Warren Buffett's Berkshire Hathaway is known for having huge stakes in companies like Apple, Coca-Cola, and Bank of America. But the conglomerate also has much smaller positions.
It has a tiny holding in Visa (V +0.71%) that most investors might not know about. Despite this being a high-quality business that Buffett owns, it's not without downside. There's one key risk facing this otherwise phenomenal stock that has climbed 403% in the past decade.
Visa's constant headache
Visa has made its early investors rich, but it's not a perfect company. Perhaps the biggest risk facing the business is from regulators. In 2011, the Durbin Amendment, which was passed as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, went into effect. The goal was to cap the fees that merchants paid to accept debit-card payments.
However, this is now viewed as failed legislation, as consumers didn't benefit. Gone are the days of many no-fee and rewards-based checking accounts. And studies have shown that big retailers actually benefited, choosing not to share their savings with shoppers.
The Durbin Amendment shows that the end result can be far from what was originally hoped for. The beneficiaries -- merchants -- aren't required to share their savings in the form of lower prices. This calls into question the legislation's overarching goal of benefiting consumers.
But that hasn't stopped more regulatory action from happening. The Credit Card Competition Act, introduced by Senator Dick Durbin (does the name sound familiar?), would allow merchants to choose which network to route their credit card transactions to -- again, in an effort to lower fees. However, Congress has yet to vote on this proposal.
It's also not unusual to see Visa pay ongoing penalties. Through the first nine months of fiscal 2024, the business set aside $452 million for potential litigation costs.
Although Visa sets the interchange rates, it isn't the stakeholder that receives it. Card issuing banks, like JPMorgan Chase or Capital One, earn interchange fees, which is the largest part of the cost of a card swipe. These financial institutions must attract customers and take on credit risk. These interchange fees help fund credit card perks and rewards.
Nonetheless, Visa's incredible financial success makes it an easy scapegoat, and I don't believe that's likely to change. Shareholders can expect the business to be the subject of more regulatory action in the future.
NYSE: V
Key Data Points
Visa is a wonderful business
If a company's top concern is regulatory risk, then maybe it's a clear indication of just how dominant its business is. The same thing happens in the tech sector, with Amazon, Alphabet, Meta Platforms, and Apple always catching the attention of politicians. And these are some of the best companies the world has ever seen.
To be clear, I believe Visa falls into this elite category of high-quality businesses. Regulatory hurdles aren't anything new, and Visa has still been able to prove just how successful it can be.
That's unlikely to change for the foreseeable future. The company benefits from the long-term secular trend away from cash- and paper-based transactions toward cashless methods. There's a lot of room to further penetrate both developed and emerging economies.
Visa is extremely profitable. In the past five years, its operating margin has averaged a ridiculous 66%. And the company's competitive position is protected by the presence of network effects. These traits make it a compelling business to own.
Investors should always take the time to understand the risks facing the businesses they own. It helps you develop a more thorough understanding of the situation. In Visa's case, it will always have to deal with regulatory uncertainty, but that doesn't mean the company isn't worthy of your investment dollars.
