Visa Inc. (V) Earnings Call Transcript & Summary

Good afternoon, everybody. My name is Bob Napoli. I'm the analyst at William Blair that covers Visa and the fintech space. For a complete list of disclosures and potential conflicts of interest, please go to williamblair.com. Very excited to have with us today, Jack Forestell, the Head of Product, EVP and Chief Product Officer for Visa, a big role. Jack's been at Visa for about 7 years. And he was at Capital One, where he was Head of Digital for 12 years, I think you were at Capital One. So I was hoping maybe just give a brief background on yourself and what you're focused on at Visa.

Yes, sure, Bob. Thanks for having me. Great to be here today. Thanks, everyone, for joining. Bob, you nailed it. I'm the Chief Product Officer at Visa. That kind of encompasses a few different things at Visa. Part of it is about developing and managing and delivering the product road map for the company. Part of it is about managing a set of business units in our value-added services business, and we can talk a little bit more about that later. And then the last piece is managing the partnership portfolio with our strategic and digital partners and fintech partners around the world.

At last year's Investor Day, you spent a lot of time talking about value-added services. And I think at that point, value-added services was about 15% of revenue. And I was hoping you could maybe give a little more color on why that's important and what you're driving, what are the key products you're most excited about in value-added services.

Yes. I'd love to, Bob, and I can give you a lot of color. So you cut me off when the color starts getting too long. Value-added services are a growing part of the business and really key to that strategy. If you think about it, value-added services, as we offer them to our clients, they help grow the client business and then have the knock-on effect on the core relationship and the core volumes we're doing the clients. They generally deepen our client relationships. And then, of course, they deliver a new source of revenue growth for us. And our value-added services are less penetrated than our core business and also a little bit more key toward digital and e-commerce services. So growing a little faster than the core with a ton of upside, just to give you a sense. It's like in 2020, about 60% of our clients used 5 value-added services and 30% of them used 10 or more. So we're being successful, but we still have a long way to go, let be that 30% number get a lot higher. I can give you a quick overview of the whole portfolio, if you want, sort of what's in that bucket of value-added services.

Sure. Great. Yes.

I'm going to probably do it like things that we do pre-transaction, during the transaction and after the transaction. Pre-transaction, a lot of that has to do with risk management and security. So that's products like Visa Advanced Authorization and Risk Manager, which is our transaction risk product for the issuing side of the table. We got about 8,000 issuers and 125 countries using it. Decision Manager is another one that's equivalent only for the seller side, focused on the digital seller. That's been growing really fast as we've seen the pandemic put wind in the sales of digital, about 30% a year. And we've got a suite of authentication services to authenticate user, getting into the identity space. CardinalCommerce is part of that, our Visa secured service is part of that, and we have a consumer authentication service for issuers, that's part of that. Again, a ton of growth coming out of that suite of products as we've seen digital transactions really taped off. Cardinal, for example, grew 50% in the second quarter. That's the pre -- I'll speed it up a little. But during, I think, installments, transaction alerts, transaction controls, loyalty solutions after the transaction, if there's a problem, we've got disputes processing along with our Verifi services for rapid dispute resolution, digital receipts. So that's just sort of a super quick overview of some of the services. Now we kind of think it's incredibly important to have a differentiated set of services, but it's equally important to have a capacity to deliver them as solutions to clients. And there, we've got 2 really important value-added services, delivery platforms. One is DPS, which is one of the largest issuer processing platforms in the world. It's been heavily focused in the U.S. So lots of upside there to grow internationally. We just launched our first client in Germany, DKB, our largest issuing bank partner there. And if you think -- now that they're up and running on DPS, they've now got access to 20 other value-added services via that DPS platform. On the seller side, you all know about CyberSource, which has grown from a payment gateway to a full-service payment management platform. We connect directly to 450,000 merchants. But more recently, have really started to invest in partnerships with acquirers and enabling our acquired partners like SMCC in Japan or Barclays in the UK, KeyBanc here in the U.S. And then lastly, I'd call out our advisory services and data solutions. We've got an incredible data set to help our clients gain insight on what's happening within their business and where the leverage is, where, frankly, they could deploy some of our solutions to help them. In 2020, we had 5,000 clients using our Visa analytics platform, and we've got a whole army of consulting advisers, over 500 people around the world in the consulting business, who work with our clients. So that's just a potted version of our services portfolio.

