Visa Inc. (V) Earnings Call Transcript & Summary

Good afternoon. This is Ashwin Shirvaikar, Citi's Payments Analyst and Global Co-Head of FinTech Research. So we have over 700 registrants for the conference. I know that for a majority of you, this session is one you all have been waiting for. So without further delay, let me welcome Visa. And from Visa, we're fortunate to have Vasant Prabhu, who is Vice Chairman and CFO. Vasant, welcome to our event.

Thank you, Ashwin. Thanks for having me.

Absolutely. I thought it would be maybe a good idea to start off talking about sort of the structural changes that you see in the payments landscape going forward, and particularly given what we've gone through this year because of the pandemic and so on and so forth. I'm thinking e-commerce acceleration. I'm thinking the emergence of buy now, pay later. Not that, that's related necessarily to the pandemic, but that and the rise of alternative payment mechanisms, a lot of stuff going on. So give us your view of the structural changes in the payments landscape.

Sure. We had our Investor Day in February, and we talked about our conviction that there was an extraordinary amount of growth ahead of us, a 10x opportunity. And I think what the pandemic has done effectively is accelerated a lot of that, as you described. One of the more obvious ones, of course, is the acceleration of the shift to e-commerce. Now this shift has been underway for a while, but only 15% of consumer payments were actually e-commerce coming into 2020. And there's no question there's been an acceleration in that. And you can see that from the numbers that we've reported. You've seen some massive growth in our e-commerce side of the business. It's growing significantly faster than it was pre-pandemic in an economy that clearly is not growing as fast almost anywhere in the world. So one thing that's happened is the massive shift to e-commerce. And we're seeing that in all categories, including categories that historically were not heavy on e-commerce like food and drug, for example. So that's clearly one structural shift. It's also important to note that something we've been watching very closely is what happens to this when face-to-face commerce is possible again. And as economies have opened up in the past few months, we have seen e-commerce stay very strong even as face-to-face commerce is possible, which means that the habits that people have formed in the past few months are sticking. We've seen significantly more people activate their cards online, and we're seeing more transactions per card online, which means that the whole move of people away from face-to-face commerce to e-commerce has definitely seen a step change, and it's sticking. The other things that go with e-commerce, of course, is it gives us a greater opportunity to sell value-added services. Certainly, fraud and authentication are all important things. And cybersecurity are far more important online than they are face to face. Products like Visa Advanced Authorization and Visa Risk Manager, we've screened over 160 billion online face-to-face transactions, over 8,000 issuers in 125 markets, for example. Our tokenization services are incredibly important online. 1.4 billion tokens, we just crossed that milestone, again, 8,300 issuers of tokens across 192 markets. Our click to pay is off to a good start, 15,000 merchants live in 16 markets. And then omni-commerce with CyberSource is also getting a big boost. So the whole shift to e-commerce comes with a lot of big benefits. Face to face too, people now don't want to use cash. Cash is dirty. And so we've seen a substantial move away from cash to digital forms of payment. Click to pay, I mean, tap to pay is clearly helping it. Tap to pay is now 2/3 of transactions outside the U.S., over 40% on a global basis. Many markets have seen massive increases in tap to pay and debit is a big beneficiary. So you can see the shift away from cash in our debit business, which is growing twice as fast, so 2 of the big structural shifts. Now beyond that, we're seeing big improvements in our new flows business. P2P, massive growth, massive growth in disbursements, I think this has been a big boost to Visa Direct. If you look at our Visa Direct numbers, you wouldn't even know there's a pandemic going on. It continues to grow at rates that we saw pre-pandemic, which is extremely high, in the 60% and 70% range. And then installments, you talked about it. We approach it in 2 ways. We have partnerships to do it. We have investments in companies like Klarna and Paidy, and we partner with a bunch of other people like Afterpay, Affirm. And we also enable it in our own book. There's just a lot going on, on multiple fronts that highlights what we said in February that the opportunity is large. And what this has shown is that things are accelerating and sticking.

