Visa – The Plumbing For Payments ($V Stock Analysis) [SGO 22]

Joining me today to geek out on this payment juggernaut is Thomas Thio, our in-house stock and tech geek. We’re going to talk about Visa, because the other one is MasterCard, but Visa is the focus for today; and Visa runs the underlying infrastructure for most digital payments today. They essentially have built a road between the merchants, the banks, the consumers… and yeah, because of that, they have dominated the space, but there’s a lot of serious competition and a lot of money coming in to challenge their dominance. They are also putting up a lot of cash to try to acquire their competitors and stay relevant. But all that being said, can Visa fight the… continue to be there with us within the next decade? Listen in to find out more.

For your reference sake, this episode was recorded on the 7th of August, 2021. Our discussion today is solely for education and entertainment purposes only. It does not serve as any form of advice or recommendations. Thank you for loving what we do and empowering us financially to do more for you. Join our community Telegram group for further discussion.

Thomas: Let’s geek out.

Reggie: So today we are back to record another thing about payments, right? I think the payment ecosystem is extremely underexplored, in a sense of everybody’s only talking about the big bang, the famous stuff, the things in the media cycle; but actually, there are a lot of big boys in the payment space already.

And today we’re going to spend some time to talk about one of the three big boys, right? There are three, right? There’s MasterCard, UnionPay, and today we’re gonna talk about Visa, right? Why, why do we want to talk about Visa, Thomas?

Thomas: I think Visa is a very common brand that we see that is being used today, especially for your debit or credit cards, but the understanding of how it actually works behind the scenes is also important to understand the payments industry as a whole.

And basically they are incumbent, they are the existing players, and we have a lot of new tech players that’s trying to eat into their market share. We also have to understand what Visa is trying to do about it, whether they can actually fight it off, and whether it can still exist.

Reggie: So what does it mean that they are the incumbent, in a sense of, I know they are the OG guys, they are one of the biggest out there, even bigger than MasterCard. So amongst the three, they are the biggest; but in terms of number of payments process and all that, so volume – processing volume. But what does it mean by ‘they are the incumbent’ and other people are trying to attack them, like in what way?

Thomas: Because they are basically facilitating a lot of the credit payments around the world, even for debit payments. They are the infrastructure, that you can call it a network, right? There’s… you have your undersea cables for your internet, you have your Singtel and all these kinds of things which is your Telco; but you also need to have another network for payments, and Visa is basically providing that kind of backbone to facilitate the payments between banks, between different kinds of parties.

Now, it doesn’t mean that these kinds of networks is there to stay, because if there’s probably other tech or other kinds of ways that payments can be made, say, example through online means, this tech infrastructure could no longer be relevant anymore. So what do I mean by that? There’s always these kinds of incumbents in other industries where the main players – your old telcos and all that; and then say you have your new players that comes in, (who) don’t even need any infrastructure – it’s like on the software level, they call it OpenRAN and all that…. recently Rakuten, they’re just doing partnerships with existing telcos to provide 5G without all the clunky infrastructure. So those are the new players.

So in the form for payments, Visa is the incumbent. Who are the newer players? You’ve got PayPal, you’ve got, say, even Square, you’ve got other kinds of startups sprouting left and right and all that. Yeah.

Reggie: Yeah. And that’s the interesting part that a lot of people I think don’t understand about Visa, is that if you want to start a payment company, the bank is not interested to entertain you, the merchants are not interested to entertain you. There is just so much going on to build that trust and credibility, right? So most of the payment companies are actually using Visa and Master(Card) and UnionPay as their backbone.

So they got all their… whatever brand that they put on top, Square Pay, Shopify Pay, Apple Pay, Google Pay, whatever pay, as long as the payment actually goes through the banking system, they are actually using Visa, Master(Card) or Union Pay as their backbone infrastructure. But exactly like what you say, these days, people are routing out of the banking infrastructure already. Which is why Alibaba is… Alipay or what do they… or they call it Ant Financial, Ant Financial is getting regulated by the Chinese government because they’re essentially routing out of the banking system, right?

So they are building their own ecosystem and they’re just lending amongst themselves, transacting payments. So your…. whether is it transfer wise: Alipay, WeChat Pay, Venmo, Cash App, which is also from Square; essentially all these guys are routing out of the banking system. They are building their own small little credit ecosystem and, they’re not using the banking system anymore.

So in that sense, exactly what you said, Visa is going through this process of… people are not attacking their business, but they’re just building a whole different way to do payments. And in that sense it’s challenging for them.

Thomas: And so you hear an important point. Basically any network has to have some kind of regulation involved by the government, right? So with the newer ways of doing these payments, they either have to comply or they will face fines, or even in the case of China shutting down and things like that. So Visa does have certain kinds of foothold because of this – it’s an existing infrastructure, don’t change the whole thing. And there’s a dependency on this such that it can do, say, checks for fraud, especially, and for governments, if they need to lock down certain kinds of accounts, then Visa will have to comply also. So, it’s a lot wider – payment systems, the payments infrastructure, the whole ecosystem; there’s a lot of players involved and it’s important in today’s globalised world.

Reggie: But of course I think Visa is not hanging around. It’s not like chilling and doing nothing…

Thomas: For sure.

Reggie: They’re making all these cash it is a very high margin business in a sense of… it’s the same with tech, it’s the same with brands. It’s the same as a lot of these kind of asset light businesses, that content also is a very asset-lite business, once you put it out there, your marginal cost for production is minimal, or in fact limited, because you just keep selling, you do the same thing, keeps selling upside. So same for Visa as a business, they have all these cash, and what are they doing to compete with all these guys?

Thomas: We will talk a lot about that. I think a bit later. But I like to just have a… or give a broader understanding of the ecosystem.

So it’s basically about the process between what happens when you try to buy something. So we can go right to it – it’s that example flow. So let’s say you are wanting to buy something from a shopping mall. Assuming that you have a debit or credit card it doesn’t matter, but you just want to buy something,

Reggie: I very long never go shopping mall buy anything.

Thomas: I hope this brings you memories… yeah through COVID, please support the physical stores.

