Visa Inc. (V) Earnings Call Transcript & Summary

All right. It appears we are now live. So good morning, everyone, and thanks so much for joining us. My name is Dave Koning. I'm a senior analyst at Robert W. Baird, covering the payments industry, and very pleased to have Ryan McInerney from Visa, the President of Visa, with us today. And I think you all know Visa very well is the premier card network company in the world.

And so with that, maybe we can just kind of jump right in. One of the most impressive things we've seen from April and May trends, I would say, is how U.S. debit volumes have been so strong. I think they're tracking at 150% of the 2-year ago numbers. And maybe, Ryan, you could kind of kick us off with why is debit so strong? And is this more structural in a long-term impact that debit is just here to stay and just better than it's been before, better growth than before? Or is some of the stimulus related and maybe a combination of the 2?

Yes. Well, first, thanks for having me. It's great to be here. Looking forward to talking to you. Looking forward to talking about whatever's on people's minds. Maybe before I dive into your specific question about debit, which is a great one, maybe just paint a little bit of kind of the overall economic picture. Because I think there's many signs for optimism. And then I'll hit your debit one specifically, if that's okay. So I'm sure that most of your audience saw that we put out our 8-K, I guess, it was last week. And if you just look at what you're seeing in the U.S., I'd say, in general, trends are either consistent or better than what we saw in April, which is really good. In the U.S., we have total payments volume at about 132% of 2019 levels, which is actually up a point from April. As you mentioned, debit was really strong, 151% of 2019 levels. And I'll kind of circle back to that. Credit has an improving trajectory at 114%, so up 4 points from April. And we're seeing strong recovery in travel, entertainment and restaurant spending. We're actually seeing spending improvement across all categories in credit, which is great. And we're seeing improvement in card present. We're seeing in our card not present, excluding travel, holding up really, really strong. So really positive trends in the U.S. And if you look at outside the U.S. to the rest of the world, the trends are fairly consistent, maybe with a couple of exceptions. Asia, in a couple of places, you've seen Singapore and Japan who have put in new restrictions. So we've seen some volume come down. India worsened a lot, but has been showing some signs of improvement recently. And on the other hand of Europe, we've seen some positive improvements over the last several weeks and months. In many markets in Europe that are up probably 10 points since April as they've started to loosen up a little bit. So that's all good news. And we can talk about cross-border later if it's helpful. There's some positive signs there, too. As it relates to debt in the U.S., I guess, to your question, we've seen continued strength, for sure, If you just do globally before we dive into the U.S., in the second quarter, our payment volume was at about 135% of 2019 levels globally. In the U.S. as I said, that's kind of mid-140s. I think it was 144% at the end of the last quarter. And then what I think is encouraging is we've seen that level hold since the stimulus. So if you look at the first 2 rounds of U.S. stimulus, the spend lift that we see typically lasts for about 2 months. So we would have expected the benefit from stimulus to have really faded in May, but that didn't happen. Both April and May in the U.S., debit spending levels were at about 150% of 2019 levels. So getting to your question around how structural or not is that I think there's a couple of things going on. I think maybe there's some just pent-up demand, right? We're seeing kind of the relaxing of restrictions and people are getting out and about, that's certainly true here in Northern California. But I do think there are some real structural changes in the U.S. debit business, which are positive. I think we've seen kind of a real shift from cash purchases at the point of sale. I think those changes are structural in nature. I think as we get further and further toward kind of the back end of the pandemic, we're going to see just more and more people continuing to use their debit cards at the point-of-sale when previously, they might have used cash. They've gotten comfortable, more comfortable doing that during the pandemic. They've gotten comfortable using tap-to-pay, which is, I think, become a big success in the U.S. The other thing that I'm always looking at on this question of cash is how are people using the Visa cards at ATMs, because that's like another indicator. If you look over the last, I guess, the last year or so, we've seen a 7% decline in ATM transactions. While debit has grown about 16 percentage points. You've got like this 20 kind of percentage point gap that's emerged in ATM versus point-of-sale debit usage, which is just another indicator that people are just using less cash and using their cards. So I think the strength in debit is likely to persist even after the pandemic due to some of the structural changes. And we'll continue to invest behind that and hopefully use those tailwinds as a way to continue to grow debit in the U.S. for the foreseeable future.

