking card payments. The
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reality is that the alternatives
are also extremely expensive.
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And it's a very quick, easy,
especially with like contactless
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payments nowadays where you can
just tap it and go like it
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speeds up your checkout lines
just facilitates the whole world
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of commerce.
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