That's a great setup, and we'll get into many of those topics in detail. But first I want to ask about, the world has spent the better part of 2020 dealing with the pandemic. Through the summer, we saw a recovery in payment volumes, but then that seems to have kind of stalled out. There isn't certainly a linear pace of any kind. Particularly, we see the recent cases in multiple geographies and so on. So give us an idea of what Visa's planning process has been like in terms of dealing with this extreme uncertainty.

Yes. I think you described it in calling it extreme uncertainty, right? We're dealing with a 100-year event. The world has never seen this in our lifetimes. We've never seen shutdowns of economies and things like that. So we started to see this, as you know, in about February when we saw the first impact in Asia. And we knew immediately that we had to start to act on it. So we didn't wait. We started to act right away. We started to really focus on 3 things, and we stayed that way all the way through. The first is rigorous prioritization. We knew that this was going to have an impact on our business. So we started the process of figuring out what the real priorities were that we have to make sure we sustain investments in, what can wait, what can be cut. And we made all those decisions fairly quickly, and you saw that we started to scale back the level of investment almost immediately in our second fiscal quarter. And then in the third and fourth, our expense base was actually down about 4% to 5%. So prioritization becomes extremely important in times like these. Some of them are obvious. I mean if borders were shut down, there isn't going to be a lot of cross-border travel. So a lot of marketing directed towards cross-border spending is probably not very useful because people are not traveling because they can't. The Olympics didn't happen. Certainly, that helped us. The second thing there is to be very focused on what is happening with our business drivers almost on a daily basis. So we have a very granular and almost daily understanding of how trends are changing because you can't predict these trends. We don't pretend to be able to predict 2 and 3 quarters out, which is why we have chosen not to provide an outlook. But what that means is that we really have to monitor trends and understand how the trend is changing, where the trend is changing and why the trend is changing so that you can then understand how the business might play out over the next several weeks until the trend changes again. So we are very focused on it. We talked, for example, in the fourth fiscal quarter, we saw an improvement in the cross-border business on the travel side in the month of September. And we knew very quickly why because some borders were opening up. And you saw that Mexico, U.S.-Mexico, U.S.-Caribbean opened up. We saw some significant improvements there. Turkey opened up. So it wasn't a broad-based improvement. It was borders opening up. So we sort of had a feel for how that's going to play out. So the second thing is really monitoring trends very closely and planning accordingly. And then the third thing then would be to stay very flexible. You really have to be willing to adjust your plans based on how the trends are changing. Right now, for example, there's anxiety about spiking infections. And so we're monitoring very closely what impact it's going to have on our business. And one of the things we're finding is that it all depends on what the reaction to the spikes in infections is. If the spike in infections is causing governments to shut things down, it has one impact. If the spike in infections isn't causing governments to take action because some governments just are not, it has a different impact. And different cultures have different impacts. So there's no single answer to what the impact is when infections spike. And once again, you have to react accordingly. So prioritization is important. Close monitoring is important. Flexibility is important. And then agility, moving really fast to respond is also very important. So that's how we try to react to this. We stay flexible. We adjust plans as we go along. I know many of you would like us to tell you what the next 3 or 4 quarters are going to look like. We've chosen not to do that because it would be, I think, disingenuous of us to tell you that we can forecast that far out. Now through all this though, there have been 2 clear areas of growth where we've kept our foot on the pedal. The first is our new flows business. As I said earlier, it's growing extremely fast. Visa Direct is really doing well. So we are not scaling back any level of investment in that. And the other is our value-added services business. We told you that it was growing in the mid-teens. I believe the growth in 2020 was about 18% for our value-added services through the year. And we're very excited about that. So there are some parts of our business that, pandemic or not, have continued to grow at a very steady clip. And we remain very focused on investing in them.

Got it. Got it. An add-on question is, the recovery discussion for payments companies, it often tends to be limited to consumer spending trends. You mentioned your flows business. I mean Visa obviously has exposure to B2B payments. What are you seeing in that part of the market? How are businesses reacting?

