Visa Inc. (V) Earnings Call Transcript & Summary

Welcome to Evercore ISI's Fifth Annual Payments and Fintech Innovators Forum. I'm David Togut, payments research analyst at Evercore ISI. Delighted to welcome Visa, Charlotte Hogg, Executive Vice President and CEO of Visa Europe; and Mike Milotich, Global Head of Investor Relations. Charlotte and Mike, thanks so much for being with us here today.

Sure, a pleasure, David. Thank you.

Visa Europe's growth pivot to Continental Europe seems to be paying dividends. You have a large and growing issuing relationship with leading fintechs like Revolut. You signed a large contract with Isbank in Turkey. And you have a preferred partnership with Santander in Continental Europe for credit and commercial cards. What is your strategy to capitalize on the growth opportunities in Continental Europe? And do you expect most of your gains to come from your direct global competitor, or more from the national payment schemes like Cartes Bancaires and Girocard?

A lot of questions in one, David. So maybe I can start. I think the first thing is just to say, Europe is a tremendous long-term opportunity for Visa. And Visa in Europe today is probably unrecognizable from the business we acquired in 2016. And I'm, across the board, very happy with the momentum that we're seeing. . Just a little bit of context for you. Visa Europe is 38 different countries, and they all have different consumer behaviors, different payment cultures. If there's one universal theme, it's probably that the banking industry is a very national one. And so the way I think to gauge the health of the business is not to think about big deal headlines, but to think about 3 factors, and I'll go into those, if I may. One is the growth in credentials. The second one is the activity on those. And then it's the services and solutions that you're seeing on top of those. And I think that provides quite a useful guidepost to how to think about the business. And then to more directly answer your question, let me work through those. So in terms of our credentials, the number of active credentials has grown by more than 10% over the last years from 2018 to 2020. And as portfolios migrate to us, that will continue to build. So we're migrating, for example, more than 25 million credentials over the coming year. Some of our partners, as you mentioned, will be very well-known to you. So over the past couple of years, we've renewed our partnerships with some of the major U.K. banks, such as Barclays, some of the continental players like Nordea. We've renewed and extended our partnerships with players like Santander and UniCredit, UBS, BBVA and BPCE and ING. They're all names very familiar to us in Europe. And in fact, BPCE is the largest issuer in Continental Europe, with more than 40 million customers. So beyond these names that you may know, there's a host that you may not know. Like Danske Bank in Norway or Cornèr Bank in Switzerland. So there's a whole range of players. There's also the whole, as you say, fintech space, and I think we've really transformed our position in fintech in Europe. As we know, Europe is an important birthing ground really for fintech. It's a center of innovation because of the nature of the customer base, it's affluent, it's digital, it's urban. And they're looking for different things from payments: speed, control, security, convenience. And they're really embracing new ways to pay. So perhaps Europe has seen one of the greatest takeoffs in fintech. I think 39 billion was invested just in 2018. Many of the world's largest fintechs launched in Europe first, and many of them you know, Revolut and TransferWise, N26. And we recognized, I think, shortly after acquisition how important a role that fintechs are playing, and so we actively transformed our engagement with them and our offering to fintech. So now I'm really pleased to say we have over 120 fintech partners, and we number the global leaders amongst our partners. Revolut, we've talked about. TransferWise and names like Vivid, whom you may know better as Tinkoff from Russia. And we also have partnerships with players such as ininal, who focuses on the unbanked in Turkey, dozens and Railsbank who's becoming well known. So that's one way of thinking about sort of the nature of the number of credentials we have out there. I'll speak a little bit, if I may, about how we're building activity, too, because I think that's particularly interesting in Europe. We really, I think, seized the opportunity to build activity. So of course, there's the consumer experience at point-of-sale and e-commerce. And I think like other parts of the world, COVID-19 has really transformed consumer behaviors. So in Europe, the shift to digital appears very pronounced. And across Europe, we've worked with all 27 of the EA countries to raise the contactless limit to the maximum of EUR 50. And actually very excitingly, yesterday, you may have seen the U.K. budget announced a raise in the contactless limit in the U.K. to GBP 100. So that's from about GBP 30 -- that's from GBP 30 a year ago. So to date, we've actually seen about 1 billion transactions now being conducted in those limits between where they were and where they are now. So that's a big change in terms of the level of consumer experience at point-of-sale. And then e-commerce, again, you all have heard this throughout the world, but it's been important for us in Europe. So 14 of our countries has seen a 25% increase or more in e-commerce. And in some countries, 40% of cards that hadn't previously been used in e-commerce are now being used in places like Belgium and Ireland. And we're working with a range of partners to really enable that. And that's really where also the solutions play in for consumers because if you take some of the domestic schemes in Europe, they don't always offer such a great e-commerce experience. So for example, Girocard operates on 19 digits, which is tricky to use when you're trying to type that into an e-commerce site. There's also all the work we've been doing on transit, which, again, I think Europe was, in some ways, the thought leader on this with transport for London. But just over the last number of years, we have turned on 60 transit systems across Europe. And just the last 6 months, places like Brussels, Bonn, Stockholm and Seville, and they are really, I think, changing the experience as people are coming back to work and going back to work. In fact, for a period during the COVID pandemic in Madrid, the buses were only taking contactless. I also just wanted to mention the work we're doing with small business. In June last year, we established a commitment in Europe as part of our global commitment to digital, for our European commitment was 8 million small businesses because we know just how vital they are to a healthy and inclusive recovery. And it's increasingly clear that the importance of being able to take digital payments is going to be part of any recovery. So I'm glad to say, over the last number of weeks, we've been able to announce we've digitized 2 million small businesses in partnering with a whole range of players across Europe, such as Shopify, Wix and Shopappy. There's also work we've been doing on co-brands. We launched a co-brand with Accor last year, which is the fourth largest hotel chain. And then that's what we do with our partners to help activate those who use our solutions. So it's been a real progress in terms of both the number of financials and the activity. It's also been a story of increasing the value-added services on top. And many of you will know, of course, that in Europe, strong customer authentication has been rolling out, and our secure solution is a hot topic right now since January 1 when strong customer authentication started to roll out sequentially across Europe. Everybody is looking for that wonderful triple of high authorization, low abandonment and low fraud, and we really think our solutions provide that. I know it's a range of things to cover, but I think it just helps to have some of that context around why we think the there's a huge opportunity in Europe and why we think we're making some good progress.

