Visa Inc. (V) Earnings Call Transcript & Summary

Good afternoon, everyone. Thanks for joining us today for our 37th Annual Strategic Decisions Conference. I'm Harshita Rawat, the senior analyst covering U.S. payments at Bernstein. I'm delighted to be joined today by Vasant Prabhu, the CFO of Visa. A quick housekeeping item for people viewing this webcast. Investors are able to submit questions through the Pigeonhole link on the left-hand side of your viewing screen. And with that, let's begin. Vasant, thank you very much for joining us today.

[indiscernible] Harshita. Thanks for having me.

Fantastic. And Vasant, you put out an 8-K last night with a lot of good data around some of the improving spending trends you're seeing both in domestic as well as cross-border spend. To kick things off for the audience, can you talk about some of the overarching spending trends around consumer travel behavior that you're seeing today?

Sure. So The 8-K is out, and it's in keeping with what we've been doing for the last several quarters since the pandemic started. We've been putting out an 8-K in the middle of the quarter to give people a sense of how trends are moving along since things are changing fast. You might remember, when we did our second quarter call, we provided a lot of color on what was going on with the business. And so it's perhaps useful to just compare how it may be relative to the second quarter in April. If you look at the 8-K we put out, normally, what we provide is U.S. trends. And then we also talk about cross-border and process transactions. And I can give you some color on what's happening outside the U.S. In the U.S., what you saw in May was that TV growth stayed very strong. It was at 132% of 2019. Now just to remind you, we're comparing to 2019 because growth rates, as you compare to last year now, are not as meaningful because they're comparing to some big declines last year. Obviously, the growth rate relative to 2020 was a lot higher. 2019 is a good baseline year. And what's good about the 132% is that it's upper point from April. And the reason that is important is that we have seen the impact of the stimulus in March and April. And there was a belief that perhaps we would start to see some slowdown. But we didn't see that. So American consumers continue to spend at a very healthy clip in May. In fact, debit was almost exactly at the same level relative to '19 as April. It grew at about 151%, which means our debit business relative to '19 is up over 50% [indiscernible] pandemic. The other piece of, I think, good news in the May results is the continued recovery of credit. Credit improved its trajectory in May relative to April by almost 4 points. So credit now is indexing at about 114 [ to 19 ]. So in a way, it's almost back to the pre-COVID trajectory. Not quite there, but very close. And what we're seeing in credit is improvements in travel restaurants and entertainment, which means that people are starting to get out and about, at least in domestic spending. In the case of debit, the strength is people are buying goods and services. The strength was in retail, in department stores, in apparel and home improvement. So clearly, the American consumer is spending, and that spend trend has not been affected with any wear out from the stimulus payments. The other couple of pieces to point out is on the travel front, so May spend was about 10 points above '19 levels. Excluding travel, in all the other categories, spend was about 10 points above '19 levels; and travel was approaching '19 levels, although slightly below. So it's getting close. In fact, travel has improved steadily from January, almost a 30-point improvement. And in fact, as you go to the end of May, domestic travel at least was approaching 2019 levels. So you're starting to see that travel is beginning to normalize. And as a reminder, a lot of our travel is consumer travel, not business travel. And then as far as the U.S. goes, one last point, card-present spending improved by 4 points relative to April. Again, it tells you people are up and about and shopping in stores. And card-not-present, excluding travel, is very, very strong still. It's still at about 159 of 2019 levels. So what you're seeing is that even as people are up and about and going into stores and card-present is recovering, card-not-present is still almost 60% above 2019 levels. So you're starting to see that card-not-present is not slowing down even as card-present recovers to, let's say, almost pre-pandemic levels. If you go around the world, Asia is a mixed bag. Asia remains an area where COVID controls are still pretty prevalent. And you've seen the latest news. People are worried about variants in Asia. Certainly India, the situation worsened a lot in May, but it's showing some time signs of stabilizing. Singapore and Japan put in some new restrictions. We saw their volumes decrease versus April. On the other hand, Europe saw a big improvement. You know that Europe had put in some restrictions in the first calendar quarter because of COVID spikes. As they reopened, we have seen some nice improvement in Europe. Many key markets have improved almost 10 points versus April. Process transactions, again, mirroring the trends in payment volumes. Globally, process transactions are indexing at 1 21 to 2019 right now, up 4 points from April. Europe has improved a lot in May. LAC and CEMEA, which are already very strong, had continued to stay strong. And Asia Pacific is sort of the same as it was in April. Moving to the crucial cross-border business, which everybody is watching. You can see in what we released that we are about 85% to 2019 levels. So that's a 6-point improvement from April, which is quite substantial. Travel spending improved 5 points. So now travel is indexing at about 45% to 2019. So it's still severely depressed. It's less than -- more than half below where it was in '19, but it is recovering. And the recovery is interesting because it depends on where the corridors are open. So for example, travel from North America, almost anywhere in the world, is very strong, almost back to '19 levels. In fact, it passed '19 levels in May. Travel into Latin America is another bright spot. Again, it's above '19 levels right now. Just to give you an idea of how certain corridors benefit, U.S. to Mexico is now 70% of our 2019 levels. So it tells you that people want to travel. And where the corridors are open, they're seeing some hefty, hefty increases. Asia Pacific is the area where travel across borders is still not strong. Europe is improving a lot. In fact, all the indications are that popular tourist destinations in Southern Europe will be open for the summer and bookings are trending well. The fact that Europe will be open to vaccinated visitors from the U.S. is a good trend. For example, in Greece, once Greece reopened in mid-April, in the 6 weeks after that, cross-border spending has doubled and is accelerating every week. And we give you these data points because these are just the corridors opening up. Iceland opened its border in mid-April, and volume is up almost 4x in the last week of May and improving almost every week. There are bubbles opening up like Australia and New Zealand, for example. Cross-border card-present spending from each country had more than doubled from pre-bubble levels and has remained that through May, it's almost back to '19 levels. So really, there's a lot of bright spots around the world. And of course, the final bright spot is cross-border e-commerce. Cross-border e-commerce is indexing at 1 62 to '19 in the 8-K we just released. Now a lot of it is cryptocurrency purchases. Many of them tend to be cross-border. That's clearly helping and that could go away over time. So net-net, you are starting to see a good recovery in many parts of the business and certainly a sequential improvement from April. So hopefully, that was a fairly long answer to the question you have, but I want to give you the best sense of where things are right now.

