Visa Inc. (V) Earnings Call Transcript & Summary

Good morning. This is Matthew O'Neill. Goldman Sachs' payments and IT service analyst. Very pleased to be joined this morning by Al Kelly, CEO of Visa. And before we kick it off, given the first session of the day, I just need to point everybody to the box below the video, remind everybody that full listed disclosures can be found there as well as on www.gs.com/research. So with that, without further ado, Al, thank you so much for your time and for joining us this morning. Really excited to be following up not too long after earnings here and figured we'd just kind of kick off.

I know on earnings, you guys have been extremely helpful and throughout the entire pandemic, providing a lot of data and details around the sort of pace of the recovery. Just wondering if there's any kind of updates even since earnings and kind of your most recent thoughts on the pace of the recovery and then kind of on a longer term, the broad strokes on what's changed, what you think will stay in this kind of new world.

Well, Matt, it's good to be with you. Thank you for having me. Despite this pandemic, it's been interesting, domestic volumes for the last numbers of months have held up quite well, and that's really been driven by a real growth in e-commerce as well as debit. Obviously, face-to-face volume, credit volume and cross-border volume continue to be challenged. We did share our results through the first number of weeks of January, and we saw the debit was up 10 points from December, largely driven by the stimulus at the beginning of September. Cross-border was kind of stable with our Q1, although a little bit down from the month of December. Domestic spend in some of the AP markets was down as much as 5%. And obviously, in Europe, where the virus has really stormed back and there's been a lot of lockdowns, we've seen Europe numbers down in a number of countries by 10 points plus. Looking ahead, there's a number of factors. One is how quickly the vaccine rolls out. And I was on a call with a number of CEOs with Governor Cuomo yesterday or the day before, and frankly, I was a bit disappointed because it feels like the pace of vaccine from the federal government to the states is going slower than people thought. I had kind of been in the camp that maybe by the late spring, early summer, we would be in a place where a lot of people are vaccinated. He thinks it's more like the fall before we reach any kind of critical mass. But obviously, vaccine rollout is critical. A second thing is government restrictions and to what degree they get lifted or not. A third is all of these capacity-constrained businesses and what happens with them, where do we end up in terms of restaurant volumes, et cetera, around the world. And then obviously, travel restrictions. Much of the world still has travel restrictions, and that's a real big deal. And obviously, all these factors differ by geography. I mean we do business in every country in the world but 5 that the U.S. has sanctions against. So there's not one model here. It will differ. We have countries, a few in Asia, that are largely widely back open, and then you've got countries greatly restricted. I was talking to somebody in Dubai yesterday. And Dubai, a number of weeks ago, was 1,000 cases a day, and now they're back up to over 3,000 cases a day. So this virus continues to ebb and flow. The one thing we do know, Matt, is that consumers can move pretty quickly either way. So when the U.K. went into lockdown, we saw spend really drop. And then back in the fall, when we saw countries like Turkey and Mexico open up their borders and make travel less restricted, within weeks, we saw a 30 to 40 percentage points increases in the flow of travel into those countries. Now there's still -- it was still negative growth year-over-year, but it was a massive shift in a short period of time. So I'm a believer, Matt, that the demand is there. People just have to be able to have the comfort to want to be able to be on the move. And that, by the way, isn't just travel. It's going to a restaurant and eating inside. It's going to a sporting event. Those who live in New York might have heard today and Cuomo told us the other day that he's opening up arenas of more than 10,000 people to crowds of 10%. But you still have to show up with proof that you had a negative COVID test within 72 hours. So I don't know how comfortable people are going to feel about that and what happens when you get all the way to the arena and you forgot your proof of a test. It just sounds a bit difficult in terms of logistics. But I do think watching mobility and people's comfort over the next numbers of months as we proceed through this period, it's going to be an interesting indicator, I think, of the recovery, Matt.

Yes. That's interesting, yes. Thinking about it from a mobility standpoint beyond just kind of vaccines and borders reopening for the ever-important kind of cross-border components of the networks business. Another area that probably we wouldn't have foreseen that came as a result of the pandemic has been stimulus. I wonder if you could just talk a little bit about how that's kind of flowed through the business, the puts and takes there and how you're thinking about any final potential stimulus, I guess, that we might see to come.