That's great. Well, on strong customer authentication, European payments potentially could be transformed by Payment Services Directive 2, which mandates the rollout of account-to-account payments once strong customer authentication has been adopted widespread later this year, early next year. Can you kind of explore how Visa Europe is positioned for account-to-account payments, considering your capabilities with Earthport and Visa Direct? And what about value-added services?

Yes, of course. And strong customer authentication is a very significant change in e-commerce in Europe. And it is a real priority for us, working with the ecosystem. It's been a great effort across the ecosystem. Just over the last few months, we've gone from about 78% of e-commerce enabled -- issuer base enabled to about 98% today. So it's been great progress, but there's a lot left to do as the countries roll out, with the U.K. being sort of amongst the last in September. There's also the follow-on services that come out of strong customer authentication. So because of the number of exemptions in the legislation that help people take advantage of different solutions, we've got products for those as well. So whether that's CardinalCommerce, which really does provide best-in-class, risk-based biometric and behavioral authentication to issuers and merchants, we're seeing take-up of that. Visa Trusted Listing takes advantage of the opportunity customers are going to have to identify merchants they want to trust to make a seamless experience next time then. And then there's the work we're doing on delegated authentication, where issuers can delegate authentication to merchants or digital wallets, which again make this whole process of commerce more seamless. It's a big effort, but that's only, as you say, half of PSD2, the other half is open banking. So I guess where we see open banking at the moment is the number of AISPs and PISPs is growing, but it's still a relatively nascent market at this point in terms of any measure, like revenues, for example. And I think some people confuse the solutions that you can provide account-to-account with open banking. So we actually have a whole set of services, as you say, through Visa Direct and Earthport that are, in fact, account-to-account and address some real business and consumer needs. So Visa Direct, in combination with Earthport, is adding a whole series of case examples. And we also think we can utilize real-time payments to enhance that payment with some of our capabilities. So for example, you've got things like Bell ID, which is a tokenization that allows us to tokenize bank accounts; Verifi, which provides dispute capability, and that's increasingly in second age. Cardinal provides authentication, and we also have some loyalty security and analytics services. So all of this builds on top of enabling consumers to make the form of payments that they want in our network, network strategy.

