Visa Inc. (V) Earnings Call Transcript & Summary

Hello, everybody. I'm Jason Kupferberg, the payments, processors and IT services analyst here at Bank of America, and we're very excited to have Visa with us today. Specifically, we have Jack Forestell who is Chief Product Officer at the company. Jack, thanks very much for joining us. We appreciate it.

Thanks for having me, Jason. Hello, everybody.

So Visa's been very good about providing some regular updates on key metrics amid this macro backdrop. And obviously, we saw the latest update that you disclosed last night. So I thought just to start, maybe for those who might have missed some of the details, can you just give us kind of the highlights for the month of May? And maybe talk a little bit about some of the growth rates that you saw as you actually exited the month and perhaps a little bit of color on the types of transactions that have been driving some of the reacceleration.

Yes. I'd be happy to, Jason. And look, we're -- I know I am, we are, at Visa, spending a ton of time poring over the numbers. There's just so much going on, so many moving pieces by individual country, by market, by vertical, by channel, by day, by week. So we know you guys are as curious as we are, so we thought we would try and package up May and get that out there. And [indiscernible] do that in advance to today's conversation. So hopefully, people had a chance to see some of it. But why don't we just dig in? So maybe starting with the U.S. in payments volume, overall spending declined in May by 5% on a year-on-year basis. But May was actually 13 percentage points better than April, and we saw a pretty steady improvement in spending week-over-week and we've seen that happening since mid-April. Another big thing we've seen is a real debit/credit mix shift. Debit continued to significantly outperform credit. That would have positive year-over-year growth and has had since late April. It grew 12% in the month of May. Credit also improved from April to May by 9 percentage points. By the way, I can't believe I'm saying percentage points and all these things month-to-month. I mean we're used to talking in a little more [indiscernible]. Credit improved in May by 9 percentage points but it's still down year-on-year 21%. And look, there shouldn't be any big surprise there. Debit outperforming credit, we've seen it before. People tend to want to rely on their own funds in tougher times, especially when it comes to purchases for essentials. And we've definitely seen a mix shift away from more discretionary items where consumers are more likely to turn to credit. But look, when we look across different verticals and different ticket size bands, in almost every case, the larger share of spending is now on debit than precrisis, even, as I said, for some of the higher-ticket stuff which people may find surprising. Turning outside of the U.S. For most of Europe and in a handful of countries, like Australia, Canada, Japan, we've seen pretty similar performance to what we've seen in the U.S. I mean the cycle of the crisis so far has been pretty similar across most of those markets. Different levels, different degrees of stringency on lockdowns in different places have driven different rates of drop-off. And so if you adjust for that in those markets that I just listed, we've seen similar patterns of relative improvement. We also have seen kind of a consistent approach to stimulus in those markets, which we think is a big factor in some of the bounce-back that we're seeing. We definitely have markets where strong restrictions got put in place. We saw big drops in spend and we're just seeing flat at bottom. India is a good example of that. Singapore, which initially was doing pretty well but then had a sort of second wave of the virus and instituted some pretty severe lockdown impositions, is also in that kind of hard down and sort of flat. We've also seen -- some of our larger markets have really positive year-over-year growth, especially May, as things started to open up more. New Zealand, Denmark and Chile have all done really well. New Zealand is a particularly interesting example. New Zealand implemented really tight restrictions, saw a pretty sharp drop in spend earlier in the crisis; largely eradicated, knock on wood, the virus and was able to open all the way up to sort of level 2 opening mid-May. And in New Zealand, I remember, as we saw a pretty dramatic shift relatively quickly and consumers getting back out in face-to-face world, doing transactions. Actually, saw growth pop by 60 percentage points, and so far has -- I guess, that -- I had to stop myself a few times here and say did I really mean percentage points? Yes, I really meant percentage points. It kind of stuck up at that level so far. So look, when you look at the whole world, process transactions declined 12% in May, which is actually 12 percentage points better than April. Let's see what else can I tell you. Beginning -- since April, we've seen elevated average ticket sizes, and that's sort of a reflection of a few things. We're certainly seeing people buy more on a single shopping trip. I'm sure for many of you listening, that resonates, right? If you're in a shelter in place, you're supposed to get to the grocery store and buy as much as you can to last you a little while so you don't have to go back again. So we're definitely seeing that show up in ticket sizes. And we're also seeing a change in mix of spending as people are staying home. So they're not bouncing around from the coffee shop with that low-ticket purchase to buying their lunch while they're at the office, which is a low-ticket purchase, to tapping to pay for their commute or paying for their commute. So we think all that is driving some degree of elevation in average ticket sizes for the time being. Last thing I'll comment on is cross-border. So if we look at constant dollar cross-border spend, stripping out transactions within Europe, those transactions shrunk by 45% in May, which is about a 6% improvement from April. The overall constant-dollar cross-border volume for Visa, by the way, declined 35%, which is 10 percentage points better than the volume excluding intra-Europe. So it's a reasonable -- a significant difference. But the reason we wanted to split that out is our international fee revenue is really driven by the volume excluding those intra-European transactions. So those are the numbers we thought you'd most really want to track. And so sticking with those numbers, excluding the intra-European transactions, just a little more detail in there, we've seen travel-related spend remain really weak, shrank 78% in May and very little improvement from April even -- and then if you're -- if you think about travel within that, perhaps not surprisingly, just not a lot of activity on long-haul trips and not a ton of short trips either, but maybe a little bit more than long haul. And then again, inside of cross-border card-not-present spend, we saw that increase relatively early in the crisis and it sort of maintained that level throughout May. It's up about 18% year-on-year, mostly driven by retail. So sorry if that was a bit long, I think there's actually a lot more in the 8-K than I covered there. But those are some of the highlights that might be most top of mind for people.