Okay. So imagine it’s a physical store. Now you have a Visa debit card or credit card. The credit card or debit card, it’s not issued by Visa. This is issued by your bank. Visa is just an intermediary. So this is an important term. It’s an intermediary between all the different payment and the receivers – someone is paying, someone is receiving. Usually in consumer transactions, this will be between two banks – Visa does not hold the money, Visa facilitates how the money is being transferred. So this is an important point: Visa is the intermediary, and then you have your banks, you can call them the acquirers, can call them issuers. These are all the industry terms, but just think of it as your bank transfers. But because it’s credit card, it’s not just a simple bank transfer anymore, it’s got to go through Visa or MasterCard or any other card that you use. So once you actually want to purchase something, right? Your information as the customer is going to be sent over some network, right?

It’s not the internet, this is Visa’s own network to the, acquiring bank. So let’s say it’s like Citibank or OCBC or whichever; it will request permission to transact with this card – your debit or credit card that is being issued by your bank. And once your bank authorizes, this transaction is made.

So some response is then issued to the store to say “Okay, go ahead. The person has enough. The person passes all the possible credit checks and all that, and is not listed for fraud.” Then beep, you hear the machine do that. So all these behind the scenes is actually Visa that is doing it, but of course, it’s got to have all these interconnected links, right? The responses and all that between the two banks. So again, Visa does not hold the money, but it benefits the few banks in several ways. So that’s how they actually make the money, the services to the banks, the data processing side of things, and making these whole payments through credit or debit cards seamless. That’s what Visa actually does.

Reggie: Yeah. And I think for a lot of people that don’t recognize it, this is not… this thing did not happen overnight. It’s an overtime process that they become so efficient and so dominant that other people just pull out of the game and they become one of the only few.

So they have a duopoly or like a oligopoly amongst the few… a few of them, which are very efficient and very big in the space already. And they do process a lot of transactions, thousands of transactions per second. So I think that is something that people should be aware of, but it’s also the base case as to why cryptocurrency is becoming a thing, with the whole blockchain technology or even your P2P (Peer-to-Peer) transfer, which are all the things that are competing with this transaction volume. But fundamentally Visa is the grandfather of this thing, essentially, besides MasterCard, and this is the old way of how transactions are being done.

Thomas: Do you remember seven or eight years ago? Visa, MasterCard. You’re pushing very hard on actually this ‘step to pay’ concept, by using their credit cards. It was in the cinemas, it was on the billboards. It was on the bus stop the advertisement… payWave, yeah. And then…

Reggie: It’s their technology.

Thomas: It slowly got… it’s their tech, yes. And the evolution of that you can see now, is that now you can do the tap to pay, but through your phone instead. But underlying all that, whoever started it, it’s the Visa, it’s the MasterCard, it’s… your UnionPay.

Reggie: A lot of the things is… it’s not just the cards, it’s the terminals, the whole connectivity and all these little things that they were trying to do. So it is a lot more than just a payment processor, a lot of the new technology that you see through payments, they were the ones that created, but… but the competition is real. So the competition with the tech guys and all your cryptocurrency guys, they are challenging this space. So any other things that we need to note when understanding the payment processes or at least specifically on Visa’s business processes?

Thomas: Okay. I think on the regulation side of things and some of the service level agreements that you have with the banks is basically to do with fraud, or reversal of the transactions. I think this is the two key things that they do. They do a lot of other stuff also. But mainly to do with payments is regarding this. So let’s say, the buyer, the customer, you have a dispute in the transaction, right? If you buy it to a bank transfer, that’s it, your money is already transferred to the merchant, you are at the mercy of the merchant.

But if you do it through a credit card, this money is a sort of controlled because it’s facilitated by Visa. You can go through the bank to ask for help, but what the bank does is that it will then ask Visa for help, to block or reverse the transaction for you. If there’s fraud, then it’s going to be blocked also through the Visa network. So they have some critical services which they provide to the bank, which is how they actually make their money also. So there’s a double thing: they provide a service to facilitate payments for you, the customer, and between the merchant; but also for the bank, on the behind the scenes things, which is like for fraud prevention/detection, authorization, clearing settlement, all the back end stuff that you don’t usually think about. Yeah. But these are essential as a bank and for the government as well.

Reggie: Can you help me expand a little bit? I know just now you talk a little bit about credit. So credit and debit is fundamentally very different and I’m sure people listening, they understand: debit card means you spend the money, it’s already your money, you spend you just transact. So, very simple in that sense, but what is the difference then from a processes standpoint, when processing credit on top of… that is different from debit?

Thomas: Because credit is actually money that you borrow. Close-in commerce from the bank. It has interest, it has late fees and all that kind of stuff. But the bank knows that it can make a certain amount because there’s always this percentage of people who actually pay late…

Reggie: Because they charge you a very high interest, if you late payment.

Thomas: Yeah. Yeah. And you only need that… you need that sliver of people to pay late, and then you make the interest on top of that, it’s actually a lot.

Reggie: A lot, (inaudible) percent…

Thomas: Yeah. The bank actually makes a lot of money for this. So they are the ones that’s distributing different kinds of cards with different offerings, say, like this one, this card is for cashback one, this one is for rebates, like groceries only, some is for frequent flyer miles…

Reggie: …they disturbing us to sponsor content and all that.

Yeah, they have high margin as a business. So essentially they will do a lot of marketing campaigns, I mean they give free luggage and everything so…

Thomas: Right. And this marketing is actually done by the banks. Visa has got nothing to do with this – only Visa just say, “Okay, I’m going to support you whichever, just provide me more transactions, it’s fine, you can do whichever.” It’s the bank that is selling these products to us, the consumers; or say, like to the businesses and all that, so this money that you borrow is actually from the bank, they have their own way to go and calculate their P and L (Profit/Loss) and all that kind of stuff.

But that’s how they make (money), and they will make more from the credit cards rather than the debit cards, cause debit card basically you have enough… it’s just what you have in your account. You’re not borrowing anything. So for credit, Visa will have to spend more effort in doing this checks and balances behind the scenes, just because there’s this borrowing amount, but also when you’re borrowing from other kinds of banks and all that, there’s additional processes, like the reversal of the transaction is: if you are the buyer, you probably have a higher chance of reversing the transaction through a credit card as compared to a debit card, because a debit card is just like a bank transfer – it’s much less involved, but with credit, there’s a lot more in-between checks, you can stop in-between. The more processes there are, and the more stop points that there are within the process, the easier it is to actually stop a transaction from going through.