Appreciate that. Your most direct competitor in Europe has notched some recent market share gains in the U.K. where Visa Europe leads, such as the NatWest contract. Can you protect your high market share in U.K. debit? Or are you approaching Europe more holistically, looking for overall market share gain between U.K. and Continental Europe?

So look, we were -- honestly, we were disappointed to lose NatWest in the U.K., and it shouldn't have happened. That said, I'm really glad to achieve the renewals that we have done, including, for example, Barclays. And our other U.K. clients are in medium- to long-term deals. So we do view this as a one-off situation. I also want to say that we're committed to being a really great and innovative partner to all of our clients, realizing that the relationship is ongoing, even if a deal is not. And so even if something is, I hope, temporarily lost, we believe in committing to our partners. And I was so pleased to see that the commitment we made to Santander actually has resulted in a recent deepening in our partnership in other parts of Europe, even if not in the U.K. So overall, we feel really good about our position in Europe and the business we're generating on the continent as well as with fintechs. If you net it all out, we -- because of all these wins, we don't expect to see a material impact on our reported Europe PV growth in the coming years from NatWest and from Santander and the U.K. This, of course, depends on exactly the timing and pace at which clients convert business, both wins and losses, so it's hard to say exactly. But given the pace of change in the long cycle nature of our business, it will take some time for all of our numbers to reflect all the ins and outs. So I do think we've got the right strategy in place and across Europe to have this great growth potential.

Appreciate that. You recently rolled out Visa Debit processing services in Europe with DKB, the largest issuing bank in Germany. How would you gauge the growth opportunity in Europe for Visa DPS?

Yes. I'm really excited about this announcement and the progress we're making here because, obviously, we do operate one of the largest scale issuer processing platforms in the world. And last year, Visa DPS enabled us to process nearly 40 billion transactions for over 200 clients. And we've continued to invest in this business. So it's so exciting to be able to bring it to Europe. And by choosing DPS, European issuers can have access to a really comprehensive and end-to-end solution from core processing services to authorization to some of the value added, including some of the fraud services and the campaign management. So it's a real scale-up for them in terms of what we can offer. It's one thing in mind, it's coming in combination with Visa Debit in Germany. And that's why Germany is the real place to start with DPS. Because in Germany, Visa Debit is a really innovative new payment form, and enables so much else. It enables mobile and wearables and a much better e-commerce experience. And it allows Germans to operate across all of the different channels. So the partnership with DKB, which is the biggest -- our biggest issuing bank in Germany for credit and the introduction of Visa Debit has been a really important one. And we've seen other Visa Debit signings with [indiscernible] and Penta, which is one of the German neobanks. And since -- actually, overall, since the start of 2020, Visa Debit represents a significant share of newly issued cards in Germany, which is about 70%. So in the case of DKB, this is a multi-phased approach. So they had been a Visa credit issuer for a while, and it was really the biggest side to enhance their product suite is moving into Visa Debit, and then become a DPS client. And they'll be able to take advantage of nearly 20 value-added services on the DPS platform so they can offer German consumers something really special. So this is just, at the moment, one client in one country, but we're very excited about the opportunities to expand as well as thinking of this as part of all the sets of services we have in Europe.

Appreciate that. How is Visa Europe positioned for the expansion of Buy Now, Pay Later in Continental Europe and in the U.K.?

