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Flash Player 9 or higher is required to view the chart Click here to download Flash Player now See all Bulls Reasons Bulls: Reasons To Buy Proliferation of credit cards 100% agree Proliferation of credit cards People are using credit cards for smaller and smaller purchases, amounts around $5. Many stores don't even require a signature for purchases under $20 or $30. Customers find it convenient and processors love it because they get a fee. Only merchants dislike it because they have to pay... read more View or Edit Reason 5 votes 100% agree Global market is untapped opportunity for credit cards 100% agree Global market is untapped opportunity for credit cards Developing countries still use mostly cash, and have yet to stumble upon the catastrophe, er, convenience that is credit cards. The sad truth is that most people just can't manage cards properly in their own favor, so they end up carrying balances at exorbitant interest rates. That's... read more View or Edit Reason 3 votes 100% agree Bigger, better than MasterCard but not as expensive 57% agree Bigger, better than MasterCard but not as expensive Visa issued an IPO around March 19th under the proposed symbol V being oversubscribed at 44$. The company made nearly $17 billion , possibly increasing this amount to $19 Billion; on more than 400 million shares, which would be the biggest U.S. IPO ever. In comparison, Mastercard (MA)... read more View or Edit Reason 7 votes 57% agree Add your own Bulls Reason See all Bears Reasons Bears: Reasons To Sell More Exposure to Credit Than Most Realize 66% agree More Exposure to Credit Than Most Realize Visa is often touted as a great investment because it does not make/hold loans to its card users. This is deceptive, because Visa is reliant on the issuing banks' continuing willingness to underwrite large lines of consumer credit. If issuing banks (i.e. Citigroup, Bank of America,... read more View or Edit Reason 3 votes 66% agree One expensive lawsuit behind them, but another still to come 0% agree One expensive lawsuit behind them, but another still to come Visa paid more than $2 billion late last year to resolve a suit with American Express Co. (AXP), but a similar case brought by Discover Financial Services LLC (DFS) is set to go to trial in New York on Sept. 9. View or Edit Reason 1 votes 0% agree Add your own Bears Reason Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

Top Contributors Remi Cossart Tom Taulli Jason Kelly Related Articles Mastercard (MA) American Express Company (AXP) Credit Services 2007 Credit Crunch Capital One Financial (COF) Related Blog Posts » See All Related Posts powered by Wikinvest Wire

Visa (NYSE: V) operates the world's largest retail Credit Card Network, in terms of transaction volume and the number of branded credit and debit cards in circulation. Visa is simply a transaction-processing company that collects a fee based on the number and dollar value of the transactions that it processes. This means that Visa does not extend credit to its customers; its member banks such as Capital One Financial (COF) extend the credit. Visa simply provides the information and resources to complete the transaction between the customer, the merchant and their respective banks. The cards are accepted in more than 170 countries, and in 2007, Visa processed more than 78 billion transactions.^[1]

Visa revenue grew by 157% growth from 2004 to 2008. However, Visa was forced to pay American Express Company (AXP) $2.25B in a settlement over anti-trust infringement in 2007.^[2] In October 2008, Visa agreed to settle a similar $6B suit with Discover Financial Services (DFS).^[3] Moreover, American express also gained the right to provide transaction to services to banks that were previously locked into exclusive agreements with Visa and Mastercard.

Visa does not actually lend money to its customers, so it is not directly impacted by the credit crunch as holding and lending banks. Instead, it acts as an intermediary between the customer and merchant and their respective banks. This gives Visa some protection against credit faults, but the company --which depends on the both the number and value of its transactions-- is still vulnerable to falling consumer spending.

[edit] Business Financials

Visa's makes money from card service fees, data processing fees, and international transaction fees. Visa operates a four-party payment system consisting of a card-holder who purchases a good or service from a merchant using one of Visa's cards. The merchant is paid the value of the good, minus the cost of the transaction by the merchant's bank (the acquiring bank). The merchant's bank is then paid back by the card-holder's bank (or the issuing bank), which in turn charges the customer the cost of the good. ^[4]

By increasing the number of cardholders, and the number and value of the transactions, Visa increases its revenue. The use of payment cards has risen drastically in the United States, and this has provided Visa with a strong continued growth in volume of transactions. Its total number of transactions rose from 44.0 billion in 2007 to 50.3 billion in 2008 - a 14% increase.^[5][6]

2008 International Revenue compared with US Revenue ^[7]

For the fiscal year ended September 30, 2007, revenues increased from $3.9B to $5.2B. During this period, company's pro forma net income went from a gain of $453 million to a loss of $861 million. This loss was mainly caused by litigation settlements with American Express Company (AXP), where Visa paid part of the $2.25B settlement. Discover Financial Services (DFS) also filed a similar suit against Visa for $6B. The lawsuit alleged that Visa was involved in uncompetitive pricing. Visa and Discover were negotiating a settlement out of court as of January 2009.^[8]

Visa's Revenue Breakdown by Fees ^[10]

[edit] Business Segments

• Service Fees (41% of Revenue): Service fees come from customers who hold cards with Visa. V relies on its customers to report the payments volume. Service fees make up the larges portion of Visa's revenue and are from fees from customer purchases.^[11]
• Data Processing Fees (28% of Revenue): Visa controls a large data base of information and charges a fee for passing information from a merchants bank to a customers bank. This information transaction includes when the merchant requests approval from the customers bank, transferring the value of the transaction between the banks, fees for using debit services, and other similar data processing.^[12]
• International Transaction Fees (23% of Revenue): International Transaction Fees are fees that are issued when the merchant bank is situated in one country and the customers bank is in another. These fees tend to occur with across the border type transactions, where the customer crosses a border and makes a purchase. These fees are caused by conversion from one currency to another.^[13]
• Other Revenues (8% of Revenue): Other revenues come from extra services customers can use at an extra charge. This includes extended cardholder protection, concierge services, and exclusive services in Visa Europe.^[14]

