Is Vodafone Going to Kill Visa's Chances in Emerging Markets?

Spending money is one thing that we excel at in the United States, which is why Visa (NYSE: V  ) is such a valuable business. It long ago carved out an enduring place in consumers' wallets. In emerging markets, it's starting to look like companies such as Western Union (NYSE: WU  ) and Vodafone (NASDAQ: VOD  ) are in the command seat.

Changing technology
In essence, Visa acts as the middleman between buyers and sellers. Its technology allowed 58 billion transactions to take place last year. These pipes are so integral to business today that retail giants are accusing Visa of using its market position to inflate fees. But that's exactly the kind of power that Visa has in developed markets. In fact, the largest retailer in the world just hit Visa with a lawsuit that could have far-reaching implications not just for Visa, but for the entire retail industry.

Source: Lotus Head

While mature markets are the past, the future is in emerging markets. That's where companies like Western Union are trying to build their businesses. For example, of the 500,000 or so Western Union locations around the world, about 90% are outside of the United States. The company has been gearing up its business in areas with large underbanked populations so that customers can use the modern technology they have, like cell phones, to do all of the buying and selling they want without ever having to use a bank.

That's effectively what Visa did to paying by check, which put the bank at the heart of a transaction. The fact that so many consumers in emerging markets have technology, but not a lot of money, actually puts companies like Western Union ahead of Visa in these markets.

Where the growth is
While new services from a Western Union would have to unseat Visa and MasterCard in mature markets, that isn't the case in emerging markets. These nations will simply leapfrog the old ways and jump right into more modern methods -- like mobile payment systems. It's why Western Union is focusing on that space. It's also why Vodafone, the telecom company, happens to be doing so well in the finance arena.

(Source: Raidarmax

Vodafone already has a large base of customers in emerging markets like India, and select countries in Africa. That makes adopting the company M-PESA money transfer service very easy for customers. The offering was started in Kenya in 2007 under the Safaricom banner (Vodafone runs that business),  and has since expanded it to nine countries.

To get a sense of the scale of the company's success, there are 23 million mobile money users in Kenya and 17 million (nearly 75%) are M-PESA customers. Visa would kill for that kind of penetration. If Vodafone can reach even half that level in M-PESA served countries like India, South Africa, and Egypt it will be building a fortress that not even a giant like Visa can defeat. And it's set to bring the service to Europe, too, recently launching it in Romania.

Don't underestimate the underbanked
It's easy to look at the United States and question the value of serving what is a pretty small population of people with limited access to banks. Those with bank access are so much richer and easier to reach. However, the underbanked are a global phenomena, and there are much larger opportunities in emerging markets where bank access is much less common. Visa can't really serve these customers, but Western Union and Vodafone can. The emerging strength of Vodafone's M-PESA service is both an example of the opportunity, and a call to action for investors.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 20, 2014, at 11:00 PM, smalls6262 wrote:

    ummmm. Do some homework on Vodafone launching its virtual wallet program in EU in COORDINATION WITH VISA. Search engine gives great results:

    Vodafone SmartPass launches in the Netherlands Pan-European mobile payments partnership goes live in its third market after Spain and Germany – with the UK to follow later this year Thursday 27 March 2014: Today Vodafone and Visa launched the Vodafone Wallet and Visa SmartPass service in the Netherlands, the third European market to see the benefit of the wide-ranging partnership announced by the two companies in 2012. - See more at: http://www.visaeurope.com/en/newsroom/news/articles/2014/vod...

    Some interesting reads to be had on this topic and should be something to do further homework on.

    Some speculate M-PESA will eventually be folded in with this program. My intrigue is the synergy of such a money business position IF T and VOD should merge. T has working relationship and a little over 8% stake with America Movil which covers much of Latin America, T covers U.S., Vodafone covers EU, Turkey, much of the more developed African economies, India, Australia.... A merger would cover much of the globe with the exception of Russia, China and the small geographical but powerhouse economy Japan. Few realize a T/VOD merger (a merger given scale IMO) could lead to the creation of a large money transfer business...and VISA looks to be part of the program. Western Union should be the one worried if T/VOD merge, not VISA.

    Some say a T approach for VOD is off but do some DD. Lots of conflicting comments and reports but read thoroughly through the Morgan Stanley interview of T's Stephenson and you will realize really quickly his comments were taken out of context.

  • Report this Comment On May 13, 2014, at 8:31 PM, kogwheel wrote:

    Has anyone heard of VOD paying a special dividend soon? I read a report a few weeks ago saying that would happen, in the tune of $17 per share.

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