Visa Is the New AmEx, and Not in the Good Way

In this week's episode of Industry Focus: Financials, host Jason Moser and Motley Fool contributor Matt Frankel look over the biggest news in the sector this week. Grocery giant Kroger (KR 0.56%) put some pressure on Visa (V -0.48%) to lower its fees in much the same way that so many retailers used to refuse AmEx (AXP -0.08%) cards. What does this mean for the future of fintech companies like Visa, Discover (DFS 3.65%), and MasterCard (MA -1.19%)? Green Dot (GDOT 2.56%) and Square (SQ -1.97%) reported earnings, and the market seems to be missing the bright long-term future for both. MercadoLibre (MELI -1.98%) saw new highs as its changing business model delivers even more potential. And, as always, the hosts share some stocks on their radar.

A full transcript follows the video.

This video was recorded on March 4, 2019.

Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, March 4th, and we're talking Financials. I'm your host, Jason Moser, and joining me in the studio via Skype, on location this week, in, I'm assuming, beautiful, Las Vegas, is Certified Financial Planner Matt Frankel. Matt, I'm sitting here looking at the background there. You've got this busy show. It's the Money20/20 show, is that right?

Matt Frankel: No, this is Shoptalk.

Moser: Oh, this is Shoptalk. I had it all wrong to begin with.

Frankel: It's the same people who put on Money20/20. 

Moser: OK. Does this mean you get to go to Vegas twice a year for these things?

Frankel: Yeah, my wife loves it, let me tell you.

Moser: I'm thinking maybe you need an assistant. Is there a job opening where you're working? Two trips to Vegas a year, that sounds like a pretty sweet deal. But, I just got back from Austin, Texas, so I can't complain. And I'm not complaining. I'm not complaining at all!

Frankel: I guess technically, Dan Kline is my assistant. I'm actually using his laptop because mine died, so I already have an assistant on my Vegas trip. He's sitting over my left shoulder.

Moser: As long as we get something that's working, that's all that matters. We're going to cover some more today about your week ahead here, Matt, what you're looking forward to in regard to your trip there in Vegas. We're going to take a quick look at some of the earnings that have come through here recently in the financial sector, including Green Dot and Square and my One to Watch from last week, MercadoLibre. As always, we'll check out Twitter, we'll have One to Watch for this coming week. 

Matt, we're going to start this week with Visa. If Kroger had a theme song for the company right now, I can't help but think it would probably be something like Twisted Sister's We're Not Gonna Take It. As it stands, Kroger seems like they're standing up the Visa and saying, "Look, at some point or another, somebody's going to have to start pushing back."

Frankel: They are. This is definitely a play to try to get their credit card fees down, which is by far the most common reasons retailers accept one credit card over another. Generally, though, Visa is not the one they choose not to accept. American Express and Discover are by far the most common.

Moser: Visa being the biggest card out there, right? 

Frankel: Right. Visa's the biggest payment card. Generally, they charge lower fees than some of the other ones. Having said that, payment processing fees are often done on a case-by-case basis. Larger companies can generally negotiate a better deal than, say, a smaller merchant can.

In this case, Kroger feels that Visa's fees that they're charging them are a little bit too high and are not accepting Visa anymore at some of their owned brands. It's not all of Kroger, but some of their own brands. It's a play to get the fees down.

Generally speaking, American Express is the one. That's why you hear the dreaded "we don't accept American Express" pretty often still. American Express, in general, their fees are about 1% higher than the others. Especially when you're talking about a business was pretty low profit margins like grocery stores, a 1% difference can be a big deal. 

Moser: A tremendous difference.

Frankel: The biggest surprise to me in this case is that it was Visa. It's a common thing for a retailer to not accept one form of credit card. But because it's Visa, that's why this is big news.

Moser: I think we're in the face of both MasterCard and Visa getting ready to pass through a little bit of a price increase there, as interchange fees are going to be going up for a lot of their merchant customers. We talk a lot about it, they have these admirable competitive positions, owning the rails, essentially, MasterCard and Visa. But that doesn't mean they have pricing power to the moon. At some point or another, it's going to be pulled back either by merchants complaining about it and doing what Kroger is trying to do here, or, as we've seen before with regulations, you'll have folks in D.C. who want to get in there and try to regulate the industry a little bit, which is understandable as well. They can only raise those prices so far, so it becomes imperative that they maximize the number of those transactions.

