Visa Inc. (V) Earnings Call Transcript & Summary

Hello. It's Bryan Keane, senior payments processors and IT services analyst at Deutsche Bank. And we're thrilled to have Oliver Jenkyn, who's the Regional President of North America at Visa, for a virtual fireside chat today. And both of us are fighting the smoke and staying indoors in Southern California. So I think what we'll do, we'll keep this chat virtual, obviously. And if you have any questions, you can submit your questions through the portal, and you can also just e-mail me directly. So with that, Oliver, hope you are safe and sound. Thanks for joining us.

Pleasure to be here, Bryan.

I wanted to start high level. And just thinking about the world changing in 2020 due to the unfortunate impact of COVID-19, but it also has accelerated the movement towards electronic transactions. Is this the catalyst to finally ignite contactless payments adoption at the point-of-sale in the U.S.?

I think so. Let me let me put COVID aside for 1 second and just talk generally about contactless, and then layer in the catalyst that COVID had been. But contactless, in our view, and it's been our view for quite a while at Visa, it's simply a better, more seamless, secure, sanitary, easier way for consumer to pay. It's just a better consumer experience. It's an idea whose time has come in North America. And frankly, it's an idea whose time came in markets around the world a long, long time ago. So as contactless payments become ubiquitous, consumers really love it. I use this quote all the time. "once the market's gone contactless and you actually talk to consumers, it's not like they say, "Oh, I like those contactless payments thing 17.3% better than the old model. They always say, what the heck were we doing before? And why haven't we always paid this way? So it really is a very positive consumer experience. And our view is the better consumer experience will always win in the long term. So that's why we've been investing so hard in it around the world and specifically now in the U.S. But sometimes that change requires a catalyst. And I think COVID really has been a great catalyst, notwithstanding the fact that we've been making investments here for several years. But where it stands right now, we -- we'll have about 300 million cards in the U.S., tap to pay cards in the U.S. by the end of the year. I think we're over -- slightly over 250 of the top 300 merchants in the U.S. are contactless-enabled. About 70% of all face-to-face transactions take place at terminals and merchants that are contactless-enabled, ready to use. But most importantly, all the players that need to do the work to support it, terminal manufacturers, software providers, card stock manufacturers, they're all doing the work, and they've all sort of kicked into gear. And consumers are building habituation. This is really the best thing about what's happening with COVID. There's nothing good about COVID, but it's a really tiny, small silver lining for payments is that consumers, for health-related reasons, have been tapping to pay. And merchants have been making the efforts, getting used to it. Cardholders have been building the habituation, building the muscle memory to do it. And that's all really good. And so we feel really good about that. And I think, again, as face-to-face storefronts begin to open up, we do think there's going to be a really, really positive wave for contactless. Because again, contactless, it's an in-person payment experience. And given that in payment -- in-person payments are contracting still a little bit right now, we're excited for when it really opens back up and health reasons are behind us, and we think contacts have a really good push. So we do think it will be the catalyst, and maybe that's, again, a tiny little silver lining to what's overall a really unfortunate situation.

One of the stats I saw was that the tap to pay increased spend per active card, almost 15% to 20%. Is that -- is it true? And why might that be?

Well, I think it's a few things. One of the most important things we're looking at, obviously, is replacing cash and check. And there's still about $4 trillion in cash and check in the U.S. to go and get. And importantly, about 55%, last time I looked at the numbers, it's approximately 55% of all transactions under $10 are still in cash. And the contactless experience is so simple. The simple sort of tap and move on, that it's really more efficient than cash, especially in these small ticket transactions. And so again, when things open back up and you're taking public transit to work, you're grabbing the coffee, you're grabbing a bagel, quick service restaurant, maybe going to the drugstore, all sorts of things that require fast, easy, simple throughput, that simple tap to pay experience is enabling us to see great transaction lift at all sizes, but in particular, in those really small transactions where cash is still sort of seen as the easiest thing to use, just pull out a couple of bucks and make a payment for that bagel. The contactless card is a simpler, easier experience than that. And I think that's one of the -- certainly, one of the key drivers. And so I think that's -- and I think also, the last thing I'd say on that is it's those simple every day about town experiences that build that memory for consumers. And so again, once people are out and about a bit more, we think that will help drive transaction lift and habituation in a material way.

In the U.S., would you call it the tap and pay with the card, the stepping stone to multi-payments or not necessarily?

