One of the best things about Visa (V, Financial) is that it operates a very low-risk business model on a massive, global scale. Unlike a bank that depends on selling financial products, Visa is like a commission agent to the world’s buying needs. As such, it is one of the most stable businesses in the world and it shares a duopoly with MasterCard (MA, Financial).
Not only is the business extremely stable, it is also a growing one. I’ve already detailed their “moat” in a recent article titled "Visa and MasterCard: Ideal Long-Term Dividend Plays."
Obviously, consumer spending keeps growing in any stable economy, and that’s what we’re seeing around the world. Let’s see if that’s what Visa is experiencing as well.
Third quarter 2016 results
Visa’s quarterly revenues were up 6% on a constant currency basis to $3.63 billion. Not adjusting for currency headwinds, that was a 3.2% growth over the year-ago period. The company narrowly missed Wall Street’s revenue expectation of $3.65 billion, but it beat EPS estimates, posting 69 cents against the 66-cent estimate.
One significant metric that grew was payment volume, which was up 10% (constant currency) to $1.3 trillion. Number of transactions processes also grew to 19.8 billion - a similar 10% growth compared to the previous period.
Obviously, this company is still growing despite high penetration in mature markets, and the increase in transactional volume and number show that growth is still a long way from stalling. That’s great news for investors, but Visa recognizes the imminent threat of market saturation. It's already preparing for the moment when revenue growth will flatten and leave it with a steady but non-growing business.
Visa is taking steps to ensure that doesn’t happen, and one of the things it has recently done is something no one would have expected: It signed a deal with PayPal (PYPL, Financial) so the latter’s users can make physical payments with their Visa-linked PayPal accounts.
But this is not a random act to expand its reach. It is part of a strategy to make the most of its strengths in physical payments. It is already supporting Apple Pay in a big way, and have even invested in a startup called Square Inc., which operates in the mobile payments space.
Powerful payment partnerships
So, is Visa going mobile? Yes, I think the company’s strategy is a sound one. With mobile usage on the rise, Visa realizes that web payments, such as the market dominated by PayPal, are not the only opportunity they have yet to tap into. With the entry into mobile payment systems like Apple Pay and Square, Visa is readying itself for a major shift into this niche within the digital payments industry.
The deal with PayPal, the acquisition and the partnership with Apple all underscore that major shift. The rise of mobile wallets are a very real threat to companies like Visa and MasterCard because the provider has the option of completely bypassing them and going directly to the banks that actually hold these funds and credit accounts.
In order to neutralize that threat, Visa has been forced to look deeper into the mobile and web payments space and make bedfellows of companies that would normally be fierce rivals - PayPal, Apple (AAPL, Financial) and so on.
And this is exactly the kind of thing that deals like the PayPal one will facilitate, according to Reuters:
“The partnership with Visa allows PayPal users to withdraw cash from their PayPal accounts instantly by using a Visa debit card. The process used to take several hours or days, said Bill Ready, PayPal's global head of product and engineering.
In exchange, Visa will integrate PayPal into its tap-and-pay feature - which allows the shopper to wave a card or mobile phone over a reader to pay - at certain retail locations. PayPal agreed to share data about those transactions.”
And it’s the very exact thing that they will go through with Apple Pay, Samsung Pay and Android Pay. Both PayPal and Visa are looking at the mobile wallet segment with hungry eyes, and at the end of the day, both can win if they work with each other.
Apple, Samsung and Android (Google) collectively control the smartphone market around the world, and with that comes the entire potential payment market. With Visa and PayPal behind them, all of these companies will be able to see healthy, sustainable growth well into the next several decades.
This is not an industry where new disruptors can come in and upset the Apple cart, so if my assumptions are correct, Visa, PayPal, Apple, Samsung and Google’s Android are the five companies to watch in the mobile, web and physical payment spaces over the next few years.
Such a consolidation has tremendous synergies, and for Visa investors, this will be a new phase of growth and expansion beyond anyone’s wildest imagination.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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