Speaking in line with maximizing that number of transactions, we see more and more places going to cashless transactions, going to only cards. I was reading today, Hodges hit me on Twitter earlier today with note that the Mercedes Benz stadium there in Atlanta is going to be moving to cashless-only transactions for their NFL and their Major League Baseball events. That's going to be starting here soon. Essentially card and mobile payment only. They justify it for a number of different reasons. It's going to give them, obviously, the opportunity to speed up transactions because there's no cash. They're talking about how cash really dictated the whole dollar policy and their pricing scheme to begin with. There are a number of reasons why it could probably work out. I know if I go to a game somewhere, I hate having to have cash, it just sucks. You have to have a lot of it, too, if you want to buy something there, because prices are so expensive. 

At least over the coming five or 10 years, I think these companies like Visa and MasterCard will at least benefit from increased transactions. Would you agree?

Frankel: They will. It's also worth mentioning that I'm not AmEx bashing.

Moser: No, no!

Frankel: AmEx and Discover have actually made a big effort to lower their fees and reduce the non-acceptance. They both realized that one of their biggest obstacles to growing their user base is the fact that they don't have universal acceptance like Visa and MasterCard do. The point being that, over the next few years, you could see increased pressure on Visa from those other two as well. Like you said, you just saw Kroger get rid of Visa in certain places because AmEx and Discover made more sense. So, that's another source of competitive pressure. 

It's also worth noting that merchants, especially big ones like Kroger, really do have a lot of negotiating power. Costco is the biggest example of one that only accepts one type of credit card. If you've been to a Costco, you know they only take Visa. While they're pretty tight-lipped about how much Costco is paying, they say Visa's interchange fees for Costco are something like 0.4%, whereas the standard merchant pays between 2% and 3%. I see a lot more negotiating. Right now, Costco is the only big notorious retailer that does that. But I definitely see this negotiating coming into play with other retailers in the future. 

Moser: Yeah. Certainly something for investors to keep an eye on. As that pricing power hits a limit, we'll at least see the benefit from the number of transactions continuing to go up, at least in the short run. Further down the line, something at least to ponder. How strong is the competitive advantage for companies like Visa and MasterCard and even American Express as a lot of these newfangled payments providers try to get in there and really disrupt the model?

Frankel: Definitely. It's going to be an interesting time in the fintech space for the next decade or so. 

Moser: Speaking of fintech, we had a lot of earnings that have come out recently. We wanted to touch on those here this week. A company that you follow, you've called it out as your one to watch before, Green Dot. Earnings came out. It looked like the stock felt a little bit of pressure from that earnings report. What were a couple of your top takeaways from Green Dot's most recent quarter?

Frankel: The numbers looked good. They beat earnings, they beat revenue. But the guidance was a little bit light. If you've been following it, the stock is down after earnings. It's not that the guidance is disappointing. They're still projecting 10% year over year earnings growth, 6% revenue growth. But my takeaway is that, from a short-term perspective, a lot of people don't want to pay 20X earnings for a company that's growing at 10% in the immediate term. 

Moser: Makes sense.

Frankel: Green Dot is ahead of its time in some ways, especially its banking-as-a-service platform. While it's only projecting to grow about 10% this year, that doesn't give credit to the long-term potential of its business. So, as a long-term investor, I like Square -- not Square, sorry, Green Dot.

Moser: [laughs] We'll get to Square in a minute, don't worry.

Frankel: I know, it's on the brain. I like Green Dot after earnings with this new lower price if you have a long time horizon. You might not be happy with my recommendation in six months or a year, but I'm very confident that in a decade, Green Dot will be a much larger company than it is today, especially if it keeps picking up partners like Apple, Uber, and some of the others that it's added recently. 

Moser: I think that's what investors want to hear. We certainly never profess to take that quarterly view. We like to look at quarterly earnings and see how the companies are doing, but we're looking at these businesses from the perspective of three, five, 10 years. It sounds like Green Dot still has plenty of opportunity. They're talking about plenty of opportunity.

I'll jump into MercadoLibre here really quick. MercadoLibre was my One to Watch last week. While it really gained recognition early on as the e-commerce king of Latin America, this has clearly become a case of an e-commerce business that has become quite an attractive payments business as well. I was talking about this on Motley Fool Money this past week -- when you look at the numbers that are going through MercadoLibre's network, it's really quite impressive. Forget about the e-commerce business for a minute, they brought $5.3 billion of total payment volume through their networks over the fourth quarter. When we talk about how successful that is, what's even more impressive is the offline payments that are going through their platform. If you look at the actual offline payments, they continue to bring dollars that aren't necessarily originated from their e-commerce platform. The total off-platform payment volume grew on a currency-neutral basis 172% for the quarter, which is impressive. For the first time ever, off-platform payments processed more than $2 billion in transactions, reaching almost 70 million payment transactions in a single quarter. 

