Visa's Strong Third-Quarter Earnings

Many financial sector companies have reported fantastic results so far this year, and payment processing giant Visa (V 0.95%) was no exception.

In this clip from Industry Focus: Financials, host Shannon Jones and Fool.com contributor Matt Frankel give listeners a rundown of Visa's quarter, as well as what could be the future drivers of the company's growth.

A full transcript follows the video.

This video was recorded on July 30, 2018.

Shannon Jones: Let's actually turn our focus over to Visa. Visa is the largest payment processor in the world. They recently reported earnings for their third quarter. They're on a slightly different fiscal calendar than Mastercard (MA 0.30%). Matt, what can you tell us about how Visa fared in this last quarter?

Matt Frankel: First of all, just to give you an idea of how big Visa is, Visa has nearly 3.3 billion cards in circulation with its logo on it. That's a lot of cards. That's about one for every two people in the world. So, Visa is the big company here. They're both big, but relatively speaking.

Visa grew its revenue by 15% year over year, grew its earnings by 40% year over year. Most of that was due to tax reform, but like I said, there was some revenue growth, so it was pretty strong on both ends. Tax reform and revenue growth combined to produce some pretty nice profit growth. Their payment volume -- just to name a couple of statistics -- was up 11% year over year. The number of cards, I mentioned it was 3.3 billion, that grew by 4% year over year. And it was equal growth on debit card and credit card products, which was nice to see. Service revenue was up by 13%. Data processing revenues were up by 19%.

Internationally, they grew by 16%. You mentioned a little bit ago that international is a very big growth market for Visa and Mastercard. In a lot of places around the world, credit cards and card payments in general are not like they are in the U.S., where if you go to any merchant, you can expect them to at least accept Visa and Mastercard. In places like a lot of Asia and Central America, especially, there are a lot of places where Visa and Mastercard are not widespread accepted yet. China is a big market that Visa is just tiptoeing into now. So, there's a lot of international room to grow. That's a key number that we want to watch every quarter. 16% international growth is really impressive.

Jones: Yeah, absolutely. A phenomenal quarter for Visa, as expected. Just going back to the international markets, for our listeners who want a little more about that. When you think about it, the U.S. is pretty saturated when it comes to the payment processors. Really, the opportunities are abroad. Especially with the advancement of mobile connectivity, you see a huge opportunity for Visa and Mastercard to really dominate and gain more market share.

Typically, these international retailers, many of them small businesses, just the outlay required to acquire some of these big, expensive credit card processing machines was so detrimental to the business, it really wasn't even worth it. So, cash really is the dominant form of payment internationally -- especially, as Matt mentioned, in Asian markets in particular.

With mobile connectivity, you have, now, many more consumers abroad using their mobile phones for payment. That's a huge opportunity in itself. Some estimates are that the global mobile payments volume will increase from $75 billion this year to over $500 billion by 2020. That's roughly an 88% compound annual growth rate. That's huge. Those are opportunities that Visa and Mastercard are definitely going after.

Frankel: Right. There are a couple of other big catalysts for Visa and Mastercard going forward. The rise of e-commerce. E-commerce sales were up 16% in 2017 year over year. E-commerce is an area where they don't have to compete against things like cash and checks.

Also, cash is going away in mom and pop merchants all around the country, and in some international markets. When you think about how many small merchants have the little Square payment readers, you can't walk through a craft market in North America these days without everyone accepting credit cards. The rise of e-commerce and the ease with which merchants can accept card payments these days have really been big catalysts for these companies.

Jones: Yeah, absolutely. One other thing I will say, one key area that I'll be watching in particular, is China. One thing investors should know is, in China, there is Alipay and Tencent's WeChat app. These were basically created for consumers who didn't have credit and debit cards there. They still wanted their consumers to be able to shop on their online marketplaces, to still be able to participate in e-commerce. Basically, this eliminated the need for the middlemen, the traditional banking system that we have here in the U.S. I've seen Visa and Mastercard executives talk about it a bit, and think about ways to monitor that, and, even more so, defend against that. That'll be one area to watch, because I think it'll be interesting.

Frankel: Yeah, definitely. China, like I said, is a pretty untapped market for credit cards. It was only a couple of years ago where Visa and the others weren't allowed to operate in China. As we know, that's the most populated area in the world. If you think Visa and Mastercard are saturated, in terms of how big they can get, you might be surprised.

Jones: That's right, there's a huge growth opportunity there. Let's talk about Visa's strategy. What really makes Visa unique? What areas are they going after, apart from international?

Frankel: Like I said, Visa and Mastercard are 95% the same business. Having said that, they're emphasizing different areas. Visa is really emphasizing safety and security in payments. Both of them are aggressively investing in fintech, with Visa having an orientation toward safety. Security, especially with all these data breaches that have been going on recently, they want to make the case around the world that it's safe for people to make card payments.

They have the advantage of scale at this point. They have a big head start over Mastercard in many markets because they're such a bigger company. As we'll see in a minute, there are about 50% more Visa cards in existence in the world than Mastercard cards. That in itself is a big competitive advantage that gives them a leg up when it comes to efficiency and things like that.

Jones: Really, in order to stay competitive, you mentioned how both companies are really working with and partnering alongside with fintech companies. It's interesting, Visa is really changing their overall focus. They're attempting to move away from just being known as a card network and really wanting to be seen as a technology platform solutions company.

One thing that they actually recently rolled out is something that they call fintech in a box. Many of these smaller fintech companies that are out there, they are attempting to onboard many of these smaller companies onto their network within about a month, which is pretty fast, and basically giving them the tools, as a developer, to easily integrate on to the Visa network. I think that's something that should help them as an open-source platform moving forward.

Another thing that's been really interesting is their Visa Direct program. Basically, they're attempting to expedite how quickly funds go from, if I'm going to pay for something at a merchant's store, how quickly those funds get from me over to that merchant's bank, and really try to expedite that entire process. Visa Direct is another way that they're doing that. Of course, they're well-positioned with the growth of mobile payments, with Apple Pay, PayPal, Samsung Pay, Android Pay, Microsoft Wallet -- again, not too much different from Mastercard.

They also, too, acquired Visa Europe back in 2016. This was really designed to help accelerate the transition from cash to electronic payments there in Europe. So far, you're just starting to see the fruits of that, but I think that really opened up the door to really give Visa that extra push forward ahead of Mastercard in that regard.

Frankel: Definitely. Visa has done a great job of transforming itself, as you said, from just a payments company into a technology company. The open source is great. Fintech, they're investing very heavily, as is Mastercard. The Visa Checkout button that you'll see on a lot of merchants' websites is one good example. That allows a one-click checkout, to encourage customers to use their Visa card instead of some other company's. Mastercard has a competing feature now, but that was one big Visa innovation a few years ago. It's a great example of how they're trying to transform themselves into more of a technology company than a payments company.