Reggie: Yes, I mean, we’ve all stayed in a hotel before somehow, hotel ask us to put deposit, and then they will say “Oh, this will be indicated in your statements, but when you leave, it will come back to you because it’s a deposit, blah blah…” So if you think about it, Visa is essentially supporting this whole process, from insurance, to late fees, rebates, Forex differences and what have you. So the more complicated the transaction, the more money they make, essentially, which is why they were trying to push for global payments and a lot of stuff also. For many, many years, a lot of these payment companies, their opening statement is always ‘Global Payments’. Everyone! Visa…. it’s not unique in itself. So yeah, that’s something to, I think for our listeners to be vividly aware of what Visa is really trying to do as a company, it’s just processing payments; and the more complicated the process, the more they can charge. So international payments are even more complicated, so they charge higher and that’s why they want to push for international payments. Essentially that’s the idea, right?

Thomas: Right. Oh, sometimes…. so just a side note, sometimes the charges that, say, either the hotel or let’s say, a refund that’s being processed; you notice that the transaction is done a little bit weird. So what happens is that some hotels, they charge you for the amount, then they refund you the full amount. Some actually do it as a whole, so mentally, it’s actually like money coming out of your account but money is being put back. Net (outcome) is still okay, but you are totally not okay with that, because your credit card actually got charged. It’s different from a whole, let’s say $500 is pending outwards if something happens. Some is just, they just deduct automatically then return to you in two or three days. This is very different. So when you investigate further, this is facilitated by Visa, but how it was structured, you have to go after the merchant or that hotel.

Reggie: Okay. So for all of you credit card hackers, you know, this is some inside thoughts, okay. So knowing that Visa does all these different things, can we have a segmentation of how do we rate their business?

Thomas: Sure. Mainly it’s the data processing side of things. This constitutes like 40% of their revenue. Imagine this as your toll gate, the fees which Visa collects is based off the number of transactions made, basically volume – the more transactions that is being authorized, that’s cleared, that’s settled, Visa gets paid for that; and probably it’s the banks that’s paying them, or in some segments it’s also the businesses directly (paying). So it’s between the merchant, between the banks and so on and so forth, depending on whichever use case. So that’s data processing.

They have another segment called services. Services is basically directly impacting to earnings also: the more the product costs, usually Visa earns a little bit more also. So all these is to do with data processing in some sense, but they separate it out, because this is specifically for more, I’ll say, a bit more unique use cases.

Reggie: Like what?

Thomas: So let’s say the higher value the amount, they of course would have to conduct more checks. Let’s say, now you go and buy a car online. That’s going to be very different from say, buying…

Reggie: Donuts.

Thomas: Yeah. That kind of thing.

Reggie: I don’t know why I think of donuts anyway but yes. Yeah, it’s Saturday guys, we’re recording Saturday morning. Really want to go and have some donuts.

Thomas: And then if you want to have more custom checks, let’s say the refund kind of thing, the fees for those kind of refund mechanisms will be more expensive, than say, “Oh, you transact then I just give you back lah, I’m using your existing mechanism already what.” But if you want something that is more customer oriented, then pay more lor. And usually with that, the ticket items are higher.

Reggie: Okay, fair, fair.

Thomas: Then there is the international transaction segment, so basically this has to do with cross-border payments. So there are some fees there between the banks, there’s some currency conversions, which Visa also can collect, and yeah, but the bulk of it they are making is through data processing as well as for services.

Reggie: Essentially, I think the idea holds, right, for most of you… for people… for you guys listening, they are doing processing as a payment processor. So the basic level is the processing, which is the 40% of the business. And then as the process becomes more and more complicated, international big ticket, what have you, then everything gets add(ed) on. So in that sense, you can look at Visa’s business as fundamentally just processing, and everything is just on top; and you can see from their breakdown. I’m trying to understand all these newer kind of transaction styles that they are facilitating and how are they really charging as we go along.

Thomas: Oh many, many, yeah. They’re really just aggregating all the different use cases into data processing and services. But if you want to break down there, there are several, so example there’s… they split between direct, which is like real time transaction, versus commercial, so this is the difference.

Let’s say it is enabling Peer-to-Peer payments. Peer-to-Peer payments, you want it to be as real time as possible. Where got two or three days, then later appear in your friends account one? Cannot be what. So that’s one thing.

Another is say, cross border remittance. So basically, let’s say you’re working in Singapore and then you send back money to your family overseas and things like that, Visa can facilitate that as well. Insurance – let’s say you want to claim online and all that, that is also more big ticket items. So that’s where these kinds of things can come in. Other services that’s underneath is together with data processing as well as services, so it can get quite complex.

Then there is gig economy and contractor payments – now these things are… usually gig economy is like: you don’t send the whole lump sum one shot, right? Let’s say you engage a freelancer, you break it up into different payments; but for the freelancer also, you want to make sure that they have some guarante, so you operate in some kind of escrow – so Visa holds the full amount, but incrementally as the project progresses, you unlock some of the funds and then that gets processed. So that being said, there are some fees for this, but other freelance sites, they opt to do their own altogether.

So if you go like freelancer.com and all that, do you have the same escrow system but they build it on themselves, and the only transact through PayPal. So this is the whole online route, which is gaining, I’ll say, more awareness, to try and bypass Visa’s network. So that’s the reason why some of the business models exist today because of these things.

Then there’s payroll, marketplaces like e-commerce, small business settlement and loan disbursement and all that. So really, the whole idea of payments right, there’s so many other kinds of use cases, but this is just within data processing, you can just label it as transaction – if that helps you to understand better.

Then finally for services, services is really by… you can look at it to help to process the payments. These can differ by the specific country which they are in because of regulatory requirements, it’s also by the specific use case. So why do I mean by that? Let’s say you want to conduct client portfolio checks – wah, these kinds of things is really different – your jurisdiction, your size, your brokerage and all that, which different banks or… yeah, you need to go and check on all that.

Now the next one is like approving… improving the credit approvals turnaround time. Huh? How do you do that? It’s very, very commercial. This is also quite customized. You have different plans for this. You also want to enable the recurring payments. So example, you have software as a service companies, right? Online, there’s the option of PayPal, there’s also the option of credit cards and all that, but there’s different ways to bill, let’s say a lump sum, or you bill every month, or you have this package that’s like: Oh you buy three, get one free that kind of thing.

Reggie: Package.

Thomas: And lastly is performance risk compliance monitoring. Now, different use cases will mean that: basically, if you’re a finance person, you want to have some kind of reports over, say, fraudulent transactions and all that – if you ask Visa to do all these for each customer, it’s going to be expensive. So they will have to mark up in some way. They cannot just treat every transaction as the same, it has to go by the use case.