I think that really seals the argument that a lot of us here at HQ have been making for a while in that MercadoLibre is as much of a payments company as it is an e-commerce company. I think that's where e-commerce companies are really succeeding, is being able to become more than just a place where people are buying it, but they're using services like payment platforms and whatnot to keep their customers happy. It's very sticky and it's something that I think will continue to benefit the company for some time to come. So, not surprising that the stock continues to do very well. 

Matt, let's pivot over to Square really quick. This is one that you and I both follow. Earnings came out. Kind of a funny reaction from this one. The market initially was selling the stock off. By the end of the day, it seemed to be back in the good graces of the market. What were a couple of things that stood out to you for Square's most recent quarter?

Frankel: First of all, I wish I had bought it the morning after earnings. 

Moser: [laughs] Timing is everything.

Frankel: It was a really knee-jerk reaction. The guidance for the coming quarter is a little bit weak in terms of earnings if you care about the profitability of a company that's growing at 65% year over year. But investors quickly wised up to the fact that Square is not about current profitability. It's not about if they're losing money right now. When a company is growing like that and has cash in the bank, who cares? That's my opinion on that.

Some of the highlights I like out of Square's earnings. Obviously, the revenue growth is impressive. Even not including their acquisitions, they're growing at a rate of over 50%, which is huge. Their services business continues to grow to more than double year over year. 

The biggest highlight to me is the Cash app users. They only report Cash app users once a year. Last year, they reported that there were about seven million active users in December 2017. For December 2018, that number more than doubled to 15 million. Now, it's worth pointing out that this is not an area of the business where they're making money yet. Square makes the bulk of its money still from payment processing, small business lending, and things like that. Where this really comes into play is, this could be a huge long-term driver of growth in other areas. Specifically, Square has said many times that it wants to get into the consumer side of the financial industry, offering things like high-yield savings accounts, personal lending, an investment platform, things of that nature. This is an active user base of 15 million people that they could potentially cross-sell those products to who are already part of the Square ecosystem. Just to put that number in perspective, Square's core customer is the small business, and that customer base is about two million large. This is a customer base that's more than 7X their small business customer base that is currently not being monetized. And, this doesn't factor in any future growth. I'm pretty confident in saying that next year, when we hear their Cash app numbers, it's going to be a whole lot more than 15 million. So, this is an untapped and rapidly growing source of future revenue potential for the company that I really don't think the market's fully taking into account yet. 

Moser: Yeah, I tend to agree. There's a lot to like about the quarter. I continue to be impressed by the opportunity that's in front of them in regard to how many dollars are going through that network on a yearly basis. We were looking at PayPal for 2018, they're closing in on $600 billion flowing through their networks. Square is essentially a tenth of that. And growing at double-digit rates, very similar to PayPal. So, you can see plenty of opportunity there for Square to capture. 

Speaking of the Cash at being something that's not profitable right now, we saw much the same thing in Venmo early on for PayPal, when they had the wherewithal to acquire that. That's now becoming a channel that they're starting to rely a little bit more on and work with a little bit. 

I'll just speak from personal perspective here. My daughters, we just got them their first phones, and we're looking to create an opportunity for them to have their first quote-unquote "banking relationship." So, we all downloaded the Cash app. We all set up Cash apps on our phone. It works seamlessly. I can transfer money to their accounts, they can give me cash if they don't want to hold it. I can give them money through their Cash app. We're all very happy users of that Cash app. So, we tacked on a few more users there. They'll be able to count us in next year. [laughs] 

A lot to like. I like their efforts to figure out new ways to extend capital to their merchant customers. The Square lending side of the business is going to be huge, Square Capital, all of those types of things. Tremendous opportunities. I think we all know by this point that Jack Dorsey certainly is a very long-term, big-picture thinker, not concerned with those quarterly numbers whatsoever. So, yeah, I remain a happy shareholder. It sounds like you do, too. I think that all the folks out there in our Foolish universe who have picked up shares of Square along the way should feel encouraged as well, right?

Frankel: I bought Square for $11 a share and haven't sold a single one yet, if that tells you how confident I am in the company long-term. Even though I could lock in a 600% profit right now if I really wanted to, I'm convinced that this is still just the beginning. 

Moser: The only way you get that 10-bagger is by hanging on. That's what we're going to do.