Well, the interesting thing in some ways is that Europe is pretty familiar with Buy Now, Pay Later. Because in many of our countries, it already exists. So they're not really new to Europe in some ways. So you're probably aware that Turkey has, for a long time, combined loyalty programs and installments for a large portion of its purchases. Typically, food and cosmetics get excluded from that. And Yape Credit and NISH bank are both partners and have large loyalty programs. They're also popular, by the way, in Greece, Romania, Croatia and Israel, where consumers really like the flexibility and the convenience for spacing out transactions on large ticket items. But if I step back a bit and talk about it more generally -- actually, as you know, I think, it's twofold. One is to partner with the existing players who enable the ecosystem and the other one is our own solution. Again, in Europe, there's a few firsts. So we invested in Klarna, which is the European provider and in PAYD many years ago now. And we're also working with other providers, including Afterpay, Affirm, ChargeAfter and Splitit. So we're partnering with them on the development of these solutions and growth strategies. And in many cases, the growth includes expansion into Europe. So the partnerships take a couple of different forms. And firstly, obviously, the point of repayment. So when a customer uses their Visa card to repay the installment provider over the installment term, that turns one payment into many. And a lot of this volume is currently on card. The second category is a virtual card. So an installment provided users of visa virtual credential to settle with the merchant. There's a digital card so installment providers can provision digital credentials into a consumer's pay wallet to allow them to use their solution at point of sale. And then there's a whole range of value-added services, particularly in risk and data. So for example, Visa offers an API-based solution that confirms the type of card that a customer is adding to their account to inform a customer experience and reduce fraud. And then, of course, Visa Direct where we're doing a whole bunch of pilots to include merchant settlement and installments. If you turn then to what we're delivering ourselves in the Visa installment solutions, we're also building that out. And that really is trying to solve 3 pain points. One is there isn't a global ubiquitous solution for merchants. Two is it's actually a pretty friction-heavy experience at sign-up for customers. And also, it enables large issuers to participate in this space. So with this solution, issuers can identify who they'd like to extend an installment offer to, and when the customers are at the point-of-sale or online or checkout of a participating merchant, an offer can be presented to them, it can be accepted without a long sign-up process. And as it's a network solution, it can be offered essentially anywhere that Visa is accepted. So Visa's offering is directly as well as working with fintech installment providers and acquirers through CyberSource. And it is in North America and in Russia, and we look to expand it to other countries, including those in Europe very soon.

Great. What are your strategies to capture a share of the $185 trillion in new flows, including the $120 trillion in B2B payments? And related to that, what's your strategy to capitalize on Visa's acquisition of Earthport and cross-border payments.

Yes, this is a really interesting space. And Europe is actually 1 of our top 3 markets in terms of the B2B PV opportunity. So if you break down that $120 trillion opportunity into 3 different pieces. So there's a piece about $20 trillion, we think, that can be addressed with card-based solutions. We are the market segment leader with over 1 trillion in PV, and we feel good about it. I have to say that in Europe, commercial cards is a space where, perhaps surprisingly, we underinvested in the pre-acquisition days. So our position is pretty robust, but it also suggests there's a big opportunity for growth. And we've invested pretty heavily over the last couple of years in talent and in the product solutions and leverage the global capabilities that we had. So this includes the traditional business debit and credit cards in the SME segment. It includes corporate T&E cards and purchasing cards, or actually some more sophisticated solutions such as fleet cards and virtual cards, expense management solutions and other platform enablers. So our strategy really relies on going into these new spend categories, expanding into new verticals and accelerating digital adoption, digital wallets, virtual cards, et cetera, to give a better user experience. So expanding our B2B footprint implies thinking differently and solving industry issues, not necessarily card payments and building acceptance and partnering with key players that are rightly positioned within each vertical's value chain. So if we take the virtual card space, we recently announced a partnership with the U.K.-based Conferma to launch Visa Commercial Pay, which is a mobile app in completing virtual card issuance and management for business incidentals. And it's a solution to manage business travel spend with enhanced data and an integrated payables platform that can seamlessly send payments to suppliers. And I'm really pleased to say that Barclays has recently launched functionality for their commercial clients. In 2019, by the way, we partnered with Ixaris, and since then, we've been working closely on gaining share in the travel sector and shifting noncard volume to card and partnering to win OTA deals. There's about 10 trillion, by the way, in cross-border large ticket payments that might be addressed with Visa B2B Connect, which can offer a more affordable solution than that is -- that, in many cases, also faster and more efficient for all banks. This B2B Connect facilitates direct bank-to-bank cross-border transactions through tokenized digital identity and the use of distributed ledger technology. Many banks that don't have an extensive cross-border banking presence see this as a way to offer corporate clients a competitive and efficient capability. So we are working on enrolling European banks, large and small, that speaks to the value of this product. So then you talked about the remaining GBP 90 trillion, which is largely in domestic accounts receivable and accounts payable. And our strategy here is around partnership. So in Europe, we're focusing on working with our fintech onboarding teams to identify new partners that are addressing this challenge. One example, for example, is Modulr, which is a payment-as-a-service API platform to help facilitate B2B payments. Our second focus is looking at use cases in B2B, where we can reduce the friction for businesses, such as the global travel industry and small business. And then let's turn to Earthport. And as you know, Earthport provides Direct ACH and RTP connection in 88 countries. And now we can then integrate into Visa Direct. It enables cross-border money to and from essentially any bank account in those countries, including the top 50 markets. So Visa Direct in Europe represents a significant opportunity for cross-border as well as domestic net flows. So a couple of examples for you. For the B2C use case, we've signed an agreement with Wagestream, which is the leading earned wage from access provider in Europe. It's signed on to Visa Direct. In insurance, [ Sato ] and SafeCharge are utilizing Visa Direct to power insurance disbursements in Europe. And in cross-border remittances, in addition to Wise, the new name for TransferWise, being a facilitator of transactions, we've partnered with Ozan in Turkey, who plans to launch a global mobile remittance service to the underbanked and the gig economy workers, which is well over 1/4 of Turkey's 83 million population. And then TransferGo, which is a money transfer -- global money transfer company that supports migrant workers to send money back to their relatives without paying unnecessary bank fees, and that's enabled Visa Direct in 55 markets. So those are some of the examples, I think, that answer your point.