I don't think so. What we're seeing in the U.S. and in most markets around the world is that, that tap to pay experience on a physical card is greater than and growing faster than the mobile payment experience with tap to pay with a phone. And I think that's the functionalities there on the card, the capability, the familiarity. I think people are just very used to paying that way, and I think they'll continue to do it for a long chunk of time. But the data supports it. We're certainly seeing in the U.S. it's more tap to pay on card than there is on a mobile device. And it's growing significantly faster. Having said that, we want the simple and easiest way to pay for a consumer, and they can choose whatever they prefer. So if they prefer using a mobile device to make that tap to pay payment because that's just how they like to do things, that's fantastic. If they're more used to doing it via a card, and that's their preference, that's fantastic as well. We just want to make sure it's how the consumer wants to pay, and it's seamless, easy, secure. So we're relatively indifferent to which one is growing, but the data is showing that, that card, the familiarity with the card is winning out at the moment in most markets around the world and currently in the U.S. as well.

So shouldn't this contactless trend help push up growth rates a little bit in the U.S. when you normalize for the overall COVID impact on volumes?

Yes. Certainly, certainly. I think if you look just specifically at the impact of contactless on what growth would have otherwise been without contactless, for sure. I mean we, without any doubt, believe that this, for all the reasons I mentioned earlier, that this will cannibalize cash-based payments and will increase the growth rate of debit and credit. So if you look at it just on that one piece, that's true. When you think about it across the whole North American business, as I know you can appreciate, it's hard to separate the sort of multiple variables that are driving growth. So there's a wide range of things that are impacting the growth in credit and debit, most of which are overshadowed by what's happening from a macroeconomic point of view with COVID. And so how we isolate the specific impact of contactless is sometimes a little bit difficult. But without doubt, this will be a -- will have a positive impact on growth rates of both debit and credit for us and for our issuers.

Yes. We saw the latest data trends for August, and we saw the acceleration of volume grades -- growth rates moderated a touch. But to be honest with you, I think it was better than I anticipated in August, considering there was less stimulus. And part of that has been the strength, I think, in debit versus credit with debit being up over 24% in August, which has been surprising and credit still lags. So I was just hoping you could just sum up what you're seeing in the recovery in August and the differences between debit and credit?

Yes. This is something, obviously, we stare at every day. But just to build on the first comments that you made again, it's still a good recovery. I think our Q3 -- fiscal year Q3, for us, payment volume was still down in the U.S. And then in Q4, payment volume was up about 8% so far in Q4 with growth of 8% in July, 7% in August per our recent 8-K. So that's good. Credit was consistent with about an 8% decline. And then debit went, I think, gosh, I think it went -- dropped by about 2 percentage points from, gosh, I think it was 26 to 24. But overall, those are pretty good numbers. I agree with your characterization of it. There's a bit of a dip, it was on the debit side, but it was a small dip. My main message is similar to yours, when I look at August. I'm not worried about it, and we watch this data really, really closely. The recovery is going to take some time. It's going to have some ups and downs, some leveling off periods, catch your breath and then hopefully grow again. So I don't think it's -- I personally don't think it's part of a bigger story. And again, there are reasons certainly why there's a little bit of moderation on the debit side, largely with the unemployment benefits coming off a little bit, which are on prepaid cards, which we put in the debit category. So I agree with your overall assessment. To your point on debit versus credit, yes. Yes, so debit is obviously growing much stronger than credit, and there are several reasons for it. This isn't new, first of all. In difficult times, there's what we refer to as the rise of the pragmatic consumer. And history has shown it. So folks become very pragmatic and deliberate about what they're buying, how they pay, what products they choose to use. And there's a shift to spending money that I've got versus borrowing money to make those purchases. And we've seen it in past downturns, it's relatively common. This is more stark than we've seen it in times past, the separation between debit and credit. But the fact that it's happening is something that is quite consistent and very similar to past downturns. Certainly, another driver of it is discretionary spend. Consumers contract their discretionary spend while nondiscretionary holds up and debit is a more nondiscretionary product and credit is a more discretionary product. Related to that, affluent consumers who spend more on credit and more undiscretionary have been restricted with shelter-in-place from doing the sorts of discretionary stuff they would like to do like travel, like restaurants, et cetera. Another reason for the growth in debit has been the government's EIP pushing that through to prepaid cards, unemployment, pushing it through to prepaid cards. And as I said, prepaid, we count in our debit category. And so a lot of that has helped lift those debit numbers and Visa Direct continues to do well in this environment as well. So a lot of those are the reasons that are driving it. But the most important reason is consumer psyche and this responsible pragmatic spend what I've got, not what I borrow in this period of time. And frankly, we even see it in credit, even for folks that stay spending on credit cards. So they have -- for folks that aren't migrating to debit, but are staying on their credit cards, you even see a migration from credit products for more experiential travel products to much more pragmatic, no fee, cash back credit card. So there's a sort of this slide all the way across the credit spectrum to more pragmatism. And frankly, this is going to stay for a while. Coming out of the last recession to sort of '08, '09, '10, it took a few years where debit was growing stronger than credit for a period of time before consumers got comfortable again. So I think it's quite common, but I will say the spread between debit and credit is greater in this downturn than normal.