Well, the stimulus has definitely played a role. I remember back on April 15 of last year was when treasury in the United States -- and by the way, stimulus has impacted a few other countries positively as well. But treasury deposited funds in the demand deposit accounts of about 88 million people. And I remember on April 20 or so, looking at the 5 days before April 15 and the 5 days after, and there was a tremendous uptick in spending. And really, that spending uptick stimulated by the stimulus lasted some 6 to 8 weeks. Now we had a recent round at the beginning of January. We saw a similar phenomena. Particularly, the first 2 weeks of January were quite a bit up from the levels that we saw in our first quarter, the fiscal -- the calendar fourth quarter, a little bit down from the first 2-week levels in the third week of January but still ahead of the prior months. So we know for sure that stimulus plays a pretty important role here. But I think it's -- and I think if the stimulus bill passes, which it appears now more likely than not, but we are talking about Washington, so you never do quite know that we will see a similar phenomenon. My guess is though that, that -- in many ways, I hope that's the last stimulus package because we -- I'd rather be in a mode where the economy is recovering and more people are participating in the real economy where they're out earning money and spending some of that money back into the economy. The other thing I'd say is that we really have been helped by e-commerce because if you look -- if you think back in April, again, we were in the depths of lockdown in much of the world. And if we didn't have e-com taking off, a lot of that spending wouldn't have had been possible. Between the beginning of last year and September, we saw a 14-point increase in the number of people who were activating in e-commerce for the first time. If you look at some of the graphs we've been distributing, either at earnings or in 8-Ks in the interim periods, you've seen that in the U.S., domestic card-not-present volume or e-commerce volume excluding travel has been running like positive 30%. I mean it's incredible. And if you look at cross-border, card-not-present excluding travel has been running in the high teens. And so people have actually clearly been home and shopping in big ways, and that made a big difference. So the combination of stimulus checks plus a great emergence of e-commerce was a big deal.

That's helpful. Another sort of trend that's kind of come out of the pandemic, and I think this is more of a behavioral dynamic that we've seen in troubled episodes prior like the financial crisis, has been the shift towards debit. I wonder if you could help us understand how the company kind of thinks about the ebb and flow of sort of the debit/credit mix from the consumer behavior perspective as we presumably come out of this. And if I'm not mistaken, you were at Amex last time that we saw one of these large shifts so you're probably acutely focused on the return to credit the last go around, albeit for a whole different set of reasons.

Look, I've never seen anything like this before. Even if we go back to the '07, '11 kind of period, the separation between debit growth and credit growth has been incredible. If you look at pre COVID and you look at Visa's global growth in debit and its global growth in credit, that'd be within 100, 150 basis points of each other. We've had periods of time during this pandemic where they've been separated by as much as close to 40 percentage points, which is just truly incredible. A few things driving debit. One is just cash displacement. And people have really worried a little bit about whether -- some people have worried about whether cash is a vehicle that carries germs and just wanted to get away from cash. Secondly, a lot of the new players I was talking about who came into the e-commerce space are people who are buying everyday spending types of things, and for them, everyday spending has tended to be associated with debit. So we're just simply seeing more debit usage in e-commerce as a percentage of purchases than we had seen prior to that. Thirdly, during times like this, and we've seen it in history as well, people prefer to spend the money that they have versus the money they would be borrowing, and that certainly favors debit cards. Fourthly, we work with the federal government and several states on unemployment insurance. And so we have prepaid card arrangements with about half the states of the United States to distribute unemployment benefits. And so obviously, in our debit numbers, Matt, is the prepaid volume, so that makes a difference as well. If you go back to that period where -- that you referred to, the last big recession, about $100 billion shifted from credit to debit, and it took a couple of years, 2 to 3 years for that kind of equilibrium to return to the pre-recession levels. This time, I'm not so sure. I think that debit really has some real momentum behind it. And obviously, by the way, it's amazing. We're now about 11 months into this virus for people in the U.S., a year for people in Asia. So we will start to lap some of these debit numbers. So clearly, that will impact our growth. But I think that the acceleration of e-com and people's comfort with debit is something that's going to continue with us. So I think that we might not see the full shift back that we saw in the '07 to '11 time period. In the credit world, one of the things that's been interesting but, if I think -- if you think about it, not terribly surprising about this pandemic is it's the top of the middle and the stratus above that in terms of wealth that are spending less. The middle market of the world and below has tended to have the same level of spending that they did pre-COVID levels. But it's the higher earners, the higher spenders whose spending is down. And it makes sense. And look, I know my spending is down. If you don't travel, if you're not going to nice restaurants and buying a nice bottle of wine versus takeout, the ticket level is much lower driven by less food, less liquor and less -- lower tips. So the -- and many of those people happen to be credit card users. And think about the numbers of people, particularly in Canada and the United States, that are on reward propositions, many of them travel based. Those propositions are just not getting -- and those -- the products are not necessarily -- are not getting the spending they got pre COVID. It's hard to believe that's not going to come back though. As things do start to open up, to the earlier questions, constraints get lifted, government restrictions ease, travel restrictions ease and that mobility that we talked about takes place, I personally believe that, that volume will start to come back. So you're going to have a combination of credit -- debit lapping big growth levels and credit starting to come back that I think we'll have the growth levels associated with these 2 different types of products start to converge. But I don't think that -- because of the things we discussed, that debit will necessarily go down to as low as it -- to the level -- I shouldn't say low, to the level that it was pre COVID.