Reggie: And exactly about package; so I think Visa is very similar to Microsoft that we previously discussed. Microsoft also got all these different things that they’re doing, and then they serve the enterprise client as a package. Same for Visa: the bigger the business as… if you run let’s say a international law firm, and you have all these different ways of payment and all these different strategy and all these different styles, essentially Visa will be your one stop provider that you can go to and use it. So I think, essentially what Visa is trying to do is to be able to process everything. So if it can process everything that you one stop look for them, you will get a special rate and all that, right?

So for a lot of people, you may only recognize Visa, MasterCard as the stupid logo on your card, or on the… in front of the merchant’s shop, but actually a lot of things, whether is it big payment companies, branded payment companies, or your enterprise companies, they charge you different ways. They are… you don’t even know what processes they’re using. It’s very complicated. Even some of PayPal, Apple Pay, Google Pay transactions will use the Visa, MasterCard, UnionPay ecosystem, depending on: where are they doing, what are they doing, and all that stuff.

So it’s… essentially right, if you think about it, everybody – whoever wins the payment game, Visa and MasterCard are underneath all of them. So I do thinkthere is still a very strong proposition in terms of Visa. Okay, I’m not hiding my exposure to Visa. I do own Visa (stock), alright, so I think that’s something people to understand.

Thomas: And you brought up a good point. You brought up a good point actually, because whatever Visa does behind the scenes, they don’t want, let’s say the payers to bother about it. This is the bank’s, this is the merchant’s problem to go and settle. But as a brand – you use Visa, you use the credit cards, I just want you to make the payments as seamless as possible; because their network will benefit because of it: “Don’t go for MasterCard, don’t go for PayPal, go by Visa – because it’s the most seamless thing.” So as much as possible their strategy is to make sure that the payments are seamless.

So the tap to pay thing last time with a credit card, and now to the phone, because basically it’s very seamless and even next time on the web, it’s click to pay already – you don’t need to enter your credit card details – it says somewhere on the online, you click, it just works. A bit scary lah. It’s like the Amazon ‘just click to buy’, same kind of concept.

Reggie: Yes. And that’s the whole… And I believe this is one of the reasons why there are a lot of new payment companies that are coming out, they don’t actually build their own processing backend. They’re using some of these big boys like Visa. So beyond all of that, I think they are… I think something to be interesting of is all the interesting like value added services and all the new ways of payments and strategies that they’re building upon. Do we want to walk through some of these things?

Thomas: Sure. So I think going forward, Visa will want to be the dominant infrastructure, wherever the payments ecosystem goes to. So I don’t care which…

Reggie: Correction: they are already quite a dominant infrastructure…

Thomas: I say that because as an incumbent, they have threats from competitors, new entrance and all that? But because, being more I would say practical, they could have their market share taken away through like purely online means, because if let’s say everyone stops spending retail and then everything goes online, there’s less need for those kinds of retail payments network to be done; so that’s where they are strong at. But for online, you see it, say, like PayPal, Stripe, taking up more market share. So whichever the way that it goes, hopefully people will still use credit cards, that is the assumption, and through their infrastructure. Now, at least they can control the second part right, through the infrastructure.

So they want to form as much partnerships as possible, whichever startup, whichever FinTech, whichever bank, use Visa infrastructure, never mind that you don’t use our credit card – use our infrastructure. So you have a lot of partnerships, for example India – Google Pay and PayTM. In South Korea it’s this app called Toss; China is AliPay and WechatPay; in Japan there’s Paidy Cash, LinePay; Southeast Asia and Taiwan there’s Gojek and Line. These are just the bigger names, but you have a lot of other startups, a lot of other FinTech, which they don’t have certain licensing to process payments, they will tag on Visa instead. So behind the scenes, it’s actually this debit/credit card ecosystem behind the scenes. But on the front, it doesn’t matter. It’s just this new branding that’s slapped on top of a startup and then behind the scenes, it’s like “Powered by Visa”.

Reggie: But I also want to put it out there that they are not the only ones doing this thing. PayPal a few years ago also take a pivot – in the past, PayPal only process their own payments. They don’t, they don’t do all these other stuff, but they have also opened up their ecosystem to take a lower margin and co-brand and do all these partnerships with all these different… I think Uber pay uses PayPal’s ecosystem, quite a few big companies all use PayPal’s ecosystem – okay, to be exact, I think a lot of the big companies, they use multiple payment processing systems.

So PayPal also opened up their ecosystem as a challenge to this, but to be fair to all of them, they have all come out to be unanimous and say that their biggest competition is cash and not each other. But you know, I don’t know… *laughs*

Thomas: I think, and then they have to do more if the total addressable market… that sure, the market size is huge – if you talk about the cash, it just grows every year; you count inflation, you count the money printing and all that. But realistically speaking, the newer banks, digital banks, FinTech companies, they’ll say also: “Oh, we are in the war on cash also”, total addressable market is this size, but everyone is fighting for it. It should be equally divided, if not, you look by the market share so realistically speaking, just look at competition, which we can talk about later on, there’s a whole landscape which Visa has to fight against, because it’s so broad, right? If you say just the war on cash, yes, agreeable; but people are having different solutions to tackle this war on cash.

Some is very localized solution. Some is through partnership with XYZ plus Visa, plus MasterCard, which everything else. So no matter what, Visa was also going to be benefiting, but there comes, say, a player like Square, for example, they have their own payments hardware. They also have their own infrastructure behind the scenes; and now also want to offer the crypto plus their own infra plus PayPal plus Stripe, but living out Visa and MasterCard over time. So how? It really depends then on the consumer’s – which is their preferred mode of payment – if it’s going to be everything and anything, it doesn’t really matter. If it’s going to be purely crypto, it’s going to be a problem. If it’s going to be purely cash, then okay, everyone still benefits, albeit going to still be a credit card solely. So this is really a battle, it’s a whole landscape and the landscape is always changing because of these new technologies.

Reggie: Yeah. Good point. Okay, please continue.

Thomas: Sure. The next thing that they want to do other than partnerships is diversifying these revenue streams. So we talk about all these landscapes and all that. So where are all these technologies rising, where are all these competitors going, Visa wants to be there also to at least meet them where they are, and then just defend. So crypto, they have digital banks, their own versions, many different plethora of services. So in order to bridge the gap between crypto and the Fiat currency, let’s say like even for cash or credit, or just riding on a wave, it doesn’t matter.