[edit] Key Trends and Forces

[edit] Economic Weakness lowers consumer spending and the volume of transactions

Consumer spending plummeted in the third quarter of 2008 in the sharpest fall in 25 years, possibly since before World War II. The GDP shrank by .5% as economy deals with the economic turmoil.^[15] The shrinking of sales hurt Visa since it depends on both the number and value of transactions carried out using its network. Service fees fell from $792 million in the second quarter to $749 million in the third quarter. Although the number transactions has still rose by 13% in the third quarter 2008 as opposed to the third quarter 2007, analyst expects transactions to fall in 2009.^[16][17]

[edit] Disappearance of 2 trillion in credit, poses threat to Visa

According to Meredit Whitney, an analyst at Oppenheimer and Co. major banks like, Citigroup, Bank of America and JPMorgan Chase, may cut up to 2 Trillion dollars in credit lines through 2009. ^[18]. A reduction in credit lines of this sort, would have a significant, negative impact on consumer spending, and thus the number and value of the transactions that Visa is able to charge fees on.

[edit] Credit Cards replace paper transactions and are used more frequently on the internet and for small purchases

The sector is moving away from paper-based approaches to electronic payments. According to a Nilson Report, the global market for card purchase transactions grew at a compound annual growth rate (CAGR) of 14% from 2000 to 2006. The report forecasts the market to grow at a CAGR of 11% from 2006 to 2012. In 2007, credit and debit card payments made up 56% of all purchases.^[19] Many small transactions around $5 are also done with credit cards. Many stores don't even require a signature for purchases under $20 or $30. Customers find it convenient and processors love it because they get a fee. Only merchants dislike it because they have to pay a fee on each transaction. There has also been a rapid growth in online shopping. In 2007, there was a 19% increase in online shopping - nearly all using electronic forms of payment.^[20]

[edit] Competition

Visa competes against companies in the general purpose payment card industry. As the largest processor of retail payments the world, Visa Inc. dwarfs its rivals. It accounts for 60% of the debit-card transactions in the U.S. market - a four-to-one advantage over rival MasterCard. As the chart demonstrates, it is also bigger by total transactions and total volume.

Visa and its competitors in total volume and transaction

Mastercard (MA): Mastercard has a strong brand loyalty and name recognition through its "Priceless®” marketing campaign. It has also experienced a rapid growth as it has pushed to switch from paper to a fully electronic system.^[21] Visa also competes against Mastercard's Maestro - a global online debit card service.^[22]

American Express Company: American Express focuses on being the credit and debit cards for small business and merchants. It has also filed legal suits against Visa and Mastercard for violating anti-trust laws. Visa settled the suit for $2.1B.^[23]

Discover Financial Services: Discover is substantially smaller than Visa and competes with it almost exclusively in the US. Visa also competes against Discover's PULSE, a network that increases the compatibility of debit cards and ATMs in the network.^[24]

[edit] Notes

1. ↑ V 10-K 2007 Item 1, "Business Segments" p.4
2. ↑ CNBC News "Visa to Settle Antitrust Suit For Record $2.25 Billion" 7 Nov 2007
3. ↑ New York Times - Business "Discover, Visa And MasterCard Settle Antitrust Suit" 15 Oct 2008
4. ↑ V 10-K 2008 Item 1, "Transaction Processing Services" p.8
5. ↑ V 10-K 2007 Item 1, "Industry Overview" p.9
6. ↑ V 10-K 2008 Item 1, "Industry Overview" p.7
7. ↑ V 10-K 2008 Item 8, "Consolidated Operations Statement" p.101
8. ↑ V 10-K 2008 Note 23, "Legal Matters" p.179
9. ↑ V 10-K 2008 Item 8, "Selected Financial Data" p.49
10. ↑ V 10-K 2008 Item 7, "Operating Revenues" p.60
11. ↑ V 10-K 2008, "Service Fee" p.56
12. ↑ V 10-K 2008, "Data Processing Fees" p.57
13. ↑ V 10-K 2008, "International Transaction Fees" p.57
14. ↑ V 10-K 2008, "Other Revenues" p.57
15. ↑ MSNBC Business "Economy, consumer spending shrank in Q3" 23 Dec 2008
16. ↑ V 2008 3Q 10-Q "Consolidated Statements of Operations" p.3
17. ↑ V 2008 2Q 10-Q "Consolidated Statements of Operations" p.3
18. ↑ Columbus Dispatch, 2 Trillion in Credit may be cut, December 18, 2008
19. ↑ Credit Cards"Paper to plastic: Checks and cash losing to debit and credit" 3 Oct 2007
20. ↑ International Herald Tribune "Luxury goods are forecast to join rise in online shopping" 30 Nov 2007
21. ↑ 2006 MA 10-k, Item 1, pg. 4
22. ↑ Reuters Business "Mastercard Inc" - Full Description
23. ↑ "Visa Agrees to Pay Amex $2.1 Billion to Settle Suit," The New York Times
24. ↑ Google Finance "Discover Financial Services" - Summary