That's very helpful, Vasant. And I can personally attest to the pent-up demand in cross-border travel. Now Vasant, I want to talk about back in February of 2020, you hosted Visa's Investor Day in person in San Francisco. And you discussed this addressable market expansion into new flows and value-added services and how that can accelerate Visa's long-term earnings growth [ algorithm ] over time. Fast forward to today, given what you're seeing in the market with respect to Visa Direct, B2B Connect and your evolving partnerships, how do you feel about the long-term opportunity of new flows versus 1.5 years ago?

Well, for sure, we feel a lot better about what the opportunity there is and a lot of it has been validated in the last year. So if we just stick to new flows now, we sort of talked about the new flow business in 2 major buckets. We talked about the kinds of new flows we're enabling with our Visa Direct capability. And I want to emphasize that Visa Direct is not a product. It's a capability. It's a platform. It enables a whole range of use cases in P2P, in B2C, and G2C, and of course, B to small B, or small B to small B. So I'll talk about Visa Direct first, and then we can talk about B2B, too. We said that at least 65 trillion in opportunity existed in use cases that can be supported by our Visa Direct platform. And just to tell you a little bit about it, just to make sure people understand, the Visa Direct is a platform that is built on our existing platform that has more functionality than the traditional enablement of credit and debit payments to merchants. What we bring to the Visa Direct platform is our reach, which is unmatched, 5 billion endpoints globally; our scale; our network of network strategy that is really at the core of Visa Direct. So for example, in 2020, Visa Direct utilized 16 card-based networks, 65 ACH schemes, 7 RTP networks and 5 payment gateways to move money around the world. And then in addition to that, we've invested in a whole range of services that add to security, dispute resolution, et cetera. So what Visa Direct has been able to do, of course, is by the end of last year, it got to 3.5 billion transactions, and we're growing 60% a year with no signs of slowing down through the pandemic. And we have some huge use cases that we're very excited about. Of course, early days, the big use case was B2B. And as you know, Visa Direct is at the heart of most of the big P2P platforms everywhere in the world. We are very, very excited about what's going on with cross-border remittances. We have partnered with almost all the major players. And what we can provide them is a solution that is far more flexible than the way they were doing it; more secure, more reliable, more real time and also cheaper, which is why they're extremely excited about it. And every one of them have signed up with us. We're very excited about Visa Direct payouts, which is enabled through Earthport that adds to the capability where we can send money not only to debit accounts -- to debit credentials, but also to bank accounts. In addition to that, owned wage access is another huge area we're excited about that can revolutionize the payroll business. Insurance disbursement's another big area. We've talked in the past about all the things that we're doing in terms of enabling the payments that merchants get in managing their cash flows. So the Visa Direct business continues to be -- what we've seen through the pandemic is that the Visa Direct business continued to lose no momentum whatsoever and has grown in these extraordinary clips, even as the base grows larger and larger. So we feel very good about our ability to capture that TAM, as you said. If you look at B2B, as in large business B2B, as we've said before, we think about it in 3 buckets. There's the traditional B2B business that we've always been in. We're the largest player in. We're twice as big as the next player. That's going extremely well. Clearly, it was impacted by the pandemic. It's recovering. The yields there are great. We have -- the virtual card opportunity there is where there's a huge amount of potential. We'll continue to build on that. On top of that, we see an exciting opportunity in cross-border B2B, the B2B Connect. B2B Connect is now really taking off. We've