Yes. The way we look at B2B is, there are sort of 3 components of the B2B business, as we discussed at Investor Day. One is the sort of the traditional card-based B2B business, where the bulk of our historic B2B business has been. And that breaks down into sort of small businesses and large and medium-sized businesses who may use cards, T&E and e-cards and those kinds of purposes. What we're seeing there is that the small business part of it has begun to recover. In many ways, it's recovering like the consumer businesses. As we told you on the call, on the domestic consumer side, we've seen sort of a V-shaped recovery. Small businesses have tended to recover along those lines. Now part of it is because a lot of the spend in those areas is not travel-related. And so they're buying things they need to run their business. And so we've seen a recovery there. The larger-sized businesses are not recovering as fast. So they are still a little sluggish, the large and midsized market on the B2B side. Cross-border side, we have B2B Connect that is scaling. We're very excited about it. We think there's significant opportunity there. And hopefully in the next few quarters, we can tell you more about how things are scaling on the B2B side in the B2B Connect. And then the large enterprise B2B, the whole AR/AP side, that's in its early days. So the pandemic, I think, did not impact that much because it's still not a huge business. We're also trying to figure out where the value creation opportunity is in that business. But look, I mean B2B is a big opportunity. We remain very focused on it. We think there's huge opportunities in the traditional B2B business. And we're very excited about the value we can add in the cross-border B2B business. So that's what we have in the B2B front at this point.

Got it. Got it. One other trend obviously we've all seen, debit growth outpacing credit. And that's understandable partly based on where we shop, partly the remnant of stimulus impact, things like that, essential services and so on. In general as we move towards normalcy, and by normalcy I'm not suggesting that we will go completely back the other way. I think perhaps debit has permanently gained some share. But it's kind of easy to see that T&E transactions, they tend to be more credit-based. So would you agree with that? And are there factors that you think continue to sustain robust debit growth as we start to see behavior normalization?

Yes. So there's no question whatsoever that debit has become the engine for cash conversion, right? So the bulk of the cash conversion that has accelerated through this pandemic has benefited debit. And you can see that in the numbers. The debit business is growing twice as fast as it was pre-pandemic, despite the fact that economies are doing worse than they were pre-pandemic. So there's no question that all that growth is coming from cash conversion. And we went through some of the reasons why. And the first is, even at a physical point of sale, people are preferring to use digital forms of payment, and debit tends to be the preferred form of payment. We are seeing a substantial increase in e-commerce in everyday spend categories like food and drug for example, like some retail goods. And everyday spend tends to be skewed towards debit, so that's clearly helping debit. There is an element in tough times for people to use debit rather than credit, right? They'd rather use money they have in the bank than borrow money. Now we saw that in the last crisis and it took about 2 or 3 years for that to normalize. But we think this crisis is different. We think in this case because of the nature of this crisis, it's not strictly an economic crisis. It is also, as you know, a pandemic that is causing people to change habits, adopt more digital forms of payment, move more online. This is a structural shift that is benefiting debit. So while some of the move from debit to credit will change over time as people feel more confident, there's a structural element here that makes debit a larger part of the business overall. The other thing I would point to is that Visa Direct is largely debit rails. And Visa Direct, as you know, is growing extremely fast. And there are new use cases that Visa Direct is enabling that didn't exist before. And that's a structural shift too that is in favor of debit. A couple of other things I might add is, we have done a phenomenal job in the last few years signing up wallets around the world, right? Wallets are a massive engine of financial inclusion. Wallets are a massive engine in emerging markets to open up new acceptance. So there are new consumers and new merchants accepting digital forms of payment. And we're embedding our credentials in these wallets with all the big ones, right, ATM, LINE Pay, Safaricom, Rappi, you name them, Go-Jek, et cetera. A lot of it is debit. They're all payment banks. They can issue debit credentials. That's benefiting debit, too. So it's become a big engine of financial inclusion too in emerging markets. So when you put it all together, there's clearly a structural shift in favor of debit, which I believe will sustain post the pandemic.

Okay. Okay. No. Thank you for that. How should investors think then about the differences in yield between debit and credit transactions?

Yes. I mean generally speaking, the yields are relatively comparable. They can vary from market to market. Debit yields can sometimes be better. But overall, I mean, we like the debit business we have around the world. And it's a good business from a yield standpoint.