Yes. Super helpful. And maybe we can talk about card-not-present just overall as a channel and a category for a second. Obviously, COVID's been stimulating a shift in that direction. Curious if you've seen any reversal in those e-commerce behaviors in states and countries that were earliest to start reopening. I thought it was interesting in the data you released last night that card-not-present, ex travel, actually seems to be accelerating in recent weeks.

Yes. It's -- man, some really interesting things going on. To give you some numbers, first, let me talk a little bit about what's happening. So we saw card-not-present, excluding travel growth, pop early on, and it's really remained there consistently. I'm talking in the U.S. right now about 30% up. While card-present spending, at the same time, improved in April. It was down almost -- in May over April, it was down almost 50% year-over-year, and April exited in the mid-20s. So you sort of see, if you're imagining the graph, the card-not-present stuff popped up 30%, stayed up there. The card-present stuff dropped 50%, and it's now kind of climbed back up to 20%. So the big question is what are we going to see in terms of that as an acceleration of a secular consumer shift in behavior away from the face-to-face card-present transactions? And there, I would just say it is just way too early to say. I anticipate there will be some degree of acceleration there. I also anticipate we'll see a little bit of a shift back to normal as things start to open up. Yes, go ahead, Jason.

Yes. No, that all makes sense. So maybe we can zoom out a little bit now and just reflect back on your Analyst Day, which it's amazing that, that was only 4 months ago, it feels more like 4 years. But there were some very important growth initiatives highlighted at that meeting. I was hoping you could just walk us through how Visa's network of networks strategy has evolved over the past year or so. Where do you see the greatest opportunities to expand your addressable market beyond VisaNet?

Yes. And I agree, that Investor Day was actually just a few weeks before this crisis really took root, and it feels like it was years before that. But look, we talked about it at the Investor Day, our strategy really evolved from facilitating commerce to facilitating and enhancing all forms of money movement. So we're enabling the movement of money for everyone everywhere. And we really want to be a single point of connection for any kind of transaction on the Visa network and beyond the Visa network. So that's kind of, in a really short form, what our network of networks strategy is all about. I'd say the way we're delivering on it is by building and assembling a set of assets that enable us to do 3 or 4 things. One, move money to any end point into all form factors. We want to be able to push money out to anywhere: any bank account end points, any card credential end point and really any form factor. We want to be able to provide a single point of connection to all available networks for our partners. We want to leverage our sort of world-leading Visa Settlement Service to facilitate liquidity and guaranteed payments for our partners. And then if I were to add a fourth, I'd say we want to provide a set of value-added services across all Visa transactions no matter what the underlying rail is that's being used to switch the transactions. So -- and just sort of going from that articulation of the network of networks strategy to this sort of our broader growth strategy, which has 3 pieces, and the 3 pieces are: expanding consumer payments, penetrating new payment flows and delivering value-added services. If you remember, our Investor Day was sort of structured around those 3 themes. The network of networks strategy actually plays in all of them. If you think about it in consumer payment, it's about core Visa switch transactions on our proprietary networks: VisaNet, Interlink, Plus. In new flows, we drive a wide range of low-ticket, high-velocity use cases through Visa Direct, which can use a combination of VisaNet and Earthport, which we've added into the Visa family. Earthport has direct ACH and RTP connections to 88 countries, so you can get an account-to-account payment to pretty much any end point on Earth at this stage. And then for higher-ticket, lower-velocity transactions between businesses, we're focused on the cross-border side of that and scaling our B2B Connect platform, a whole new network that connects banks globally to enable cross-border payments. And then lastly, on value-added services, like I said, that's about offering a set of capabilities that really can differentiate Visa transactions even when those transactions aren't switched on our own rails. So think about things like tokenization, dispute resolution, fraud scoring, payer authentication, we can deliver all of those, obviously, over Visa transactions but, increasingly, over transactions that are switched across a different rail. And I'll add one more thing, sorry. With the acquisition of Plaid, our network of networks, I think, is going to expand even more. Plaid itself is a network, connecting financial institutions and app developers and, in and of itself, represents an opportunity to sort of expand the scope and reach of our whole network of networks model, so we're pretty excited about it.

