Visa (V -0.11%) is a company that generates billions of dollars in revenue each year. That's not surprising, given the global reach of its brand and the prevalence of its plastic. Millions of Americans have at least one Visa debit or credit card and use it frequently as a payment tool.
But not all of the company's numbers are so high. One that seems to leave much to be desired is its take rate, i.e., the percentage of revenue it collects from the gross payment volume transacted with its cards. This is far smaller than many might expect. What might the company do to increase the take rate, and perhaps more importantly, is this necessary?
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An intermediary for many merchants
Visa's payment volume for its fiscal third quarter ended June 30 was just over $4 trillion (it crossed that mark for the first time, by the way), and revenue was $11.6 billion. Dividing the latter by the former gives us the take rate -- a little less than 0.3%.
Wow, that number is wafer-thin, huh? Yes, at first glance, but there's a very good foundational reason for this. Visa is known in the payment card world as an "open-loop" operator, meaning it functions almost purely as a facilitator and processor of transactions that use its cards. It's crucial to know that it extends no credit itself; rather, this is done by issuers, which are mainly banks.
Incidentally, Mastercard is also an open-loop operator. Meanwhile, American Express is a "closed-loop" company, meaning it provides credit and processes the purchases made with its cards.
So an open-loop operator is basically a large, sprawling, omnipresent intermediary that ensures transactions go through and collects tiny fees for the work. Hence the chasm-sized gap between payment volume and revenue.
Visa is obviously happy with its business model, as are shareholders. Over the years, the company's total return (stock price appreciation plus dividend payouts) has risen more than the S&P 500 index.
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Key Data Points
Time for a change?
For all this to work, the merchant discount rate (MDR; the comprehensive fee charged to a business for every transaction) has to be modest; otherwise, stores won't be willing to accept Visa cards for payment. So the scope for bumping the take rate is limited. Nevertheless, should it choose to do so, the company could go in one or several directions.
It always has the option of simply raising its ultra-low processing fees tucked into the MDR, for example. Another take-boosting move would be to attempt to push cross-border commerce higher, as such transactions generate higher processing fees for the company. Finally, it could rein in the so-called client incentives, the sweeteners it grants to important issuers to be their exclusive card brand.
I wouldn't count on it making any such moves. Competition is tight in this business -- generally speaking, anyone who qualifies for a Visa credit card can probably score a comparable one from Mastercard, and possibly even from the more selective American Express -- so care must be exercised to avoid alienating issuers, merchants, and cardholders alike.
Besides, Visa's current model works brilliantly, in my view. I don't see a screaming need to do more than tweak it, at best.