Yes. No, that's helpful. A couple of different factors in there I don't know that I was fully contemplating. And one of them that you alluded to is the wariness around using physical cash as a potential way to transmit germs. And so it sounds like debit has really been the one that's been chipping away at cash most effectively as we've seen through Visa's results and the growth of debit. How do you think about the sort of customer preference long-term change for that secular shift, having taken a step function in the right direction for electronic payments and maintaining that, right? So you get the benefits from e-comm, you get presumably the benefits from kind of this cash-being-dirty concept. Do you view those all as being fairly sticky kind of coming out of this?

I do. And I think in the face to -- let's talk about face-to-face world for a second. Tap to pay has really continued to take off. It was moving well, but this now hygiene factor coming into play, I think, helped accelerate that a bit. And tap to pay, if you look around the world, is 2/3 of the volume, excluding the United States. During the pandemic -- 2/3 of the face-to-face volume, I should say. During the pandemic, the Visa worked with 60 countries around the world to increase the limits for tap to pay. We now have 20-or-so markets around the world where it's over 90% penetration, not quite that high, the -- but a number of countries over 90%. We have 60 countries over 50%, and that's up from 40 or 41 countries a year ago. So tap to pay is going to continue to take off. And that said, just -- it was a better experience to start with but now add this hygiene factor and it's a better solution. If you look at the United States, tap to pay is still less than 10% of the face-to-face transactions. So the U.S. is really behind, but it's already the fourth largest country in terms of the number of taps, shows the scale of the U.S. And we are at a point now -- 23 of the top 25 issuers are issuing tap -- contactless cards, tap to pay-enabled cards. I think Matt, we'll have 450,000 cards -- 450 million cards, I'm sorry, in place that are tap to pay enabled by the end of calendar year '21. And frankly, that represents most of the most active credit and debit cards. So I expect that to start really helping accelerate growth of tap to pay. If you look at the merchant side, over 260 of the top 300 merchants are tap to pay enabled. We just added Chipotle, Nordstrom. Costco now has it in their 500 gas stations, and in a short period of time, 30% of their volume in those 500 gas stations has become tap to pay, which is pretty incredible. I also think that the opportunity in the United States, when you think about the fact that $4.5 trillion is still spent on cash and check and we estimate about 55% of that volume is less than $10, I think it's just a natural for tap to pay to take off. And I think that will continue to be something, along with credit bouncing back from the affluent, that will drive a lot of good growth in the face-to-face world. And then I think what we're seeing in e-commerce sticks. The -- all these new users who have gotten used to being in their pajamas and sitting home and shopping who didn't previously do it, they were worried about it or didn't know how to sign on or et cetera. I think it has been -- there's been things that have inhibited growth. But the pandemic forced people out to say, "Hey, I got to learn this, and I got to become active." And so I think that continues to stick. And over time, as more and more people around the world -- we take for granted, probably where everybody in this audience is, that they have access to -- broadband access to the Internet and good WiFi. And that's not the case in many, many cases around the world so that over the next decade, as the infrastructure gets better and broadband access is more -- is accessible to more people, I think that's going to help drive growth. So I'm -- again, when we can get more mobility and less capacity constraints and the consumer around the world can get more comfortable that we are returning to some kind of normal, I don't know if it's going to be the prior normal or some new normal, I'm pretty bullish about these trends being important accelerants to growth.