For sure. So I wanted to come back, you mentioned B2B in the last answer, and I wanted to go a little deeper on that topic. Maybe just to start there, can you talk about to what extent COVID might be having either a positive or a negative impact on the pace of some of these initiatives?

Yes. Look, it's a -- I know it's been a theme of the day in some of our conversations. It's a little early to say what -- how exactly COVID is going to impact the B2B space. Certainly, T&E has been hit substantially, and we aren't expecting any return to normal in corporate T&E until likely there's a vaccine. And even with one, we think most businesses are going to really think differently about how business travel looks. So there's probably some long-term impact there, but we just don't know what it looks like yet. In the sort of accounts receivable, accounts payable space, we certainly saw some initial contraction caused by supply chain disruptions. But there, we'd kind of expect things to more or less return to normal. A third area that we focus on in the B2B space is cross-border B2B transactions. There, we don't really see that much of an impact. I know we've -- I already mentioned our own cross-border face-to-face business, and certainly, the cross-border B2B travel space is impacted. But here, we're talking about enterprise-level transactions across large businesses. We don't really see much of a long-term effect there either. Look, the bottom line is, I think businesses are going to be looking to gain efficiencies over the short to medium term. And whether it's the carded B2B space or the cross-border B2B enterprise payment space or the domestic accounts receivable, account payable space, I think our solutions have the promise and the opportunity to deliver efficiencies for our partners across the board. So on balance, I think there will be some long-term tailwinds here.

Sure, sure. Yes. And I'm curious just to get your perspective on how you see Visa's overall B2B product portfolio being differentiated in the marketplace.

Yes. Well, let me hit it into 3 things. I was just kind of alluding to the card-based component of the market, the cross-border piece that we're focused on and then the domestic accounts receivable, account payable space. In card, we are the market leader. I mean we do over $1 trillion worth of volume. We offer unprecedented scale and breadth of product in core T&E, procurement and virtual card but as well as reconciliation and data capabilities. So we've got the full suite of products, and we're continuing to invest more to enhance and support them and extend our capabilities in virtual fleet and government payments. So we feel like we're pretty differentiated in the card space and in a great spot. In the cross-border B2B space, we just launched a brand-new network, B2B Connect, which is a multilateral real time network to get funds from one entity in one country to another entity in another country. In today's world of cross-border B2B payments, it's a complex and multistep and linear correspondent process that can really take a lot of time and carry a lot of uncertainty. So we really like and have met with a lot of positive receptivity on B2B Connect in the short term. But it's a new network and new networks always have a chicken-and-egg, so we're working hard to scale it. We've got great partners onboard. We've reached 70 countries already. We think we'll add another 30 over the next 18 to 24 months and, hopefully, get the platform to scale by 2022. But in that space, there really isn't anything like B2B Connect out there. And then lastly, in the accounts receivable and accounts payable space, we're trying out some different things. Where we're relying on virtual card, we're working with a few different partners like PayMate in India and Billtrust here to work with them to build platforms there. But really, we're selling processes, mapping out exactly what the key pain points are and how we can best help build solutions that are differentiated and unique for Visa.

Great. Appreciate that. So as we were talking about before, e-commerce is a clear beneficiary from COVID, so thought it might be a good opportunity for you to give us an update on click-to-pay. Curious if you've seen a ramp in merchant acceptance given the recent shift in consumers spending online, or are you seeing merchants just be a bit too distracted by the crisis to focus on making changes to their checkout experience?

