A survey conducted by MasterCard (MA 0.43%) in 2012 regarding the primary mode of payment used by Americans revealed 70% more of the respondents used cashless modes today than they did 10 years ago.
As cashless transactions continue to grow, one company that looks poised to reap the benefits and capitalize on the massive opportunity is Visa (V +0.20%).
As a global electronic payments technology company, with a network spanning across geographies, Visa has established itself as a pioneer in the field of quick, safe, and reliable electronic payments.
Source: Google finance and Annual report 2012.
The sustained growth indicated above exhibit was primarily achieved on the back of continued growth in the following revenue drivers:
- High volume of nominal payments
- Rise in the number of processed transactions
- High volume of cross-border transactions
Visa boasts a healthy return on equity of 20%, which is comparable to that of its competitors like American Express (AXP 0.36%) (24%) and Discover Financial Services (NYSE: DFS-B) (26%).
Moreover, an operating margin of 60% (highest among its peers) coupled with an impressive net profit margin of nearly 47% highlights the superior operational efficiency of the company as compared to its peers in the industry.
Dodd-Frank: A brief discussion
The Dodd-Frank Act has been a matter of much debate and discussion over the past few months for its potential impact on the revenue generated by banks, network firms, and merchants.
On June 29, 2011, the Federal Reserve released the final rules for capping debit interchange fees at $0.21 per transaction.
The rules impose restrictions on payment routing and network exclusivity, which directly impact network firms like Visa and MasterCard.
The network exclusivity clause essentially mandates the banks to process debit transactions over at least two unaffiliated networks, causing companies like Visa and MasterCard to potentially lose some of their business to rivals like Discover Financial Services (DFS +0.00%).
While Discover believes the network exclusivity clause will create significant opportunity for it to grow its top line, American Express (AXP 0.36%), on the other hand, believes the regulation will create incentives to use credit or prepaid cards over debit, providing new revenue as the company does not have a debit card business.
Visa and MasterCard, the two market leading firms in a bid to mitigate the impact of these provisions on their revenue, have made changes to their fee structures to attract merchant customers.
Overall, I believe the firms have coped well with the impact of these regulations and have made significant changes to their strategy in a bid to minimize the impact to their top and bottom lines.
Why invest?
Visa has demonstrated a strong and consistent growth in operations over the last decade. Moving forward, the company is betting big on the high-growth emerging markets of China, India, Africa, and Latin America to drive the next phase of growth.