got a lot of banks on. Goldman Sachs, in their banking business. is going to be a user of B2B Connect. B2B Connect is where Visa Direct was 2 or 3 years ago. And hopefully, in 2 or 3 years, we will be talking about B2B Connect as an extraordinary growth business. What we like about it is it solves a problem that a lot of large businesses have, which is how to get money cross border, faster, more reliably, more securely and with more certainty around exchange rates and so on. So we're very excited about that. And then finally, in the large AR and AP space, that's where -- I mean, clearly, there's a lot of experimentation. There's a lot we're doing. There are a variety of partners we're working with. That will take some time to develop, but we're making good progress. We've done a lot of things with companies like Billtrust and their business payments networks. And there's more to come on that front. So we remain of the view that the new flows business is an extraordinary opportunity for us, part of why we think there's a 10x growth opportunity ahead of us, as we said at our Investor Day last year.

And Vasant, this is very helpful. And are they -- clearly, did represent significant opportunity in terms of volumes. How should we think about the revenue opportunity? In other words, how should we think about the yields on these new flows?

So first of all, I think It's important to point out from an investor standpoint, right, thinking about the investable proposition that is Visa, what you care more about is revenues and the flow through of those revenues to profits. So if you look at these new flow businesses, the revenues are all incremental, and that's very important. But these are all revenues that we were not -- we were not really serving these businesses before. As you know, we built our business for 60 years or more on enabling 1 kind of payment, which is businesses -- consumers paying businesses C2B. This is now enabling the whole bunch of use cases that we did not serve before. So the first point that's relevant to investors is incremental revenue. The second is that these are all very high-margin businesses because the economics of these businesses, from a margin standpoint, a lot different than our core business. This is a scale-driven business. These new flow businesses have the same flow-through from revenues to profits as we will have in our core business. As it relates to yield, yield is a concept that was used in debit and credit because those were a bunch of transactions that all look the same, right? So we used a term called yield where you divided the volume -- the revenue by the volume. These are all different use cases, right? And yield is not necessarily always the best way to look at them. Because in the end, I mean, what goes to the bank is the revenue and the margin to get on that revenue. There are parts of this business that if we measure them in the traditional way, have yields that are comparable to our core business. But there are parts of this business that work very differently. So these new businesses are many different use cases where the pricing is dependent on the alternatives they have available. So for example, when we talk about B2B Connect, we're talking about very high ticket transactions, right? We're talking about millions of dollars, tens of millions of dollars. The pricing proposition there is $1 per transaction. And it's a very profitable transaction, but the yield is not the same as you would expect in high-volume, low-ticket transactions. If you look at Visa Direct, you've got the whole spectrum. You've got a lot of high-volume, low-ticket transactions, some of which are cross borders that come with very good news. Some of which are like P2P, which is not the same yield as you would expect on the traditional merchant transaction. So the yields, in the traditional definition of the term, vary a lot. Net-net, we like the yields. It's early days. The yields reflect the mix of business. The mix of business is improving as we go into higher and higher value use cases and especially cross-border use cases. Net-net, it's a very profitable business. And it's a business where the revenue is incremental and the flow-through of the revenue is very high and very comparable to our core business.