At least Visa can accept payments in USD coin. USD coins are a type ofcrypto, it’s not your USD dollar, it’s an actual coin. It’s a type of stablecoin; and being able to accept that kind of payments at least opens up the avenue where, okay, people have USD coin or they’re in crypto, they can convert and then process it through Visa’s infrastructure. So that’s why they’re trying to do for on the side of crypto.

If let’s say for riding on trends, where people prefer to pay, it’s no longer on web, on your e-commerce; it’s going to be on mobile. It’s no longer on your mobile app. It might even be through your messaging applications, your WhatsApp, for example. So your peer to peer payments can be done through WhatsApp in certain countries – if I’m not wrong it’s India, and this is powered by Visa Direct, Visa Cloud Token. So that’s for, in the platform itself and a very specific application.

Then you have PayPal. Now PayPal is everywhere where Visa wants to be also. And just recently, PayPal is trying to do for retail transactions. But PayPal is more dominant on the web side of things. So they have instant transfers for merchant settlement and peer to peer via Visa Direct as well, but mostly for Australia. So the consumer trends is very different by country and it’s very different by the technology which the consumers like in the country.

So being that kind of infrastructure that is able to serve a lot has its pros and cons; like you can be wherever the new entrance are, but if the consumer trends shift, you have to be fast enough to adapt to it – if let’s say a dominant player, say like PayPal is on the web already, it’s too strong on the web, what can you do about it? Your way to fight against it is that: accept more credit cards online. It’s that kind of play. Brokerages, so in Canada, it’s called Questrade, they have the instant deposit of funding trade accounts in seconds – so this is actually facilitated by Visa as well.

I think you might see the similar kinds of user experience that Moomoo is actually providing – I think in Singapore, you can actually fund it in seconds also. So you just link up your bank account, and then that’s done – not sure whether it’s powered by Visa.

But consumer experience wise, you probably want to fund your brokerage account in seconds rather than in days. So that’s the kind of trend that’s coming on. So that’s for diversifying their streams in regards to all these landscape changes. They also want to grow by acquisition. They can’t do everything internally. So wherever there is…

Reggie: Can’t do as fast internally, so they are buying a lot because the space is moving quite fast.

Thomas: Yeah, and basically just provide an API (Application Programming Interface) end point. API basically is some way to talk with the existing infrastructure to these startups, acquire them, and then they’re good to go. There’s Think, which is personalized financial data, you can see all your financial data across wherever you have…. and then other acquisitions, they will have is your FX solutions for cross-border payments; specific countries, they have like credit checks or even…

Reggie: There’s a lot of smaller payment guys in different countries because – same idea: if you run a company and there’s already a competition that’s growing so fast, same idea with Facebook – just buy up the other social network – so you just buy up the other processing network. So I think Visa is doing a lot of that, and they are pretty aggressive in this space. So that is I think good news for Visa investor like myself. So I think that’s that.

Yeah. Okay. I think we’ve definitely established their model, what are they doing, value added services, their competition and all that. So when looking at this company, what are some core metrics that we need to understand, to know whether they are doing well or not?

Thomas: I think payments for sure – the volume, right? So this actually increased 34% year-on-year, so pretty solid. You say like this war on cash thing then, okay, Visa is still getting a lot of that. You look at cross border volume also. So including intra Europe, it’s 53%, total worldwide is 47%. So there’s a lot of transactions that’s being facilitated by Visa cross border. Now, when you have cross border, it means that it’s more globalized. You say like the whole state of what is globalization and payments being transacted across the world, is high, and it’s also increasing, so when this happens, there’s a lot of benefit to Visa’s ecosystem as compared to using other commercial means, let’s say cash, but it also means that you should track this closely with say competitors like PayPal or Aquare because they can facilitate the same thing as well, which one is growing faster and which one is taking more dominant share. Then we can have a idea of where the trend is heading at least.

The number of process transactions also is like 39% growth, so this is a number that is really down to the earnings and probably to their bottom line also. This keeps increasing every year, which is good. So other than payments, you go to the… let’s say the new areas of payments like crypto, so how many… Where are they in the whole crypto startup ecosystem?

So right now they are supporting 50 crypto wallet and platforms compared to 35 last year. And it’s definitely more than MasterCard. So if you thought about “oh, Visa and MasterCard”, Visa’s winning lah, but again, you cannot just look at it like incumbents, we must look at Visa versus PayPal versus Square and all that kind of stuff, then we have an idea.

But overall, as more and more platforms, as more and more partnerships are coming on board, if the payment volumes are increasing, that is coming from these platforms, then it’s a good sign. If it’s coming solely from their existing network, that means retail transactions or on the web, then it concerning. That means actually whatever plans they have to expand or to acquire wasn’t actually working out. But so far it seems okay, you also want to see, say the number of countries and territories which it’s at, so far it’s 200 plus with the number of credit cards that they have or debit cards worldwide, it’s 3.5 billion, right? Total number of transactions, the number of currencies they support – a lot of metrics, really a lot of metrics, but basically the ones that we talked about earlier, those are the key ones to look at.

Reggie: The base idea. As long as you see more payments, more integration… okay, I think more payment volume is the base idea when looking at payment companies, but because of the shakeup in the landscape, you want to see more integration in the more digital, the more cryptocurrency space.

And also personally, I’m not a big fan of cryptocurrencies, like in a sense of I don’t know how to evaluate it yet. I’m learning and I’m trying to see it, but so far nobody gave me very good answers. I’ll do a podcast about it. But that is, if you look at it as a gold rush, these guys are the spades, right? So you know, all your payment processes, all your exchanges, they are the spades. And it’s no harm owning some spades, whether or not the cryptocurrency eventually fade out, it’s still a very… it still keeps Visa as a dominant player or keeps some of these spades as the dominant player in this space.

So it is just a risk-reward kind of strategy that Visa is spending a lot in this space. Whether or not ultimately this space is here to stay, is still a question mark. I’m leaning towards yes, but whether or not owning the cryptocurrency will make you very wealthy. That one I am not sure. But at least I know owning Visa will make you decent, in my view lah.