Yes. Like the first thing I'd say is that the digital commerce experience just -- it's still too complicated. It's too complicated for consumers. It results in too many bad outcomes: high shopping cart abandonment, too many failed transactions, too much fraud. And the click-to-pay solution is really designed to streamline the whole consumer experience by offering stronger security, tokenization, improved transaction success rate and, ultimately, a better outcome for the consumer and more sales on the merchant side. So look, in the near term, I'm not sure it's a matter of distraction on the part of sellers with respect to click-to-pay. Our approach with click-to-pay was really to get a handful of merchants up on the platform prior to the holiday season. We did that successfully, and then we started turning our attention to a more scaled conversion of our preexisting Visa Checkout solution into click-to-pay. At the end of our second quarter, we now have 10,000 merchants enabled. That's up from over 5,000 at the end of the first quarter. So we've been very focused on getting that migration done. We've been able to do that in ways that are really low impact for those merchants. So like I said, I'm not sure it's a matter of distraction or priority. I think those merchants are just happy to get that more streamlined, efficient solution in place. And now we're starting to turn our attention more toward working with partners to scale that out, really get the mid- to long-tail merchants up and running and to start to take it outside of the initial geographic deployment here in the U.S.

Understood. So thinking back to the last earnings call, you announced that you extended and expanded your relationship with Truist. I wanted to see if you can give us a little bit more color on which parts of this are extensions versus new business, why you think Visa won those pieces of incremental business?

Yes. Look, in terms of why did we win, I don't want to deliver any -- you kind of need to ask Truist. But in general, on these things, I'd say when we win a deal, it is about a whole package. It's rarely about price and much more about the brand. It's about our products. It's about our people. It's about the work we'll do. It's about the solutions and the thinking that we put in the process. I want to emphasize the point about the strength of the brand because everyone knows the brand well, but I'm not sure we emphasize the point to announce that, look, by any measure, our brand is among the top global brands, not just in the payment space or broader financial space but just flat-out top global brands. We're proud of it. But we're also really focused on the tangible value that our brand can generate for our clients, right? And it really is, and we can demonstrate it with the facts and with the numbers through meaningfully higher consumer preference for our brand that consequently turns into higher levels of spend and engagement. So again, I'm not -- there's nothing specific to Truist here, but that's certainly a key ingredient. When it comes to our products and our people, look, I think we have the best minds in payment. We put those minds to work alongside our clients to help drive their business forward. We do joint solution design and we pool things together across risk and digital marketing and portfolio analytics, loyalty, digital solutions and so much more to develop solutions with our clients that drive real growth for them. So I mean that's how things come together to create an outcome like the one that we're so happy to have created with Truist.

So when the incremental business that you've won there clips to Visa, will that be a big bang? Or will that just be as the cards expire? And I'm just curious, once this conversion is complete, does this move the needle on your overall U.S. volumes?

Well, on the last part of your question, look, it's a marquee deal for us we're really excited about, super important to us. On the first part of the question, that one you really do need to ask Truist. I mean the Truist leadership team is focused on delivering a larger-scale integration of BB&T and SunTrust, those brands and those operations. So we're just here to help them deliver that in the way that they see fit and along their own time frame. So however that turns out, we're going to be -- we are and we're going to be incredibly excited to be a part of it.

Yes. No, fair enough. So let's talk a little bit about contactless, as you guys like to call it, tap to pay. We put out a report on this yesterday, just the expectation that there'll be some acceleration in this direction because of hygiene concerns related to COVID. So I wanted to get your perspective. To the extent that this dynamic does play out, how much of it do you think will represent an outright displacement of cash versus consumers just switching from a noncontactless card to a contactless card or to a mobile wallet like Apple Pay?