That's great to hear. And I guess, just one more question on U.S. debit there. There was regulatory -- some regulatory review. And I guess just wondering, some seem to want a shift-to-PIN and PIN-less. But it seems like there's a strong reason for a lot of merchants to want to use signature debit and not even to want to use PIN. Is that fair to say?

Well, I guess I'd say a couple of things on this, too. First is, in a business like ours, regulation is just part of operating, it's part of doing business. And we believe that our U.S. debit practices are 100% of compliance with all the applicable laws. And as it gets to your question, what we hear from merchants is they love Visa Debit. They love our brand, they love our scale, our security, our reliability, kind of settlement and dispute resolution capabilities many of them also use Visa Direct. So it's a very robust product, and they love it. And from everything that we see, merchants are free to and they regularly do route to other networks. As you know well, merchants are very sophisticated and very savvy on how they do this at the point-of-sale and especially in e-commerce. And when they make those decisions, they're balancing fraud costs, authorization rates and a bunch of other factors. So yes, we feel great about the Visa debit product. We have a very robust set of capabilities that we've invested in that help merchants increase authorization rates, reduce fraud and generally grow their business. So you've seen us invest in things like tokenization, Visa advanced authorization, authentication tools, real-time deep learning risk engines and data models. I talked about Visa Direct. There's just a whole host of things that we invest in. And I think every network makes its own decisions on what they invest in and the value they can bring to the ecosystem. And we've invested a lot but continue to do so. And hopefully, merchants will continue to want to choose Visa Debit.

Yes. Sounds good. I guess, then if we move to U.S. credit, we often think of U.S. debit as being about 15% of your revenue. We think of U.S. credit being about 30%. That declined in the early stages of the pandemic, and now it's coming -- roaring back, but it's still lagging debit. Is that because consumers have shifted to debit? Or is it just the categories of credit spending have just been weaker? And do you think there's any structural change in U.S. credit?

At this point, it's more of the latter. But let me -- the latter meaning kind of depressed spending in some specific customer segments and merchant segments, but let me try to put that in context. So I mean, as you said, when the pandemic first hit, credit was significantly impacted across all spending segments. And there are a number of reasons for that. I think we talked about that in various forms over time. But by -- I'd say the fall, most consumers had resumed their credit card spending kind of pre-pandemic levels for most merchant segments. It's really at this point, the affluent that have not -- the more affluent segments of consumers that have not seen their credit spending kind of rebound, and it's specifically in travel, entertainment and dining. Those are very big credit card spending segments by the more affluent consumer segments. And as things start to open up more, we expect that consumers will get a chance, especially the more affluent consumers, get a chance to book those trips, take those trips, go out to dinners and buy their summer concert tickets and go to summer fest up in Milwaukee and have a good time. So our performance that we put out in May starts to reflect this. The credit improved versus April by 3 percentage points indexed to 2009. The improvement is mostly driven by travel entertainment and restaurants. If you look at spending in aggregate across just those 3 segments, it was up about 10 points in April. So I expect credit in the U.S. to return to pre-pandemic levels. I don't think there's any structural reasons that it shouldn't. There's an argument that even improved to higher than pre-pandemic levels, given some of the consumer behaviors with e-commerce and tap to pay. But we expect that as things start to open up, affluent consumers they're going to get out there and they're going to get back. They're going to spend on travel, entertainment and restaurants, and we'll see credit reach pre-pandemic level sometimes soon, hopefully.

Yes. Great. And if we think of rest of the world now, and you talked about some of the different areas already. But rest of the world has lagged the U.S. in terms of recovery and maybe stimulus, maybe other factors. Typically, the rest of world grows nicely faster than the U.S., is there just a big kind of spring loaded demand coming as it might just be 3 months later than the U.S. or 6 months? But it just seems like a huge spring loaded amount of just rest of world demand.