Thomas: Yeah. So the… basically, if you want to go into a deep dive in this, you got to go by country, and then you open a rabbit hole – so the country, how many cross border payments to another country, and by which medium, medium meaning like cash, credit or by crypto, or through PayPal, PayPal through credit card which is Visa? Yeah. You opened a can of worms. So I leave it to… I leave it to how stringent you want to do your due diligence?

Reggie: Yes. It is a rabbit hole. Very deep, all the way to, hardware to software to network. It is very complicated. I did that before, so I kinda know what’s going on.

So yes, let’s walk through the financials. I think at the core, we all can agree that it is a… is fundamentally a dominant player in that space, but what are the financials looking like in recent quarters?

Thomas: Okay. We’ve got numbers from Q3 2021, cause they just reported: revenue grew by 27% year on year, it’s $66.1 billion. A lot of the key drivers increased significantly because of the COVID impact. So actually this 27% year on year, is because 2020 wasn’t such a good year for Visa. Spending actually decline worldwide. So this growth that you see is because there is some recovery, right? So the comparisons year on year, if you want to compare to other years, I think this one is the largest so far.

But it’s still healthy, when we look at the revenue by the segments and see the costs further down the line. Revenue by segment: data processing which is the biggest, increased by 32%, it’s to do with the clearing settlement authorization, the value-added, the network access and all that kind of stuff.

Services increased by 17%. So services (is) the second largest one, which constitutes about 35% of the revenue so far; which data processing is 40% – so almost equal, but services didn’t grow as fast.

International transactions: cross-border transaction processing currency conversion didn’t increase that much, but it constitutes 19% of their revenue.

And the others is quite negligible, which is like 5% of the revenue – it’s to do with license fees, value-added services again, account holder services. So the main thing that is actually growing is the number of transactions, the number of transactions which leads to the data processing is 32%, which is why the payments volume is important to look at.

Then you look at costs: costs increased by 11%, so it’s $2 billion now as compared to $1.8 billion; and then for operating margins it’s at 52.4% as compared to 64%. So margins actually dipped slightly. The cashflow is still healthy though, it’s increased by 29% – so it’s at $10 billion as compared to $7.7 billion.

Their debt levels are around the…

Reggie: (inaudible)

Thomas: Yeah, super… the debt increased, sorry, the debt decreased slightly, but not by much. So it’s like $20.1 billion compared to $21 billion. They are not in a rush to actually pay this off. So basically…

Reggie: I mean their cashflow is so high, they could pay it down easily.

Thomas: Yeah. They’re not really afraid of inflation. We can go about it into later, cause inflation is actually a good thing for Visa as the number of transactions increase, that’s a good thing; but also if the prices of goods increase, it’s also a good for Visa.

Reggie: Because they charge a percentage on the volume. So I think that’s something I think people need to recognize – it’s not a flat fee structure.

Thomas: Right.

Reggie: Okay, but why the margins drop though, in your view?

Thomas: So they were spending a lot on acquisitions, right? They were spending a lot on integrating all these kinds of, I would say, services that they acquired into their core platform.

Reggie: The online stuff lah.

Thomas: Yeah. But payments drop, payments volume drop as a whole. So the expenses are, if you assume it’s fixed or it’s growing a little bit more because they are acquiring a lot of other players. That’s why. But it’s a breakdown, the expenses also… wait ah, let me just pull up these expenses – yeah, a lot of it went into marketing. So with any new service that is being launched, Visa also wants to be there. Of course you have more platforms that you need to go and distribute these to, a lot of communications and all that. The network and processing increased very slightly, so it’s not to do with that…

Reggie: Essentially, the cost of goods couldn’t really go up, but it’s just because of the whole shake-up in the COVID situation that they have to acquire new/build new services in a short period of time and then go and market these new services to all these merchants and all – essentially that’s the idea, right?

Thomas: Yes. I’ll say it’s just really temporary.

Reggie: Okay. That’s good to know. Let’s talk a little bit about the management. This is a huge company and they’re very… they’ve been around for a long time. You know, it’s cross multiple generation already, don’t expect founder-led, just saying.

Thomas: The CEO has been there… the CEO has been in there for some time, his name is Alfred Kelly. Previously he was in American Express from 1987 to 2010. Then he was also the president from 2007 to 2010. The CEO has a background in computer information science and an MBA, and he also previously held positions in information systems and financial planning at PepsiCo. So very, very experienced person, also with a tech background that’s leading Visa. Obviously he comes from a previous credit card company, so that helps, it’s not random one lah.

Reggie: And under him, they made a lot of acquisitions under him. They were very aggressive, in the whole tech space and buying out all these guys. And I think partly has to do with his background in com(puter) science and all.

Thomas: Yeah. Then we have the Chief Marketing Officer, Lynne Biggar, since 2016; previously at the Time Inc, and also 20 years at American Express. Well, there’s some alumni there… and then actually there’s another CEO, but for the Europe region. So previously I mentioned every country or even region operates very differently.

Europe as a whole is a whole different ball game. So she, Charlotte Hogg, she joined in 2017, but she’s got 25 years of experience in the financial services bank operations management consulting. Okay, so a bit to unpack: she was previously the COO (Chief Operating Officer) for Bank of England, 2013-2017.

Reggie: That’s the central bank, right?

Thomas: Yes. And then retail distribution for Santander Bank in the UK; managing director at Experian at UK and Ireland operations; previously the CEO of the Goldfish Bank at Discover Financial Services…

Reggie: Haha, Goldfish Bank! Sorry….

Thomas: I knew you’ll laugh at that!

Reggie: I’ve got to name… and name my bank. If I have a bank in the future, that’s something cute also, yes, ‘Goldfish bank’.

Thomas: (Hogg was also) Previously managing director for strategy and planning at Morgan Stanley and management consultant at Mackenzie. Educational wise also quite zai (superb) lah. BA in Econs and History from Oxford, (Honorary) Doctor of Laws from Warwick.

Reggie: And I think a lot of people don’t understand why Europe is so complicated. Europe has firstly, a very complicated tax structure and they have multiple entities, multiple central banks in a central… in a region. So there’s the whole ECB (European Central Bank), and then below there are many central banks, they all have their own tax regime, but they kinda come together. And because a lot of them were very big powerhouse during the colonial times, so they do have a lot of legacy businesses all around the world – whether is it from the UK, France, Spain, Dutch, what have you. So in a sense, they do have a very complicated payment ecosystem, and people don’t appreciate it. It’s not as easy as in the US there’s a centralized, federal system, everybody kind of complies; or in China, everybody has a standardized system; or even in India, there’s some sort of standardization across the big space.

