The EconomistMarch 21st 2020 Business 59T
op dogsin finance used to be big banks with trillion-dollar bal-
ance-sheets. No longer. Earlier this month Visa, a humble pay-
ments processor, became the world’s most valuable financial-ser-
vices company. The ongoing stockmarket rout has dragged Visa’s
share price down, with analysts cutting forecast revenues from
transaction fees, as the coronavirus forces self-isolating consum-
ers around the world into a shopping hiatus. But it has suffered
less than erstwhile title-holders like JPMorgan Chase. That inves-
tors view Visa as more resilient than Wall Street is perhaps more
revealing even than its still eye-popping $291bn market capitalisa-
tion. How did a mere cog in the system end up here?
Ask Visa’s bosses and they crow about their firm’s tech and mar-
keting nous. That is a part of it. But the deeper reason for Visa’s suc-
cess is more prosaic. Being the biggest player in a deeply en-
trenched payments oligopoly turns out to be fabulously lucrative.
Many casual observers often confuse Visa for a lender that ex-
tends credit to people who spend using credit cards adorned with
its logo. What it actually does is co-ordinate a complex web of in-
termediaries that stand between buyers and sellers. The American
firm now connects more than 61m merchants to 3.4bn Visa-brand-
ed cards, nearly one for every two people on Earth, issued mostly
by banks. It takes a small cut for making those connections. Given
their volume—nearly $9trn last year, equivalent to over a tenth of
global gdp—the commissions add up. Before covid-19 Visa’s rev-
enues grew by around 10% a year, reaching $23bn in 2019.
Banks used to keep all the fees for themselves. Over 10,000 of
them collectively owned Visa until it was spun out in 2008. Since
then they have watched with envy as Visa’s profits have swelled 15-
fold. Some of this is the result of global expansion and so higher
revenues. Visa may not be literally “everywhere you want to be”,
but it is close. It claims to be present in more than 200 countries
and territories. Better yet, operating margins have swollen over the
past 12 years—from a rich 43% to a heart-stopping 65%. Of the
world’s 100 biggest listed firms by market value, last year only a
state-run Chinese booze giant and Saudi Aramco, an oil colossus,
had higher margins. Even the juicy 20-25% levels of technology
darlings like Apple and Alphabet are meagre by comparison.
Because adding more capacity to Visa’s payments network is
cheap, its costs have grown far more slowly than revenues in the
past decade. Visa can thus get away with charging more for its ser-
vices—sometimes considerably more—than its marginal cost of
providing them. The windfall profits are funnelled to Visa’s share-
holders, whose returns (including dividends) have averaged 24% a
year since 2008. Investors, who value the firm at nearly 30 times its
most recent annual earnings, against less than ten times for fellow
finance firms in the s&p500 index, clearly believe no competitor
will challenge its dominance any time soon.
Visa is not entirely competition-free. Americans still write
cheques and the Japanese love their cash. Local schemes nibble at
its heels in individual markets—and Mastercard, its only global ri-
val of note, does so just about everywhere. But cheques and bank-
notes are in decline. Rival incumbents are geographically limited,
smaller, or both. And consumers will not sign up to an upstart sys-
tem before merchants adopt it—which merchants won’t do until it
has been embraced by a critical mass of customers. This chicken-
and-egg problem is particularly hard to overcome.
Hard, but not impossible. In the longer term Visa faces three
threats. First, authorities fed up with it and Mastercard are setting
up national lookalikes. China already has UnionPay. Places like
Russia, Australia and the eu want payment rails they can control.
They could use regulations, including on consumer data, to weak-
en the duopoly. Competition watchdogs worldwide have gone
after both firms, forcing large settlements. Europe and America
have capped the fees that payment processors can levy.
Some countries are exploring alternative tracks. Bank-to-bank
transfers, which used to take days, are now instant in many places
(though not, inexplicably, in America). Thanks to smartphones,
interbank pipes could be used to funnel money from consumers’
accounts directly to those of sellers, bypassing Visa’s systems and
fees. Such plumbing has caught on in places like Sweden and In-
dia. But it is limited to one country, whereas Visa and Mastercard
work globally. And uptake has been slow; Britain has had instant
transfers for a decade but few shoppers or shopkeepers have no-
ticed. All eyes are on America, with its vast home market. The Fed-
eral Reserve wants such a system to be up and running by 2024.
The last threat looms in cyberspace. So far, “fintech” payments
startups like Square or Stripe shunt transactions onto Visa’s rails
rather than offer a new set of tracks. Apple Pay and Google Pay are
little more than a plastic-less way to store your Visa and Master-
card. Facebook’s more ambitious attempt to mint a digital curren-
cy, called Libra, has stalled. But Silicon Valley’s vast user base could
in principle get around the chicken-and-egg problem, as China
shows. Tencent and Alibaba used a huge social-media platform
and an online emporium, respectively, to bootstrap payments sys-
tems. Amazon could do the same, especially now that Visa has said
it would start charging the e-commerce giant higher card fees in its
American online stores.No Visa-free travel
Visa still has plenty of transactions to chase. At a time of social dis-
tancing, contactless payments and online shopping look more ap-
pealing than filthy banknotes or crowded supermarkets. Banks
continue to tolerate it, not least because they receive the bulk of
the fees merchants are charged for every Visa transaction. Its rev-
enues of about $7 per card a year are not enough to spark consumer
outrage. And it works; its systems are down just 0.001% of the
time. Until a rival emerges that is literally everywhere consumers
want to be, Visa will be hard to dislodge from its cosy perch. 7Schumpeter Processing power
Visa is the global digital network that everyone underestimated