And Vasant, you talked about Visa Direct. And I think another sort of aspect of the strategy you talked about back at the Investor Day is Visa's network-of-network strategy. We are seeing more of your peers going after this new thing for opportunity. Mastercard has its multirail strategy FIS recently unveiled its RealNet, which they also call -- now call network-of-networks. Can you talk about the competitive differentiation for Visa in your network-of-network strategy when you combine Visa Direct and Visa Net and payments of the Earthport capabilities?

Yes. Look, at the heart of value created by something like Visa as an enterprise is the network, right? That is who we are. We are a network. And the value of network and what makes 1 network better than other networks is the scale and scope of the network, right? The endpoints and the reach of the network. Other dimensions that differentiate is the ease with which you can access the network. Another point that differentiates networks is the capabilities the network can provide, the functionality the network can provide. Beyond that, clearly, other things that matter are security, reliability, certainty, et cetera. I think on all these dimensions, as you know, our network is unmatched, right? It is one of the networks that can, side-by-side, shown to be better than alternatives. And then you layer on top of that the brand. The brand is extremely important. We're talking here about money. And it's all about trust. And there's a level of trust with Visa with about a 60-year history of doing all this, and doing it securely, reliably and very -- and in a very easy way, that people trust us to move money. So network-of-network strategy really emanates from -- our goal is to move money to all endpoints and to all form factors. We use all available networks and have a single point of connection. So you want to send your money anywhere, we'll get it there. It's not your problem as to how we get it there. Part of it may be on our rails, part may not be on rails we might own. But a very critical element of the service we provide is settlement. Often not talked about. It's liquidity and guaranteed payments to settlement. And then very critically, a network can be dumb. We bring the intelligence to the network through our value-added services. So our fraud capabilities are unmatched. Our dispute resolution capabilities are very unique. We have a whole range of security capabilities that are very unique. So that's really what creates the differentiation. And then there's the whole issue beyond scale, scope and all those things of who's there first, who's enabling what first and who is able to really get the network effects going first with new use cases. And as you can see, we moved very fast on the whole range of these use cases. We have partners of what makes this business really tick. We have an extraordinary range of partners in all these new use cases. In addition to that, we've made acquisitions to expand our capabilities like Bell ID tokenization to tokenize any kind of transaction, not just the transaction on our rails. Verifi, that provides dispute resolution capabilities on any rails, not just our rails. Terminal that provides authentication capabilities. We also offer a range of loyalty, security and analytics services. So that's really what brings the network-of-network strategy to life. And the most important thing is that it's not a vision, it's reality. As I told you a few minutes ago, in 2020, we actually moved money to Visa Direct on 16 card-based networks, 65 ACH schemes, 7 RTP networks and 5 payment gateways. So being there first is also important. And I would argue that not only are we there first, we're well ahead of a lot of other people when it comes to both our capabilities, our partners, and the quality with which we can execute all this right now.

We have some very impressive stats in Visa Direct, Vasant. I want to switch gears a little bit and talk about the disruption happening in payments. A question we get very often is that the world of payments has transformed significantly over the past year with this rapid growth of buy now, pay later, crypto, digital wallets, disruptive fintechs. And investors often ask, is Visa's competitive moat still intact? So how do you think about Visa's evolving competitive positioning in this fast-evolving payments world?