Maybe dig into Visa Direct, which I think is one of the -- a very high-growth portion, a very important portion of value-added services. Can you talk a little bit about what makes Visa Direct unique? The growth potential within as far as growth of Visa Direct? It grew 60% in March to 3.5 billion transactions, I think there was or?

Yes. Yes. I look at Visa -- Visa Direct is near and dear to my heart, sort of have been there from the beginning. We've seen incredibly strong growth through the pandemic. But I'd say it's still really early days in terms of the growth. The potential for growth of the Visa Direct is pretty big. So it's probably best to think about the growth potential in 3 ways. There's existing use cases and geographies, bringing the existing use cases to new geographies, and then new use cases altogether. So we started out with domestic P2P. P2P in country, that's where we really got started. And we've gained a ton of scale in a few markets. So the U.S. and Russia are the anchor tenants in terms of the installed base of growth in the domestic P2P business. But we're really starting now with, again, the pandemic digital wins behind us, to see growth around the world. So Latin America is a great example, where we've seen a lot of activity lately. I'll give you some examples there. In Peru, there's a consortium of banks that have put together a P2P platform called PLIN. They decided to connect to Visa Direct and YellowPepper, a recent acquisition of ours. And they've grown to 5.5 million transactions just in the second quarter, having only launched in late 2019. Also in Peru, BCP, a big bank partner of ours, developed their own solution called Yape. They launched in 2018, and they've gotten to 5 million users, which, in U.S. terms, may not sound that big, but 5 million users in Peru is 50% of the country banked population. And they've more than tripled their daily Visa Direct transactions over the last 6 months. So we've seen WhatsApp now launch in Brazil, powering their P2P solution with Visa Direct. And we also got deployment going on in Colombia. So it's really starting to take off in new markets around the world. In terms of newer use cases, we're super excited about cross-border remittance, which is just starting to take off. We're already working with players like MoneyGram, Western Union, Remitly, Wise. And we got new agreements in place with a whole host of banks like VTB in Russia, TD Bank in Canada and a ton of other fintechs. And then lastly, on new use cases, we've got emerging use cases out. So just a ton of potential.

Can you give any color on the monetization of Visa Direct? Revenue per transaction or just how does Visa monetize Visa Direct?

Yes. I mean we -- it's a very straightforward revenue per -- fee per transaction model. I mean, the yields are obviously different depending on the space, there are competitive alternatives. I can't think of a space where I don't believe we have a superior product. So we tend to be priced at a premium, but it really depends. A P2P transaction is going to have a different yield than a cross-border remittance transaction, for example.

Does Visa Direct essentially drive the multi-rail strategy for Visa? And you have Mastercard with Vocalink and driving multi-rail in different ways, but is Visa Direct the core driver for multi-rail?

Yes. I mean, Visa Direct is a big part of it. I wouldn't -- multi-rail, a network for us is bigger than just Visa Direct, but Visa Direct is right at the heart of it. If you think of it with the reach we have today with Visa Direct and then you combine the acquisition of Earthport, which last year, used 16 different card networks, 65 ACH schemes, 7 RTP networks and 5 payment gateways, that's a lot of connectivity. You add all that together, and we can hit 5 billion endpoints. So we can send money not just to Visa cards, but pretty much anywhere on earth with that connectivity. So what we've developed is a platform called Visa Direct Payouts, which creates ease of use. Through a single point of connectivity, you could push payments through Visa Direct Payouts to a Visa card, to one of those other card-based networks, to an ACH account or through an RTP network.

Thank you. So what technological innovations are going to be the most important to Visa and the payments industry? And I think management has suggested over 2 billion credentials, more credentials could touch the network. But things like open APIs, tokens, fast payments, software at payments. What is -- what are the most important technological innovation?