And then are you guys pretty indifferent on the yields on -- but it feels like, I think from the last call, it seemed like yields would be pretty similar between debit and credit. And I don't know if that changes between off-line or online debit, but maybe you could just talk about the yields that you guys get. Because I think when people originally think about it, they think, well, discount rates are higher on credit versus debit, but that's not necessarily how Visa gets paid.

Yes. There's a short answer, and then there's a really painfully long answer. But the short answer is, we really are quite indifferent between which product it's coming across. It's not a big driver of difference. The slightly longer answer is there's different offsetting factors, for example, like one of the reasons that credit yields -- a thing that drives credit yields down is there's more concentration amongst the big credit issuers. And so there's a bit more pressure on yields in that side. However, on the debit side, we have to win the transaction twice, given the Durbin amendment. You've actually got to get on the surest parts, but then you've got routing considerations on the other side, which balances out debit yield. So the short answer is we genuinely are relatively indifferent, but there are approximately 300 considerations that make one better or -- but then there's a countervailing force, so it actually gets quite complicated when you go into the weed. But if we spend 2 hours talking about it, it would still come back to the same conclusion, which is we're relatively indifferent between them.

We've noticed a buzz around credit installments and in particularly some buzz happening here in the U.S., what's the opportunity for Visa for credit installments?

Yes. So we think credit installments is very real and very tangible and a great opportunity. Consumers see value in the option when they're shopping. And it's not a theoretical thing. We've seen it in markets around the world. When presented with this option, it's something that the facts bear out and the data bear out. It is something that consumers like. And so if consumers see value in a certain payment and transaction experience, then Visa is going to work hard with our partners to help deliver it to them. We have a two-pronged approach. First of all, we'll partner with existing installment players like a firm or Afterpay, Klarna, others, so we'll work with models that are already out there and there's different forms of partnerships with those folks. But also the second prong for us is these proprietary installment solutions, which we're working with our partners to bring to market, and we think this can be quite valuable, essentially leveraging the Visa network and the Visa connectivity into all of the ecosystem players to put an installment platform onto the Visa ecosystem. And there's value for all the players by doing so. For the merchants, they only need to do one solution globally, where eligible clients can use installments in store, online, traveling abroad, et cetera. Merchants can display installment plans in simple integrated ways. So that the consumer doesn't have to be redirected to a third-party website to get advantage of it. We can put it right into that experience. Financial institutions are able to offer this service to their cardholders to add additional value. So there's -- given the infrastructure that we've built in Visa, layering in an installment capability that can pipe into all of our acquirers and all of our merchants, while at the same time, all of our issuer processors and issuers is something that can bring a valuable, consistent sort of ubiquitous installment program to scale quite quickly. So we're working on that now. We're partnering with TSYS, TSYS Global Payments, Commerce Bank in the U.S. and others to begin to bring this to market. So again, two-pronged strategy, partner with existing players that are out there doing this, but also work on a solution that we could bring to scale for market, leveraging the connections and the partnerships and the infrastructure that we've got as well. And we're excited about both of those.

Does any of this disintermediate you guys? Or does this -- or are you guys still would still be involved in this process?

Yes. We'd absolutely still be involved in the process. I think, listen, our overall philosophy is we want to electronify and digitize as much payment as possible, and we want to do it with a great consumer experience. And as long as we're supporting initiatives and efforts and ideas and people who are doing that, it's our view that we'll find a healthy role for us to play, and we'll get our fair share of the business. So for us, again, new models, new ideas are going to come up. We want to participate and how we participate might change based on what other parties are bringing to the table. But if it's a good experience digitizing and electronifying payments, if those things are happening, we're going to want to be involved, and we're going to bring our assets and our capabilities and our connective tissue to bear to help make it a success. So we feel good that we'll have a nice role to play and help bring these things to scale.