In this last part of “Visa - The moat is eroding” we cover the risks to Visa and the conclusion.
Risk of disruption: 1-Wallets
Wallets are completely bypassing Visa and Mastercard in EM.
Pix in Brazil took over the market, UPI (Unified Payments Interface) in India, and many in smaller EMs.
The question we have is:
What will make the customer change to something like this in the USA or Europe? Would it come from the regulator like the ECB? Will it happen?
It’s slowly happening according to Bright, in Europe. Bizum in Spain is like Pix. (All the payments for the sports clubs and school presents are arranged by Whasthap over Bizum. It does not see a Visa or Mastercard network. It’s a Phrase now, “let me send you a Bizum”).
The difference is that Brazil and India are big countries. Brazil is probably the size of Europe. So far these changes have been happening at the country level and European countries are small. Spain has Bizum, Italy and the Netherlands have their own thing. Banks in various countries are developing their own version of Zelle which is completely bypassing Visa/Mastercard.
To which, I argued that Bizum in Spain works but the interface for payment is very slow for me and I have too many steps to validate a payment. I don’t like it, and it’s not really used for payments online.
Bright: That is what Pix and UPI did really well. Pix apparently is so easy to use. UPI actually, when it started was not that easy to use, but the government required certain transactions to only happen on UPI and they blocked Mastercard and Visa for a number of years from accessing UPI.
India subsequently published data showing how the cost of doing transactions had drastically reduced because they're using UPI versus Visa and Mastercard.
And the US?
According to Bright, the credit card in the US is more engrained in the consumption habits of people. The reason is because of points, and these companies are doubling down on that. Because in the US, if you have a credit card, you get points.
In Europe, you don't get points. Disruption is more likely to occur in Europe because there's no added benefit for using Visa and Mastercard. In the US there is a large benefit.
The issue is more user experience rather than the product itself, because from the customer's rewards perspective it's the same.
From the merchants perspective it's more expensive for them to use Visa to process payments.
If they use Bizum or a similar bank account based wallet they don't get charged those fees. (They will be charged some payment integration fees from the wallet company or the integrator company like Adyen/Stripe)
To summarise, the flow of innovation is in favour of things like Pix and UPI in Europe and in the rest of the world, emerging markets, mobile money is taking off already and is bypassing cards. Mercado Pago, Alipay, Mpesa, Momo, Opay, etc.
For Europe, they just have to bring it into commercial transactions. Right now, it's mostly P2P. It is not sure if it will happen in Europe. But there is quite a risk. Wallets like PayPal mostly use card funded payments, so they benefit Visa. While Venmo (USA) is mostly ACH based.
In the USA, Visa and Mastercard, a big shift happened: Most card payments today in the developed world does not happen with the physical card: it is through Apple Pay or Google Pay. And so the actual owner of the Card payment process is Apple/Google.
Apple controls the ecosystem now.
They own the customer relationship.
As for me, I like payment companies that control the customer relationship with an app because they can do marketing, do marketplace, they can advertise, give credit, whatever to deliver value and get a fee, and do not depend on the transaction fees only, which should go down over time.
Bright:And one of the things that Visa used to do is when you pay with your card, the merchant could get your details and Visa used to sell that to do marketing with the merchant.
Now you can't because Apple does not allow customer details to go over. So Apple controls the ecosystem now in the developed world (mostly US) and then in the developing world there's pix and there's mobile money which is winning so, Visa competitive moat just eroded.
However, customer habits in DMs will provide a stability to limit this risk, as it will take years for new generations to use more and new wallets, while old generations stick to cards. And then it will take more time for the wallets to disconnect cards. To go ACH based (Bank transfer), or cash balances (PayPal balance for example), or.. Stable coins.
Cards were totally necessary for international transactions. But now we have integration between Wechat, Mercado Libre, UPI and PayPal on the works (Announced this year). That will make wallets able to operate without cards in the middle.
Risk of disruption: 2-Stablecoins
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Stablecoins are overhyped according to Bright:
Everyone's talking about it. Everyone's trying to issue coins. I actually got a report yesterday. It's about the state of stable coins. Lots of data.
Because it's too hyped up, I am concerned. Now that's the negative part.
The positive part is I genuinely see many use cases with it. many use cases of it continuing to expand. It's very useful in remittances for sure. It's very useful in B2B crossborder payments for sure. So that's one part that it's competing with Visa Mastercards of the world because it's faster. it's objectively cheaper um especially in the emerging markets.
Then the question is for a Visa Mastercard is it really an existential threat?
I think so. But it's also very likely and I think they are trying to evolve themselves to catch this stable coin train by not just allowing fiat currencies but also have stable coins on Visa Rails.
However if so in the long term the value of stable coins is that you don't offramp: it stays on-chain and everything happens on-chain.
So in that case Visa and Mastercard are ****: they can't do anything about that. But Currently and in the medium term and this is what I think they are betting on. That there would always be a need to offramp and on ramp and that's where they are playing for. So when you convert from stables to fiat they collect a fee.
They're issuing cards now with some company that's issuing stablecoins. So you have stable coins, let's say USDT on and you can go and pay for something, but for the customer, you're using your stable coins to pay, then paying the merchant. So that's where Visa and Mastercard are getting their normal transaction fees from.
But in the future the merchant will say no don't convert to fiat give me the stable coins; and that's where Visa and Master get ***** because they can't do anything there. And then they exchange with another merchant on the stable coin marketplace or whatever.
Olivier: And so far these are just press releases and launches with no adoption, on VISA/MC/PayPal side and even on the stable coin companies. I have been trying to push the usage of stable coins or cryptos to avoid Visa and Mastercard fee problems in some companies but the management always tells me that the shoppers are not there yet. So people are investing in crypto but no-one wants to pay with it, or a fringe category of people. I think that the stable coin opportunity and risk is very far away.
I enjoyed this article on stablecoins
Conclusion and investing take
The conclusion is not investment advice. It is a review from a value investor perspective after all the previous discussion.
We think that Visa has a strong US business with lower growth, a European business exposed to disruption but with growth ahead in the mean time, and an Emerging market business that is currently being disrupted, but with growth for Visa from a low base.
We have a stock with EPS estimates still showing good growth in the next few years:
EPS up estimates up 12% for the next three years, so the headwinds are not there yet.
From my experience, if you invest in a company that's not leading in the next trend, you are exposed to extra risks and it can get really painful.
You can do well, in the best scenario. Walmart stock did ok despite Amazon.
They're outside of the train and the train is going.
. There are a lot of things that don't add up:
Data and other revenues growing fast with fees rising and forced sales of “services”. (Part 1). There is a regulation or enforcement risk here.
Their biggest market is the US and the cash has almost gone to zero so it will slow down
Other markets already competitive with new wallets taking share of payments.
What is the long term value of a business when there is a non negligible chance of disruption? It should be low because most of the value is in the terminal value. We think that the stock is overpriced at a forward P/E of 28.
As for me, as a value investor, It would make sense as a value stock under 20 times earnings, as Visa should do OK from there but maybe with limited growth. At 12-14 times earnings I would be very interested.
I favour being invested in the new generation of payment and customer relationships: Wallets.
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I have no experience in editing an article with two people giving their point of views and it was long and clunky. In the goal of making it more readable and faster to edit and publish, I will focus on building the next articles based on interview questions. The goal is to be able to produce good articles faster.
Therefore we have to build a flow to organise the interview questions. It’s a skill to learn.
We will continue with a review of PayPal. We differ in our point of views so it will be interesting to compare the key aspects. With the August Holidays it’s been delayed and we will work on this in September. Thanks.