Well, that's a good list, Bob. You're asking me to choose a favorite child. It's all good. I mean you mentioned the credential side of it. Tokenization is going to be critical to that. If you think of the history of our network, it started with the card with a 16-digit credential relatively inflexible, but a powerful distribution platform. Moved to now a credential in the form of a token that can be flexibly deployed to almost any device, bound to device and secured with the state-of-the-art cryptography. That's how we're really going to get to those billions and billions of credentials. But in terms of -- and certainly, token itself is a technical innovation. If I were going to call something out, this might sound a little weird, I might actually on your list, go to open APIs. Open APIs have been around for 20 years. So it's not like it's something brand new. But in payments and financial services, I'd say we're still in the early innings of really leveraging the power of open connectivity. Like the ability to consume and combine services that -- and build new experiences, it's what's accelerating the growth in fintech over the last few years. Now we published 600 active APIs, 600 different services, that are available for developers out there. And we're seeing 1.5 billion API calls a month. From services like tokenization, services like Visa Direct, they're all available as easy to consume APIs. But I would say, Bob, like we're still early. I think we're just going to see a whole raft over the coming decade of new experiences, new players coming on board. They're going to take API-based connectivity, cloud scalability, mobile distribution and combine them into powerful new products and services in the payments and the financial sector in general.

Thank you. Appreciate that. Now that's -- we have -- Marqeta is out there doing an IPO with their open APIs, they're an important driver. I mean, they're a partner, obviously, with Visa.

Yes, we love Marqeta. We're a great partner. Yes.

So Visa works with over 35 crypto companies, represent over 50 million credentials. I mean, maybe just talk about Visa's role in the crypto ecosystem?

Yes. We see Crypto as an opportunity. And right now, let's be honest, there's not a lot of paying and getting paid that's happening with crypto. But there's certainly the potential for that to happen. And anywhere, there's the potential for paying and getting paid, we want to be part of it. So crypto is definitely going to be part of it. Now our role in paying and getting paid is as an infrastructure provider and enabler. And so that's how we're thinking about crypto. And just in the way I was talking about Visa Direct is powering payments into RTP and ACH networks. We just think of crypto as blockchain-based versions of that. They're just other payment and account networks. So we're pretty active. And I can describe the buckets of activity we're undertaking, if it's helpful. First one is really simple. We're just enabling people, consumers, end users to make crypto purchases with their Visa cards. That's what we do. We -- as core to us, we enable people to -- if they want to buy a bitcoin, they want to buy Eth, they want to buy dogecoin. The second, we're at -- it gets a little more integrated, we're enabling users of those wallets and exchanges that cash out that cryptocurrency in fiat today. They're really on a lot of acceptance points where you can use crypto in an easy and convenient way. So we have worked with the exchanges to create programs where you can issue a Visa credential to a customer of the wallet exchange and they can cash out. The number I'll update you, Bob, is actually now 50 different digital currency platforms, up from the 35 that we last public. So you get a sense for the growth rate because I don't think we're that long ago that we published the 35. A couple more things we're doing. One, we're offering a set of API-based capabilities to help our clients be able to allow their customers to buy and sell and hold cryptocurrency. Think medium-sized issuing banks, digital platforms who don't really want to go build the whole purchase and custody infrastructure themselves. We partnered with a partner called Anchorage, who's first federally chartered digital asset bank. And then post the API, start to enable that to happen. Last -- well, not last -- second to last, we're also enabling direct settlement in stable clients on our network. Is probably worth really calling out not pure-play cryptocurrencies like bitcoin, but stable coins that are pegged to an underlying fiat currency where we settle already, we're enabling settlement in those currencies. USDC is the first. And we're really working with natives to the crypto industry who've started to say, "hey, I'd like to settle with my employees, I'd like to settle with my partners in these currencies." So we're creating that capability. And the last, we're also working with central banks around the world to explore central bank digital currencies. We think the capabilities that we're building around settlement, the capabilities we're building around custody could be really valuable to them, and we're working closely with a number of them around the world.

As a strong technological background, when you look at 100 cryptocurrencies that are out there or whatever, is there -- I mean, do you have like the technology behind each? Are they dramatically different? I mean, is there like -- bitcoin has something unique versus dogecoin or Ethereum or what -- I don't know.

Bob, I'd go back to what I said before. We're -- I am not smart enough to pick the winners and the losers in terms of the construct, the currency, the underlying commercial models, all those things. We like being an infrastructure provider, being an enabler, and we'll serve them equally, and we'll see what happens over time.

You can come out of your favorite, we might get a pop and see how much power you have.

I'll leave that to Elon Musk and others.