Well, we've always thought of ourselves as the enabler of the disruptors. We are not -- we are the ones who are probably the ones that are most able to allow disruptors to scale, right? So when -- there's a lot of innovation going on in the moats of our network. And we are the ones who are enabling a lot of that innovation. And sometimes that's confused by people as to is the network being disrupted, or are -- is there innovation of the nodes that the network is enabling? And we believe, for many, many years, that our job is to enable innovation. Our job is to enable any which way people want to move money. And that is really where all the innovation is. And that is what we've been enabling. So whether it's buy, now pay later, crypto, digital wallets, et cetera, those are all disruptions around moats. They're disrupting people who are at our moats. Years ago, people used to think Square was, in some ways, a competitor. We always thought of Square as one of our best partners because they were bringing massive increases in acceptance, for example. I would say the same for Strike who are bringing -- making it so much easier for people to do business online. Several years ago when digital wallets came around, people thought, "Well, the digital wallets are a disruptor." And we told people, "No, we see them as partners." And for a long time, digital wallets may have thought of themselves as competing with us. But over time, they realize that partnering with us created enormous value for them. And we now have partnerships with all the big wallet players around the world. What we do for them is by putting our credentials in every wallet, it opens up significant more -- significantly more value for them so that the wallet owners can now use their wallets at every point of acceptance, Visas, et cetera,. And they become, effectively, issuers of our credentials, so the wallets have a revenue stream. And by opening up their acceptance networks to Visa, they made their wallets more valuable to affluent Visa cardholders, because now, these merchants can get access to people who carry user credentials who they want access to. So the wallets have realized how valuable it is for them to partner with us. And frankly, they then become acquirers and there's an acquiring revenue stream for them. So I think, for example, the wallets today, I would say every one of them, and we have partnership with everyone from ATM to LINE Pay to Raku to you name it, Square Cash, et cetera. But we are very much an important partner that has helped them scale. If you take buy now, pay later, I mean there's always going to be new ways in which people pay for things. We enable them when credit came along. Buy now, pay later is a new way of doing this. We are enabling it. We see that as another way people want to buy things. Our job is to not pick winners and losers. Will buy now, pay later be a big business? Time will tell. It is not today. There's a lot of hype around it. But when you really look at dollars, it's not a big business today yet. It could well be a big business. We're partnered with all of them. Early investors in people like Klarna and PAYD and so on. We've partnered with all the other major players. There's clear value in it for us. We could get transactions to buy now, pay later we could not otherwise get. Some transactions that have been -- that could have been single transactions now become multiple transactions. In addition to that, we can help the providers of the NPL services with virtual cards to settle with merchants, for example. So there's a lot of revenue opportunities for us in buy now, pay later. We see that as us enabling another way to pay. Where it goes remains to be seen, but we are more than happy to help anyone in this space. As it relates to crypto, we're very excited about it. We've been very pioneering in all the partnerships. We have 30 or 35 partnerships already with all the major players. We enable movement of money from fiat to crypto, crypto to fiat, as well as enabling crypto to be used at Visa merchants where they will accept crypto. We've done a lot to offer a set of APIs so that traditional players can develop crypto offerings for their clients. There's just a lot we're doing on that front. And again, our goal is to enable any way people want to pay or be paid. And if crypto is the way they want to do it, we'll do it. So I think what I would tell you is think of us as the enabler of the disruptors. Think of us as the ones who can help disrupt their scale. Think of us as the network that disruptors need to do what they're trying to do. And as long as we can do that, then they don't need anybody else.

And Vasant, and this is, in fact, one of the top questions that came in through in Pigeonhole as well, which is over the last 2 years, many central banks around the world have announced your plans to issue a central bank digital currency; somewhat related to the point you're making in crypto. And I know we've talked about government nationals and domestic schemes in the past. But CBDCs, in the surface, sound like a more formidable risk in the form of modernization of financial infrastructure within a country. I know it's very early days, but how should we think about CBDCs and their implications for Visa? Is it a risk or an opportunity?