Thanks for that. Very extensive. In the December quarter, Visa Europe's constant dollar cross-border volume declined 33% year-over-year, excluding intra-Europe volume, which was an 8 percentage point improvement over the September quarter, given ongoing pressure on cross-border travel. What are your thoughts on how a recovery in cross-border travel might unfold in Visa Europe, both in terms of intra-Europe and interregional travel?

Yes. So through January '21, I think we've shared that the PV in many European countries was down 10 points versus December, and cross border volume, excluding intra-Europe was minus 33%, and including Europe was about 10 percentage points better. So the future, appearing into the crystal ball, what we have found is that spending is more impacted by mobility and restrictions than it is by infections. So this is really about the level of government-imposed or self-imposed restrictions and how long they're in place. So wide produce of the vaccines, we think, will certainly help, as really anything that helps make people feel comfortable being out and about. So it's very hard to predict what the pace of recovery will be. One thing we do see is that people adjust their behavior relatively quickly once restrictions are removed or changed. So if you look at the trend lines of spending, either in [indiscernible] or year-over-year growth, you can very clearly see when restrictions are put in place or removed, or when there's a new government program introduced to encourage spending. We find it highly responsible. So to give you, I think, a fun example. In the U.K., when pubs were ordered to be closed at 10 p.m. last year, you could see the rush to last orders in the last 10 minutes of this. It is very responsive. When Mexico and Turkey opened their borders earlier in the pandemic, the growth of inbound travel improved by 30 to 40 percentage points within several weeks. In Italy, things started to open up just a couple of weeks ago. We saw domestic payments improve quickly, driven by spending in restaurants and retail. And as restrictions eventually relaxed in the U.K., we expect people to go back to face-to-face spending again, although what level, it's really hard to say. The extent of cross-border travel and intra-European travel is really dependent on the level of border restrictions and quarantines between those corridors. I think as governments begin to provide a road map out of the latest restrictions, it will be interesting to see how this impacts consumer travel behavior. And we've been watching very carefully since the announcement of the U.K. road map last week. And the travel companies reported a significant [Audio Gap] Chile, which is Europe's largest total operator, said that bookings for holidays in Greece, Spain and Turkey, from July onwards, were 500% up week-on-week. And I think my daughter was one of them.

I see. As we're approaching the end of the fire side, can you just remind us about percentage of volume or Visa's exposure in Europe to personal versus business travel as we think through the pace of the recovery?

I think it's going to be very dependent on what we see. And I think that's not something that, in detail, I can really reflect on at that point -- at this point in time.

Understood. Well, Charlotte, thanks so much for spending the time with us today. We greatly appreciate all of your insights. And Mike, thanks so much to you as well.