Terrific! Let's jump into the Twitter universe here for just a second. I saw a nice back-and-forth that I thought was worth calling out. @VivekChirps said the other day, "The fuzzy identity of MercadoLibre. Is it the Amazon of Latin America, or PayPal, or somewhere in between?" And then he said, "Danny Vena, what's your view?" And Danny Vena, if you folks out there know, Danny is one of our fellow Fools here, you can find all of his great writing on fool.com. Danny, @DannyVena, said in reply to VivekChirps, "All of the above. It started out like eBay as a platform for transactions between sellers and buyers, added a PayPal-like payments system, now has e-commerce shipping, logistics, and warehouses like Amazon, merchant services and capital loans like Shopify and Square."

Listen, it sounds like what Danny is saying is what we've been saying. When you buy MercadoLibre, you're really getting the whole kit and caboodle, as they like to say. If you're looking for someone who knows MercadoLibre and follows it closely, I recommend that you give Danny a follow there. Again, @DannyVena. He probably knows MercadoLibre better than maybe anyone in our entire Foolish universe here. Danny and VivekChirps, thanks so much!

Matt, let's jump into closing out the week here with One to Watch. Given where you are in Vegas right there, anything coming to the top of your mind? What's your One to Watch this week?

Frankel: My One to Watch is not a Vegas stock. I'm looking at Berkshire this week.

Moser: All that risk out there in Vegas, you're trying to mitigate a little bit.

Frankel: I'm looking at Berkshire as my One to Watch this week. Berkshire has over $112 billion in cash. The rumors are really starting to ramp up that Warren Buffett is antsy for an acquisition. Southwest Airlines is the latest big rumor. That's why Southwest Airlines spiked last week. Not that he's necessarily going to acquire that one, but he's definitely got the itch. He wants to acquire a big company. I think it's going to finally happen sooner rather than later. I have my eye on Berkshire. I'm considering adding to my already large position in it. I know you're a Markel fan, but I think Berkshire is going to have a very interesting first half of 2019.

Moser: I get my dose of Berkshire through my ownership of Markel. Maybe it's that sort of second-level investing. Really quick, do you have your eye on any companies you think Berkshire might be looking at? Any thoughts there? We're talking big deals here, anything strike you?

Frankel: There's companies I think Berkshire should acquire, not that they necessarily will. I would actually love to see them acquire Southwest Airlines. That would be a very cool, big, needle-moving acquisition. I'd love to see them expand their holdings in the energy space, which is an area Buffett wanted to make a big acquisition last year but it fell through. There's a bunch of interesting possibilities. Value has been the big roadblock lately. It just depends what Warren Buffett sees the most value in at any given time.

Moser: Man, it just crossed my mind here. What if Buffett wants to acquire Square? I know I was saying Apple acquiring Square was my reckless prediction for 2019, but clearly, they've been looking at some payments companies and he's had a good track record with American Express. What if?

Frankel: I would love to see Square join the Buffett universe, even as just a stock investment, I'd love to see it join his portfolio.

Moser: He'd give Jack all the room in the world to keep running the business the way he wants. Crazier things could happen. That would be a size-y one.

I'm going a little bit the other way here, going to take a close look at Amalgamated Bank, ticker AMAL. This past week in Austin, I was speaking with one of our listeners and members, Neil Grayson. Neil's a fellow Wofford alumnus, Matt. Have I mentioned to you that I went to Wofford College?

Frankel: You have, many times.

Moser: Have I told you about how good Wofford's basketball team is this year?

Frankel: Didn't you guys beat us earlier in the season?

Moser: Listen, man, Wofford is top 25 in the country at this point now, after running the tables in the Southern Conference, 18 and over the year. They appear to be a shoo-in for the big dance regardless of what happens in the Southern Conference. Now, of course we want to see that victory come through as well. Tremendous year. But I digress. 

My Amalgamated Bank idea here is thanks to Neil. Neil, thanks! Small-cap bank in New York. Fairly new, with an IPO that happened just less than a year ago. Total deposits of $4.1 billion. An advantage there in a low-cost deposit base. Total assets of $4.7 billion. Smaller than that small-cap Georgia bank I've been talking about so much here, Ameris Bancorp, but it seems very similar in a lot of ways. Neil thought I'd be interested, so I'm going to dig in a little bit further there and see if we can't come up with some reasons maybe to get this name out there in front of members and listeners and the world.

Matt, it sounds like you've got your plate full there in Vegas. You take care out there, you be careful! Looking forward to next week, when you can tell us about all the great stuff you saw and heard.

Frankel: Definitely. I'm actually heading over to Square's booth after this to see if I can get a word with some of their team. 

Moser: We'll leave it there. Thanks again! As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Today's show is produced by Austin Morgan. For Matt Frankel, I'm Jason Moser. Thanks for listening! We'll see you next week!

Check out the latest earnings call transcript for Visa.