But Europe in itself is like: we kind of centralize, but we also have our own differences and all that. So I think that’s an interesting thing to know.

Thomas: Yeah. And Europe, the penetration for certain countries there are very high for Visa and for MasterCard, but in some countries, actually they either have their own solution – so they don’t use Visa or MasterCard at all, or basically they’re just not dominant. So there’s this interesting structure about Europe – it’s a region, yes. But you cannot assume that all European countries are the same. No, don’t do that.

So example, in Europe, it’s very high in Ireland, UK and Spain – it’s about 70 to 89% dominated by Visa, for Finland, Poland and Turkey it’s around the same with MasterCard, around 30 to 39%. But once you hit say Russia, Italy, Germany, Denmark, Norway, Belgium, it’s sub-40%, even down to 6%. So they just roll out their own solutions there. It’s provided by their own like Visa or MasterCard equivalent, but very localized.

And in those areas, MasterCard is slightly stronger, but it’s never as strong as the domestic solutions. So those are areas which is like, “Okay, interesting: credit cards not really penetrated, but how about crypto? How about online payments?” Ah, so it’s a very different game there. Your battleground there is totally different. So my guess is that’s why…

Reggie: Estonia, Luxembourg, all those guys big, big on the new wave for finance. A lot of people are not aware, yeah. But it is what it is.

Thomas: So you might say “Oh, 2 CEOs? So weird.” No, there’s a reason for this. Lastly, I think we need to touch on, is there’s a President for technology as well – it’s the closest to the CTO (Chief Technology Officer), his name is Rajat Taneja – he’s there since 2013; previously the EVP and CTO of EA, that’s Electronic Arts; and 1996 to 2011 he was at Microsoft as a corporate VP for the commerce division.

Reggie: Okay. Interesting. They got a gaming guy around. Yeah. I’m expecting some sort of UI and better user experience, with him on board.

Okay, that’s cool. So how would you rate the management?

Thomas: Pretty strong, pretty stable. I think the structure makes sense. Localizing the leadership according to the battleground makes sense. If you have one that’s in charge of everything, it’s too weird. The structure is a bit too weird already; and even as a say like… oftentimes when a company gets larger and larger, it tends to get more and more corporate, there’s less and less emphasis on the tech, but I still like how they have tech people there as part of the management team. And that makes a difference in their overall direction.

Reggie: Fair, good stuff. And I just want to add on that there’s a CEO of Europe, because there’s a lot of payments from Europe. They don’t have CEO of ASEAN or CEO of Africa. There’s not as much payments going on, in this… relative, it’s all relative.

So yeah. Let’s continue to see how they continue to expand their team. That’s a, I think we’ve talked a lot about the company and we make it sound like it’s impenetrable, right? There are a lot of moats. So what are some moats that we can sum up, for this company?

Thomas: I think as any network has it’s own moat, it’s a network effect, right? The value of Visa will increase with every new user, with every new mode of payment, with every new touch point basically, and being accepted everywhere will continue to spur them on. There’s also a switching cost, because this infrastructure is so vital for the banks now, the banks we can look at it as incumbents. This is very important for them to use, but this might change once there’s new digital banks and all that. Maybe they use purely online, online meaning like PayPal and Stripe and that kind of thing, it just bypass credit cards as a whole. They can even roll out their own credit cards through some other means, but of course backed by Visa, then that’s okay. But if it’s not backed by Visa, then that’s going to be an issue. There is still this, there still remains these kinds of switching costs. Yeah. And of course branding.

Yeah. So it’s a household name already. You will, of course, trust to use credit card… through Visa or MasterCard, you would trust to receive payments that’s facilitated by Visa or MasterCard. Not some random person that say “Hey, I help you to facilitate your $5,000 transaction. Can lah, can lah, no problem!” And then the guy goes missing or something, yeah very shady.

Reggie: But I think, yes, the branding is pretty there, but there are also a lot of newer localized players. They’re also doing very well in branding. So that’s also something that is interesting to look at. Branding always very wonky one, in my head, everybody can say, “Oh, this one brand very good”; I was like “Really?” So, you know, yeah. It’s how do you value the brand, right?

Thomas: Sometimes these localized players are a little bit into the competition. They provide their own off the shelf solution to try and replace the Visa we’ve learned in their own country.

Why? Because when Visa goes into say unchartered territory, let’s say they don’t support, say, like Vietnam, maybe Myanmar payments; the fees will be higher. And also because there’s some risk there. For localized players,they know the market a little bit better. They can roll their own tech also, the cost is lower. So there’s reasons why these…

Reggie: It’s like Prepaid cards, like the whole prepaid card at 7-11 and all that, a lot of people look at it as like: “Who still do that?” But actually in many parts of APEC, it’s still a very big thing because the whole digital infrastructure is not as established.

You know, all your Google, Apple, they use these infrastructure to give people the… It’s like how in the past you buy MapleStory cards like that lah, same idea – you put your cash through these guys. So it’s a very localized solution there. I think, like what you say sometimes when they go into unchartered territory, firstly, they don’t understand the landscape enough, and also, it will be very expensive as a provider. So yeah, I think in that sense, there are local providers here and there to dominate.

Thomas: So it may make more sense in that case for Visa to acquire those companies, then integrate them into their… but not often the case lah.

Reggie: Yeah, but it is what they are doing, yes.

Thomas: Yes. Yeah, so I think that’s the three main things that is a moat for Visa.

Reggie: Cool, cool. Yeah. You specifically talk about inflation. So I want to hear like why inflation is actually good for this particular company.

Thomas: I mean, the prices of goods when they increase, overall, this is beneficial for Visa, because part of it of what they charge is based off the ticket price. So, never mind that consumer spending might actually decrease a lot, but if let’s say it’s for essential kinds of items which people are purchasing through credit cards, your lower ticket price ones, no matter what, your low ticket price ones will also increase. So there is some kind of buffer which helps in Visa’s business model, as compared to say other companies with different business model.

Maybe they sell whichever goods, say like Apple, inflation is good for them also. Because they can just charge whichever they want, they are the cause of inflation, so… but it’s different for for say like the general goods and services – if inflation increase for them, let’s say their cost also increased -that doesn’t happen because they have certain kinds of margin or the range doesn’t… isn’t going to fluctuate much because their infrastructure is going to be the same.