Yes. No, that makes a lot of sense. One area that I think is kind of new versus coming out of the financial crisis is around the whole sort of subsector that we've seen really kind of explode through the pandemic, and it was on its way there prior, "the buy now, pay later" space. I think with respect to the networks, there's some misconceptions potentially around the networks' ability to play in this space and in most cases, if not the overwhelming majority, the fact that most of these transactions are being funded and effectively backstopped by a card-based product, right? So the volumes are not lost because of buy now, pay later. But maybe we can talk about your views on that fast-growing subset of the industry.

Absolutely. So our strategy here is to partner with existing players and to develop our own solution platform for financial institutions. If I start talking about the third parties for a second. We were early investors in Klarna and Paidy, so we got familiar with this space. And since then, we've been working with a Splitit firm, Afterpay. We just announced a global deal with Afterpay to work with them to expand to 7 additional countries. I think it's really interesting space, but it is still nascent in many parts of the world. It's obviously booming in Australia and a couple of other countries. But what's interesting about it is that there's a lot of variants. There's people who are extending credit and people who are being -- kind of sourcing credit. There's players who play in very short-term windows, like, say, the installments ought to be paid off within 8 weeks. And there's some that will do a bit longer. There's players who will only do installments, and there's others who will do pay now, pay upon delivery, pay over multiple installment options. We at Visa -- and this is true in all cases but it's certainly true in installments. We're not in the business of picking winners and losers. We want to be an enabler. If funds are moving anywhere, we want to try to be in the mix and be an enabler. And I think there's a lot of interesting opportunities for us in this space. You touched on probably the first one, Matt, which is just repayment, that people can use their Visa card to repay -- or pay the installments. And what's great about that for us is it takes 1 payment transaction -- 1 payment for a good and service and breaks it into 4 transactions on which we earn some revenue as opposed to just 1 transaction. Virtual card's an opportunity for us where the provider can use the virtual card to settle with the merchant; digital cards where Visa credential goes into the wallet of one of these providers and therefore, allows the consumer to use that at the point of sale. We have the ability to continue to sell our value-added services into these various providers. For example, we have an app that will look at what card type somebody put -- what the consumer put in to repay the loan. And if it's -- and we can tell the provider whether it's a consumer credit or debit card or a corporate card, which would be something that's not allowed, in most cases, for repayment. And it gives them a sense of being able to knock out some of those transactions that could be problematic. And we're using our Visa Direct platform to continue to explore ways to potentially facilitate the payoff of installments or merchant settlement. It's -- even in this space, one of the things that's really been interesting to me, we're even having conversations with some of these providers who are thinking about using our proprietary solution platform as an additional offering to their clients. So I think the big message here is that this is a space that I'm not 100% sure exactly where it's going to go. But I can tell you this, that we're extremely well positioned both with the third-party providers and the relationships we have with them as well as with our own solution platform, which we make available to financial institutions who want to use it as their chassis for providing installments to their customers. And so if it takes off, we're ready to ride the wave and have multiple options for doing so.

Yes. That makes sense. Another area where the future probably is not 100% known but I think there's a lot of building blocks in place for Visa is around cryptocurrencies, right? Broadly, it's kind of a large open-ended question, but there's a lot of dynamics that play between regulatory volatility, the ability to actually use these assets for commerce and not just stores of value or speculative investments. Can you talk a little bit more, you made some announcements on the most recent earnings call about enabling digital wallets for cryptocurrencies, just how you see this kind of future developing as these become, at least at this point, presumably a lot more mainstream than they have been up until now?