Will This Payment Processor Stay on Top?

William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Market leaders generally give investors market beating returns. Over the past three years, payment processing company, Visa (NYSE: V) holds the No. 1 spot in the industry and gave investors a total return of 88% versus a 36% total return for the S&P 500 (see chart below). Viewing this company from the perspective of strengths, weaknesses, opportunities and threats represents the best way to determine whether this company will maintain this position.

V Total Return Price data by YCharts

The company

Simply put, Visa involves itself in transaction processing between the merchant or business, the issuing bank of a credit or debit card, and the cardholder. Visa does not issue credit cards or extend credit. Visa co-brands with banks by placing its name on the bank’s credit card. Visa essentially makes its money through the processing of credit and debit card payments, internet payments, etc.

Strengths

Market leadership – Visa leads the market with $3.8 trillion in payments volume according to the 2012 form 10k. This exceeds the No. 2 player, MasterCard (NYSE: MA) by 55%. The payments volume strata go like this:

Company

Payments Volume (In billions)

Visa

$3,768

MasterCard

$2,430

American Express (NYSE: AXP)

$808

JCB

$160

Discover (NYSE: DFS)

$114

Diners Club

$28

Table comes from Visa 2012 Form 10K

While American Express, JCB, Discover, and Diners Club involve themselves in the payment transaction business their main lines of business remain credit to customers. Visa and MasterCard focus and do one thing well: payment transactions.

Recognizable brand – Visa possesses one the most recognizable brand names in the world. This will help the company in getting new merchants on board in emerging markets and reinforcing relationships in domestic markets.

Weaknesses

Litigation – According to a Bloomberg article, Visa and MasterCard and some of the biggest U.S. Banks agreed to a settlement of around $7 billion in a merchants’ swipe fee lawsuit with Visa footing $4 billion or approximately 57% of the total settlement. MasterCard’s cost amounted to $790 million. Visa’s litigation provision put a dent in its 2012 reported net income.

Visa’s high litigation price tag tells me of tensions existing with the merchants that do business with Visa. This also tarnishes the branding strength mentioned above. 

Opportunities

Emerging markets – The future of business especially for companies looking for new market opportunities always lay beyond U.S. shores. Visa’s revenue growth of 16% from outside the U.S. exceeded domestic growth of 11%.

Trending from cash – Fellow Motley Fool blogger, Anh Hoang pointed out in “Benefiting from the Cashless Transaction Trend” from a Barron’s article that cash accounted for just 2% of point of sale transactions in households in excess of $60,000 per year.

E-commerce and the desire for convenience drive the overall trend for companies like Visa. Customers, businesses and government entities want the streamlining of transactions by ditching the check.

Over the past three years Visa’s revenue and free cash flow grew 40% and 882% respectively (chart below).

V Revenue TTM data by YCharts

Threats

Competition – Visa faces intense competition from companies like No. 2 player MasterCard whose revenue and free cash flow grew 38% and 175% (see chart below) respectively over the past five years and upstarts like eBay’s (NASDAQ: EBAY) PayPal whose year to date fiscal year 2012 transaction revenue increased 25% to $3.7 billion versus the same amount of time in 2011.

MA Revenue TTM data by YCharts

More importantly, PayPal allows an anonymous buyer and seller to safely transact over the internet. No credit card info required. Safety and privacy stand out as major competitive advantages. Visa needs a platform that can enable safer e-commerce in this fashion to combat this threat.

Government regulation – The Dodd-Frank Act threatens Visa’s pricing ability and hastens the loss of merchants not wanting to deal with complexities surrounding the new rules. All of this leads to fewer cards issued and increased fees leading to lower usage of debit and credit cards. This act could jeopardize future growth for the company at least in the United States.

Conclusion

To sum up, Visa’s market leadership and recognizable brands should help it polish off some of the tarnish from the swipe fee lawsuit. The emerging markets and the trend towards a “cashless society” will serve as catalysts for future growth. Intense competition from MasterCard and up and comer PayPal will keep Visa on its toes. Finally, the Feds will breathe down Visa’s neck like they do everyone else. On the whole, Visa is worth watching for they will more than likely stay on top.


stockdissector has no position in any stocks mentioned. The Motley Fool recommends American Express Company, eBay, and Visa. The Motley Fool owns shares of MasterCard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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