Reggie: Okay. So essentially, as long as the total volume goes up, per ticket, they make more money, they charge on a percentage, it’s good for them. Essentially, yes. That’s kind of what we’re hearing. Okay. Good stuff. It sounds like the company is like very solid, no competitor is it…

Thomas: Have!

Reggie: No risk factors and what have you, so maybe in closing, let’s talk a little bit about their competition, and the risk factors, because I think the growth opportunities are quite clear, through this whole process, whether is it digital payments or integration with the new way of payments or continue expansion into the unbanked regions and what have you, everybody’s talking about that.

So what are some risk factors and their competition in this space?

Thomas: I think we can talk about the incumbents versus incumbents, so there’s of course MasterCard, which is second biggest player. They are of course doing almost the same thing that Visa does. So Visa has to watch out for that.

On the part about new entrance, this is also a threat, right? So let’s say PayPal, this is the number 1 one. They actually have integrations with PayPal, but it’s like a very offhand kind of thing. You don’t want to integrate too much into it, but just enough so you can tap on the trend. That’s always Visa’s approach.

Reggie: They are frienemies.

Thomas: Yes. But for PayPal, the last time we reviewed it, actually, now that we have understood a little bit better about the existing payments network, what PayPal is actually doing is to whack the whole entire payments network for themself – is just being transacted on the web and mobile, and now they’re going to retail. Okay, why? They operate as both the network, as well as the processor, as well as the acquiring bank, as well as the issuer, as well as working capital lender, as well as like e-wallet.

This is way more than what Visa is doing. So it’s also a very unique fight in how Visa can try to overcome this, or maybe they also are accepting that PayPal was going to be a lot bigger than them in the future. And in order to just latch on to that, just integrate with PayPal, just play ball: whichever Paypal is going, we are also going, but they are frenemies in a sense, they cannot really attack each other directly because ultimately, it’s the consumer that depends that… it’s ultimately the consumer that affects yes, that decides where this direction is going to go. But that being said, there’s a lot of opportunity for PayPal to ride on this trend because everything that Visa is doing and you’re sharing all these fees and costs with the banks and all that, PayPal is just removing it totally and absorbing it into their own P&L.

Reggie: Yeah, definitely. But I also want to point out that different companies are using different strategies. You cannot be very certain exactly what’s going to happen also because… I do appreciate that PayPal acquired Venmo and they are growing their whole like e-wallet system, P2P transfers, so they integrating the whole thing.

But, we all need to recognize that it is a very different business, from customer acquisition to competing with other similar providers and all that. Companies like Revolut, companies like CashPay, like PayLah, and all of them – they are localized wallet ecosystems that are very established in their own space.

So when we look at it from that view, you really got to question like, do you want Visa and MasterCard to be in this space? Because that will be as big as how Disney went into streaming. I think it is as big as that. It’s like this thing is dominant, And they were like, “oh no, we want to cut this thing, let’s just go into streaming. We provide our own platform.”

So whether Visa chooses to… as long, if Visa comes out and say, they’re going to do that, the share price sure move one and move very quickly. So it depends on how people price it. And I don’t think generally it will come down… generally when people look at these kind of big moves, because these are very expensive moves, right?

You got to set up the whole process, you’ve got to acquire customer, care about LTV, and a lot of these things, it is quite complicated as a business. Not as simple as what people think it is. So although PayPal potentially is a competitor, in fact, it is a competitor to Visa; I’m not sure if Visa wants to adopt the same strategies, which is why I think Visa… just API and connecting with all these big payment providers could be a very good strategy for them.

Thomas: Yeah. But why I think PayPal is a big threat because not now, not in the short-term, but in a mid to long-term, quite possibly. Because PayPal, all it’s doing now is just gaining more and more adoption, wherever they can be, until the point where they have these economies of scale. As of now already, they have better economies of scale as compared to Visa. When they get even larger, their cost is going to decrease and decrease, even on the hardware side of things, then one fine day, they can say “Oh, we will provide the same exact services as Visa, just process through us, by a half the cost.”

Ah, what is Visa, MasterCard going to do after that? So this is the threat that Visa has to be careful; or as an investor also you want to be tracking from a very industry perspective. Yeah, so that’s PayPal.

And lastly I think will be the domestic solutions. You can call it, maybe even cash is considered a domestic solution – some countries is really just operate a lot through cash one, no matter what, credit cards are not allowed or not recommended to use because the fees are high. Certain kind of banks, the won’t disperse credit cards because of – not say credit cap – the income requirements. It’s just risky for them. So there’s no point to… it doesn’t make sense from the margin to distribute that.

And the other domestic solution is a very localized version of Visa, right? These are competitors, but of course it could also be acquisition targets. But if they just decide to say no, it’s like, “Why should I get acquired? I can just sit and then absorb all the margin for myself, it’s like very nice cashflow already”, that effectively just blocks them out of a market, which could actually be crucial; think of it as like a pivot point.

If Visa is able to enter a certain country through this technology, they are better able to fight, say like PayPal or MasterCard or other alternatives, because they are there; but because they are not there, they lose the opportunity. So there’s also some kind of risk.

Reggie: Yeah. Okay. I think those are very good pointers, for people listening in, it’s good enough already.

If you want to go super deep into the tech and all, that’s a whole different discussion. So yeah, thanks for spending time together again, you know this… today to talk about Visa as a company. I’m long Visa just to put it out there, and I think that the company has its dominance in the space for a reason and… okay, but I do think right, if you invest in Visa you must be realistic – like you cannot expect like a 30, 40% growth year over year, okay? So Visa will be one of those giants that will grow at 10, 15% year on year, or it will track its top-line, it will track its free cashflow growth very closely over time because they are already very big.

Whether or not they can go into another wave of growth cycle, that’s a whole different discussion. We hope that it goes there and I hope that it goes there, but even if it does stall, as long it stays dominant in this space, you will see that it tracks very closely to its revenue, cashflow growth; and it’s not going to be like, “Wow” and “amazing”. It’s not a big tech play, it’s not a new guy in that space. )

So yeah. Thank you for joining us. Any last words you want to add?

Thomas: No. Yeah, it will be very interesting, the payment space. So a lot of activity inside payments, a lot that Visa has to do, so yeah, very interesting company.

Reggie: Yeah. Okay. Just saying this is not recommendation, take care guys.

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