Visa (V 0.10%) is a well-known brand around the globe, and the company operates the largest credit and debit card network in the world. But over the years, Visa's strategy has evolved beyond payment cards. Recently, the company acquired Latin American fintech pioneer YellowPepper for an undisclosed amount.

Here's how the acquisition fits Visa's growth strategy and the company's vision for the future.

YellowPepper specializes in easing payment transactions

In November 2020, Visa completed its acquisition of YellowPepper, a fintech company that enables real-time payments between card, account, and blockchain networks through a set of application programming interfaces (APIs). In other words, the company provides software that makes it easy for clients to send and receive various types of payments. YellowPepper CEO Serge Elkiner has explained the company in this way: "We're a fintech helping banks keep an edge against big tech firms."

Girl considering payment while holding a smartphone and a credit card.

Image source: Getty Images.

YellowPepper operates in nine countries in Latin America and the Caribbean, including Brazil and Mexico, the two largest countries in the region by current GDP. At the time of the acquisition, YellowPepper had over 50 clients and 5 million monthly active users. But despite its small size, the company could help Visa grow its market presence in a big way.

Visa's growth strategy involves a "network of networks"

In recent years, Visa's strategy has expanded beyond card-based consumer payments into real-time and account-based payments, and value-added services. Visa refers to this as its "network of networks" growth strategy -- and YellowPepper fits in perfectly, building on a previous merger.

In 2019, Visa acquired London-based Earthport, the world's largest independent automated clearing house (ACH) network, enhancing the company's account-based payment abilities. This added use cases for Visa Direct, which enables payers to push funds in real-time to cards or bank accounts. It also helped improve Visa B2B Connect, which enables account-based payments from business-to-business (B2B). Now, with the acquisition of YellowPepper, Visa can further build on this strategy, enhancing real-time and account-based payments in Latin America.

During Visa's fourth-quarter earnings call, CEO Alfred Kelly compared YellowPepper to a universal adapter that allows clients like card issuers, payment processors, and governments to access new payment capabilities without significant expense. Put another way, YellowPepper will enable Visa to build new payments solutions for merchants and consumers more quickly. For example, in early 2020 (prior to the acquisition), YellowPepper partnered with three Peruvian banks to launch PLIN, a real-time peer-to-peer (P2P) payments platform for the banks' clients.

Visa's CEO also said the acquisition would allow for easier integration with Visa Direct and Visa B2B Connect. If that pans out, Visa could more aggressively target opportunities in B2B payments, disbursements (business- or government-to-consumer), and P2P transfers in Latin America -- an $8 trillion market opportunity, according to management. In 2020, Visa Direct facilitated 3.5 billion transactions around the world, but this acquisition could drive that figure upwards in the years ahead. Likewise, Visa B2B Connect currently reaches 80 markets globally, but YellowPepper's platform could help the product gain traction in new markets.

Finally, YellowPepper bolsters Visa's offering of value-added services, which help secure payments through tokenization and identity validation. In 2020, despite a 17% drop in total revenue, Visa's revenue from value-added services jumped 18%, and this acquisition should reinforce that growth in the coming years.

A final word

Investors should keep in mind that YellowPepper is tiny compared to Visa, so its impact is likely to be subtle. Even so, this acquisition could help Visa gain market share in Latin America over time. Meanwhile, investors should pay attention to management's commentary to see if the company provides any specific updates.

Additionally, investors should watch Visa's payment volume and processed transactions in the coming quarters. Visa generates service revenue by taking a percentage of payment volume and data-processing revenue based on the number of processed transactions. While it's unlikely that this acquisition moves the needle substantially, slowing growth would still be a bad sign.