When Visa (NYSE:V) reported its third-quarter results last month, investors were looking to see if problems from the company's first two fiscal quarters of the year -- specifically, low cross-border payment growth -- would persist. Investors need not have worried. The conference call painted a picture of a management team that understood the challenges it faced and was taking decisive action to address them.
The headline numbers certainly appeared fine. Revenue rose to $5.8 billion, an 11% increase year over year, and adjusted earnings per share grew to $1.37, a 14% increase over last year's third quarter.
The double-digit revenue and earnings growth was driven by a 12% increase in processed transactions and a 5% rise in payment volume. While the latter was a bit tepid, it actually represented acceleration over the previous quarter's 3% growth.
The good news was not in the numbers, however, but in management's understanding that just continuing to let its well-oiled machine produce 67% adjusted operating margins quarter after quarter would eventually cause payment volume to drop. Instead, a rejuvenated Visa appears to be turning to small, tuck-in acquisitions to build out its network's capabilities and reach, and is using fintech partnerships to further expand its reach.
In the conference call, CEO Al Kelly said the massive completion of Visa Europe's integration and a renewed understanding of fintech companies' roles in the payments ecosystem were leading to new deals:
First of all, in Europe, we're now on our front foot. We are past the integration. We've got our management team in place. We're not all the way there. But we've been moving more resources into the markets, and we've been able to focus much more on running a very good commercial organization in Europe. And I think that it really is starting to pay dividends to be able to be not distracted by any of the integration activities.
I think the second thing that's happening in Europe, but is also happening around the world, is that we've gotten our act together as it relates to fintechs. I'd be the first to admit that we are a little bit slow out of the chute a year and a half ago, but over the last five quarters or so, we've been very, very focused on fintechs and making sure that we are easy to do business with, easy to integrate with, easy to get on-boarded. And I think that fintechs appreciate the various assets that Visa brings to the table, from our global reach to our fabulous brand to a lot of our experience and capabilities and our scale.
Let's look at the recent slew of fintech companies Visa has acquired and partnered with to contribute to its larger network.
After making one acquisition in 2018, and none in 2017, Visa has finalized and announced a number of deals this year. These include:
- Earthport: Visa outbid rival Mastercard (NYSE:MA) for this cross-border payments specialist earlier this year, enabling it to reach 99% of the bank accounts in 88 countries.
- Rambus: A tokenization specialist that allows Visa to tokenize not only Visa card numbers, but also bank accounts, regional card networks, and other credentials outside the Visa network.
- Verifi: Kelly describes this company as a "best-in-class dispute resolution tool" that allows banks to connect with merchant data after cardholders dispute transactions, allowing the issues to be settled quickly and fairly.
- Payworks: This company provides merchants with a cloud-based, point-of-sale software solution that allows sellers to make changes, such as adding a new payment method, quickly and easily.
Visa has also entered into several partnerships with fintech start-ups to expand the scope and increase the capability of its network. These include:
- Go-Jek, a Southeast Asian super app that has 108 million downloads and many different verticals, including ridesharing, payments, food delivery, laundry services, and more. Visa is adding new use cases and working to make its digital payments easier for its digital wallet, Go-Pay.
- Paymate, an India-based fintech that operates a B2B payments portal with more than 35,000 buyers and sellers. Visa will give better reconciliation data for buyers' accounts-payable divisions.
- Setoo, a European insurer, will use Visa Direct to settle and pay claims quickly.
Visa has certainly come a long way in understanding that partnerships and collaboration work in the payments industry, since former CEO Charlie Scharf threatened PayPal Holdings (NASDAQ:PYPL) after a dispute between the two companies!
The fintech future
It feels odd to suggest that a company that has seen its shares appreciate 122% over the trailing three years has now gotten its act together. It might be more accurate to suggest that Visa is now looking to the future rather than living in the present.
Either way, it admittedly understands fintech's crucial role in payments better than it did. With the Visa Europe integration behind it, the company seems focused on using fintech -- via acquisitions and partnerships -- to grow its capabilities and expand its network's reach. If this new focus is the new normal, Visa's outperformance should continue for a long time.