VISA is known for its acceptance, security, convenience, speed and reliability. A trusted tech company (payment processor) that connects consumers, merchants, finance institution and partners business through electronic payment. Visa provides payment services which enables global commerce through the transfer of information and value among entities. In this Visa Stock Analysis Report, we strive to unveil to you the power of Visa and things you must know before investing in this company.
Visa Stock Analysis – Misconceptions
Before we go deeper into Visa, let’s find out what is Visa actually doing. Below are a few misconceptions about Visa.
- Lend money
- Issue late fees
- Issue credit cards directly
- Charge fees to merchants
Visa doesn’t do anything of the above. Instead, VISA plays a vital role in the payment system – from consumer to merchant. We wrote a 3 part series about Disrupting Visa investment moat, check out to have a more holistic understanding of the company.
Visa Stock Analysis – Payment System Role
- A customer pays for a product/service though his VISA credit card
- Money from sale of product moves to the issuing bank and the issuing bank earns the interchange fees given by the acquiring bank
- Money from the sale of product then moves from acquiring bank and finally to the merchant. In exchange, merchant pays the acquiring bank the ‘discount fee’, usually a small percentage of the revenue earned from sale of product to consumer.
For example, when a consumer buys a $100 product from a merchant, the merchant ultimately receives about $98. The other rough 2% is distributed to the acquiring bank and the issuing bank, as well as VISA.
If an international sale is made, VISA also provides the service of currency conversion and earns the spread. Hence, when an international/overseas sale is made, VISA would obtain more profits.
How does VISA play a part in the payment cycle above?
Visa processes data, authorizing, settlement of transaction. It also provides secure and reliable payment handling more than 65000 transaction messages a second. VISA is built on a centralized architecture allowing to analyze authorization processed in real time and provide value-add services such as risk scoring and tokenization (process of replacing sensitive data with unique identification symbols that retain all the essential information about the data without compromising security)
Security is a highly important when it comes to handing high volumes of payment.
Visa Stock Analysis – Revenue Stream
According to Visa’s annual report in 2017, it has 4 main segments of operating revenues:
- Payment service revenues,
- data processing,
- international transaction revenues and
- license fees
Its primary revenue comes from providing payment services. The more people pay using Visa as their payment processor, the more Visa will earn.
Visa Stock Analysis – the Moat
Visa and Master has a very strong branding. A brand that represents trust, reliance and convenience. Especially in the payment processing industry, it is imperative for the company to be reliable and secure given the amount of sensitive data it is handling. Achieving the level of branding that Visa and Master has garnered over the years, is not easy.
These 2 companies have a strong moat with high barrier to entry and provides unique service that cannot be easily replicated.
Revenue from Visa and mastercard are not interest-dependent. They do not earn revenue from credit card users. Whereas competitors like AmEx and Discover Financial, besides being a card processing company, are also card issuers, and they earn revenue from interest income. In 2016, 82% of Amex’s revenue is from non-interest processing sources while Discover Financial only earns 21% of its revenue from non-interest income. This shows the superior business model that Visa and Mastercard have over its competitors.
Visa Stock Analysis – Risk
The payment industry is under high regulation by the government. Put it simply, there are laws that are passed that can affect issuing and acquiring banks as well as the interchange fees which ultimately affect Visa’s transaction volume. (Note: visa does not receive any revenue from interchange fees in a payment transaction. Interchange fees are a factor on which visa competes with other payment providers and therefore an important determinant of the volume of transactions they process. Consequently, changes to these fees can substantially affect their overall payment volume and revenues.)
Security is also a risk faced by Visa. Any leakage of cardholder’s data can damage Visa’s brand, losing customer’s trust.
Visa Stock Analysis – Competitor
You may be wondering, with the rise of Wechat pay /Alipay/ Paynow/ Favepay, do they affect Visa’s business?
Not really. Firstly, due to government regulations, VISA is unable to penetrate certain countries like Russia and China hence payment service providers such as WePay and AliPay would not affect. Secondly, payment service providers such as PayNow and FavePay or GrabPay are in different stages of the whole payment cycle, compared to the one VISA is in.
However, these companies are expanding or may expand their offerings to the physical point of sale. These companies may process payments using in-House account transfer between parties, electronic funds transfer networks like Automated Clearing House (ACH), or global or local networks like Visa. In some of these cases, these entities are both a partner and a competitor to Visa. Hence they may pose a competitive challenge in the long run.
Nevertheless, currently nothings comes close to severely disrupt Visa’s investment moat. It is a great company to invest when it’s undervalued. If you are wondering how to better analyse companies and find out what are the sensible entry price to buy, check out Stock Investing and Options Made Easy Workshop and it’s Skillfuture credit claimable. It is a 2-day workshop that teaches students how to perform fundamental analysis on stocks and ultimately, decided whether to invest in certain stocks. Moreover, the course will also be teaching options strategy, a derivative which combines investing and options to increase your return on investment.
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