Visa Takes a Hit on Threat of Disruptive Mobile Payments

In early afternoon trading Monday, the Dow Jones Industrial Average  (DJINDICES: ^DJI  ) was down 116 points amid a broad sell-off. 

Visa (NYSE: V  ) was down over 1.8%, leading the average further off of record highs last week. Visa is proportionally the heaviest weighted stock in the average, so any Dow watcher should also keep a close eye on this payment processor.

While Visa's fundamentals have remained strong over the past few quarters, a Reuters article released Sunday has once again shined a light on a huge long-term risk for the company: disruptive mobile payments.

A brief primer on Visa's business model
Every time you use your Visa credit or debit card at a store or online, the merchant is charged a small fee. That fee is then split between a host of technology companies (Visa among them) for providing the technology to allow your payment to be processed in milliseconds.

The merchant pays these fees, so the average consumer doesn't notice or generally mind. And on the surface, it makes sense that there should be some cost for the action behind our transactions.

While the fee is just pennies on the dollar, when taken in aggregate across the global economy, billions of dollars are at stake. As the world moves increasingly to cards and away from cash, the pie keeps getting larger. This chart of Visa's quarterly revenue over the past five years nails the point. At over $3 billion in revenue per quarter (and growing), there is a lot of money at stake.

For a more in-depth look into how Visa makes its money, read here.

V Revenue (Quarterly) Chart

V Revenue (Quarterly) data by YCharts.

Today, Visa is the dominant force in payment processing, but competitors and even strategic partners have taken notice. And when combined with the modern smartphone, these competitors see Visa as vulnerable.

A host of household brands have entered the mobile payments market, each hoping to take away some of Visa's traditional market share. From tech conglomerates such as Apple and Google, to traditional competitor MasterCard, Visa is under attack from multiple fronts. Perhaps worst of all, the greatest threat may be from the very merchants that accept Visa-branded cards in their stores.

Merchants are bringing Visa out from behind the curtain
Visa has for years been embroiled in an ongoing legal battle with merchants over the level of fees charged per transaction and how that money is split. In the past year, Visa has changed its tactics in the case, moving away from hard-line rhetoric and toward a more conciliatory tone. I discussed the changing dynamic last July here.

It's in this light that we, as investors, can really see the full scope of Visa's problem. All companies face competition -- that's part of doing business. Visa, though, is different. It is is fighting a war on two fronts. One one side, competitors are chipping away at Visa's existing payment network, hoping to take market share with mobile technology and cheaper systems. On the second front, Visa's actual customers, the retailers who accept Visa cards, are fighting to take margin away on every swipe, if not replace it altogether. As the Reuters article noted, some retailers are offering "digital wallets" that enable customers to make payments via their smartphone.

Reactive versus proactive
For many Visa investors, the problem seems at first blush to be a long-term risk. The company's financials remain quite strong. The chart above is a beautiful thing.

But stop for a moment and think about other industries recently challenged by new technology. The music business was doing quite well until Napster upended the entire revenue model. Or consider the transition to Internet-connected smartphones. There are countless other examples.

Right now Visa is reactive, but the technological innovations challenging the company are proactive. It may be time for Visa investors to take a step back and reconsider just how long term this risk really is.

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  • Report this Comment On April 08, 2014, at 4:04 PM, EquityBull wrote:

    I'm not seeing long term risk. Visa and MC can easily adopt any type of "mobile" payment system they want. Whether it be NFC, Beacons or whatever for POS. Mobile merely serves to possibly replace the physical plastic credit card.

    Visa/MC infrastructure runs deep. Banks are heavily involved and security is well vetted. Paypal has been around for over a decade and still has not made a significant dent in the entire payments industry with respect to Visa/MC dominant share. Will Starbucks make it happen? I don't think so.

    How about Square? Square is merely a POS terminal for visa/mc/discover/amex that works on a smartphone or tablet. No different from every POS terminal that came before it when it comes down to it. Just kills the dedicated POS hardware.

    Also V and MC are not standing still nor do they need to watch technology ever pass them by. Furthermore they can always compete further on price if they need to. Why would anyone use an alternate system that offers no benefit whether it be cost or ease of use?

    Also credit cards do more than just move money. They give you CREDIT. This means banks who have the relationships with Visa/MC. How great is it to charge something and not have it suck instantly out of your bank account and have the option to pay it in full or partial at month end.

    I'm sorry I just don't see anything in the next 10 to 20 years taking out this infrastructure.

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