As consumers were forced to do more of their shopping online due to global lockdowns, digital payments on Visa’s platforms became a necessity for U.S. consumers and retailers. The company brought in $21.8 billion for its 2020 fiscal year, slightly below last year’s revenue.
Many retail giants such as Amazon and Walmart have been seen as saviors during the pandemic. Their digital shopping efforts have allowed millions to avoid the risk of purchasing items in-store and instead opt for either delivery or pick-up options. The digital efforts taken on by the retailers are nothing short of amazing. Still, they would nonetheless be impossible without digital payment networks such as Visa, which has grown to somewhat of a monopoly since the company’s founding in 1958.
In the fiscal year 2020, Visa processed almost $9 trillion in payments volume, nearly double the amount of their closest competitor MasterCard. The company received an increasing amount of scrutiny in 2020 as their attempted purchase of Plaid Inc. has caused regulators to question whether the purpose of the acquisition is to improve the customer experience or to squelch competition purely.
Plaid’s payment processing technology allows consumers and businesses to transfer money from one bank account to another without the hassle of dealing with debit or credit cards. The technology, which has been adopted by companies such as PayPal’s Venmo, currently poses a severe threat to Visa’s existing business model.
Not only does the California-based company control 70% of all the debit transactions processed in the United States, but Visa also requires their corporate clients, such as retailers and online shopping centers, to engage in long-term contracts, restricting them from switching to MasterCard or other competitors.
In addition to Visa’s payments processing network, clients also gain access to Visa’s anti-theft services, which in 2020 helped prevent nearly $25 billion in fraud, according to the company. International payments processing also continues to have a positive impact on Visa’s revenue, with the company earning $6.2 billion from international payments volume in 2020.
Visa’s Brilliant Business Model
Unlike other credit card companies and financial institutions, Visa earns no revenue through interest on short-term credit lent to consumers or businesses. Almost all the company’s income comes from fees charged to clients for the use of their digital payments network and access to a range of Visa-branded products and services.
In 2020 alone, over 200 billion payments and transactions were made through the Visa brand, averaging more than 550 million payments per day. Still, the opportunity for growth in the global digital payments industry remains vast, with e-commerce currently representing just 14% of global retail spending.
Visa has been pouring vast resources into foreign and domestic markets to increase this number and expand its reach into the millions of businesses across the globe, starting to move more and more towards digital payments instead of cash and check. In the U.S., for instance, cash transactions are still the number one means of payment. Thirty percent of all transactions, equal to $18 trillion, are done using cash or check.
To help make the transition easier, Visa has been unveiling new services to entice global consumers to shift more towards digital payments. The biggest of which has been the go-live of Click-to-Pay, essentially Visa’s version of Amazon’s one-click shopping. The service enables consumers to purchase goods online without the need to re-enter payment information every time they make a purchase.
Digitial Solutions and the Future of Visa
Another shift their industry is experiencing is contactless payment for in-store shopping, an area where the U.S. is far behind other nations such as the U.K. and China. Global contactless payments as a percentage of face-to-face digital payments have grown to 43%, far beyond what it was just five years ago.
China’s technology adoption has primarily driven the transition through financial behemoths such as Alibaba and WeChat. European countries and Australia have seen similar growth in contactless digital payments, with the United Kingdom reporting 97% year-over-year growth in contactless transit transactions.
The global potential for additional digital payments processing is by far Visa’s most significant opportunity for growth. According to a recent report, the World Bank estimates that there are still 1.7 billion adults in the world who do not have access to formal financial services.
Even with 200 countries already being serviced by Visa, the company has no shortage of growth potential, particularly given that they are one of few U.S. financial institutions that can conduct business globally.
However, competition among other financial giants remains fierce. American Express, the third-largest player in the industry, received approval in early 2020 to start building its payment processing network across China through a partnership with one of the PRC’s largest financial services companies.
The Chinese market is currently the most significant growth opportunity for the industry and the transition of other payment mediums that have for a long time been done solely with cash and check such as rent, parking, and vending machines.
The B2B market represents yet another endless opportunity for Visa to increase their share of payments, with businesses spending roughly $120 trillion globally every year. The Visa Direct program allows consumers, businesses, and governments to seamlessly transfer money among one another without having to deal with the complexity and confusion of bank account and routing numbers.
The services were proven particularly helpful as governments worldwide sent out stimulus payments to millions of citizens and did so in a fraction of the time it would have taken for them to mail checks. As the U.S. considers another round of stimulus payments, Visa’s payment network may prove yet again to be vital to the country’s financial system.
Alternative payment methods such as the ones offered by Plaid and Square may seem capable of diminishing the competitive advantage that Visa has built up over decades. Still, with more than two-thirds of the market under their control and the Visa network ingrained into the workings of millions of companies, this day seems far away.
This article has been reprinted with permission from William Douthat’s LinkedIn page.