Yes. Look, there's certainly movement happening here. Like we can see it in our own numbers. I actually see it in my text messages. I've had so many people take pictures of sales from around the world where sellers have put together signage that says please use contactless. And I've often actually grabbed those pictures, sent them back to the team and said, "Hey, what's happened?" And lo and behold, when merchants put up that little bit of encouragement, we start to see the contactless transaction rates popping. And look, from a consumer behavioral standpoint, one of the things I think is happening here is that the virus is helping really accelerate the trial repeat purchase cycle of a consumer product. So if you think of contactless transaction like a consumer product, you got to get people to try it and then you got to get them to repeat it. And with a product like this one where you got to try it in physical space with other people around, there's someone on the other side of the checkouts, there are people behind you in line, there's a little bit of apprehension there. Sometimes people think will it work? Will I know how to do it? What if the person behind me gets mad? None of these things are, I think, a real worry, but they certainly loom over it. And so I think it can cause the adoption cycle to be a little bit slower. I think what's happening here is those apprehensions are just being obliterated by COVID. I actually have heard stories of other shoppers kind of pointing out to people that they could use contactless because their card is enabled. So I think we're really seeing a big shift on the consumer side toward it. People want it. The demand is there. We're seeing a shift on the seller side. And the shift in the demand side is helping drive supply. So issuers are delivering more contactless cards. In U.S., we got more than 190 million cards now, 9 of the top 10 issuers issuing them. But we need more. We do have 900 million cards in the U.S., so we still have a long way to go. But I'm hopeful that the demand for the experience will help accelerate it. And the U.S. is one of the markets in the world where we're still at a pretty early stage. In countries that have more penetrated contactless card bases, we're also seeing big increases in cash displacement. As of the end of April, we had, let's see, more than 50 countries that have 50% or more tap-to-pay penetration, up from 30% a year ago. And we're now up to 12 countries where it's more than 90%. And a year ago, at this time, we only had 3. So you can just see it. And then I think you're asking a little bit about how do we know about how much cash is getting displaced by those transactions. We don't really see the cash side, so it's hard for us to do the calculus on that. That said, we like both, the cash distillation and the migration from a chip or max swipe transaction, over a contactless because using contactless is just a better experience, right? So instead of a noncontactless transaction, it's creating a habituation to a better experience, which leads to more cash displacement because it gets used more frequently in more everyday transactions and just overall contributes to a stronger relationship with the product overall.

Yes. No, it makes sense. I wanted to also ask you a little bit about some international partnerships that were highlighted on the last earnings call: Paytm, Tencent, Safaricom. Can you maybe just make a couple of brief comments about the significance of each of those and any sort of time frame when you think they could start showing up more notably in volumes?

Yes. I mean I am like super excited about all 3 of those. I mentioned our network of networks strategy. There are components there about driving growth in core consumer payments but also penetrating new flows and getting to new end points. And all 3 of these contribute, I think, in meaningful ways to that. So let me just try and tick through them quickly. Paytm in India, I mean, those guys are a juggernaut. They've grown massively over the last few years, more than 500 million users, 16 million sellers in their closed-loop network. But what we're doing with them is helping them embed a Visa credential into the Paytm wallet. When we think about it, that wallet then becomes more valuable to the Paytm user because they can use it anywhere Visa is accepted, physically or online. And Paytm can generate issuer-type revenues from that product add. On the merchant side, they're enabling their sellers to accept Visa. So their sellers can attract a different, perhaps more affluent, client base and Paytm can generate acquirer-type revenue streams. So it's like a win-win-win for Visa, for Paytm and for Paytm's users on both the consumer and seller side. With Tencent, we signed a partnership with them. They are the parent, as you all well know, of WeChat, which is a platform with more than 1 billion monthly active users on it. In this case, we're going to enable a Visa credential to be embedded into the WeChat wallet for Chinese tourists to use at Visa acceptance points as they travel around the world and want to tap to pay or when a Chinese consumer is shopping online with merchants outside of China. And cross-border outbound Chinese volume is very important to us, so we're really excited about the partnership. It's a first of its kind for WeChat and for us. Then the last one you mentioned was Safaricom, largest telco operator in Kenya and a big provider of financial services through their M-Pesa platform. They got 24 million M-Pesa users, 173,000 M-Pesa merchants. And this one, it's sort of a little bit similar to the Paytm partnership where we'll put them on the wallet side to expand cashless and online payments to a huge number of merchants and consumers. And I think you also then asked when will it show up. Look, it's going to take time for these things to show up. There's usually a lag from the time we announce a deal until we've got all the solutioning done, we've got things lit up, fully tested and then scaled. So it could be a little while. I don't want to give you an exact time frame. But I'd just point you back to the significance of the opportunity. When you combine the 3 of them, it's 1.5 billion potential end user credentials and 65 million merchant locations. So we're pretty excited about the scope of it overall.

Well, that's great. And time has flown here, and unfortunately, we are out of time. Really appreciate all of your thoughts and commentary, Jack. And thanks, again, for taking the time to join us. Hope you stay safe.

Thanks for having me, Jason. And thanks, everyone, for joining. Take care.

Okay. Talk soon. Take care. Bye-bye.