I do think there's pent up demand. I do think there's spring loaded demand. I mean, what drives the recovery in spending is the restrictions in mobility being moved and then people being confident to get out and get out there into the world. I mean it really is that simple. And we're starting to see that in certain parts of the world. If you go back and, I guess, look at our Q2 results, the recovery is well underway in a number of our markets. If you look at, for example, our SEMEA region or I guess, in our Latin America region, both those were at 150% and I think 140% of 2019 levels in Q2. I mean those are a very strong spending growth numbers versus certainly what we were seeing a couple of quarters ago. Asia Pacific, excluding China, and Europe, were probably the slowest to recover when you go back and look at that core second quarter. They were both at about 108% at 2019 levels, although much higher obviously than where we were a couple of quarters ago. When you look through May, the rest of the world trends were fairly consistent with many of the things we're seeing in the U.S., as I said earlier, except for some of the places I mentioned, like in Asia and India and the others. So we're seeing good trends in parts of the world that have started to open up. We're also seeing good trends in parts of the world where we continue to win share, places like Europe and Latin America, and you're seeing those wins show up in strong growth numbers that we're seeing. So I do think there's real pent-up demand. I think as the next several quarters start to unfold and hopefully, vaccination rates go up, hopefully, consumer confidence goes up. Hopefully, we're seeing more and more of the travel restrictions removed. We'll start to see that in the spending numbers.

Yes. Yes. Well, in if we kind of transition and think about cross border, right, like cross-border travel has been weak for a while, cross-border e-com has been really strong. How do you see kind of the pace of cross-border travel recovery and maybe the structural like changes to that business being more e-com less travel over time? Or maybe just talk about that business a little bit.

Yes, sure. Well, first, let me paint some of the trends we're seeing in cross-border in general and then hit your -- I think your question specifically. So cross-border, excluding kind of intra-Europe has continued to show improvement, about 85% of 2019 levels, that's up 6 points from April. We've seen very strong e-commerce and starting to see improved travel spending. Travel is up about 5 percentage points at about 45% at 2019 levels in May. I think what's really encouraging is looking at the corridors that have started to open up. U.S., Mexico is a great example. So in May, U.S. travelers spent at 170% of 2019 levels. It's really kind of staggering, given just the environment that we've all been living in for the last year or 1.5 years. And that's significantly up from last quarter. So this gets back a little bit of that pent-up demand we're talking from the consumers. The same thing is true in cross border. When borders start to open, we're seeing some real big jumps. While in Asia, cross-border continues to be weaker, there, too, we started to see some bubbles open up. We've had the New Zealand, Australia, travel bubble, the Hong Kong, Singapore, travel bubble. And when these bubbles open up, after a couple of weeks, we see a big jump up in travel spending, kind of a 2x increase. And I'm hopeful and optimistic about Europe for the summer. We've seen some popular tourist destinations in Southern Europe open up. Bookings are trending up. We look at the markets that open quite quickly. We look at the markets that opened quite closely. And Greece reopened in mid-April after a few weeks, we saw cross-border double. We saw that in Iceland as well. So mindful, especially with the news about vaccinated Americans being able to travel into Europe. Hopeful, we'll see some good trends there. If you come back to, I guess, your bigger question about kind of cross-border as a business and where does it go from here? Prior to the pandemic, cross-border, about 2/3 of our cross-border volumes were travel related. Both in a card present, when you travel to another country, but also e-commerce, booking your travel, hotel and whatnot. And about 1/3 was e-commerce, excluding travel, so 2/3, 1/3. And during the pandemic, that ratio kind of reversed itself effectively. I think coming out of the pandemic, I would say that non-travel e-commerce cross-border is likely to be structurally higher. The new buyer and seller behaviors that emerged during the pandemic are likely to stick. And I think that will be structurally higher. That's, I guess, one component of it. I think cross-border travel will come back. It's hard to predict when. It's determined by when the borders reopen and what vaccination rates look like and what consumer confidence looks like. But as I was mentioning earlier, as we've seen borders open, we've seen significant pent-up demand for consumer travel and it's notched back fast. And I guess the last thing I'd say with cross-border is we're also investing to diversify as our cross-border business across B2B, B2C, P2P, with a number of different initiatives. So I'd say, structurally, we believe that e-counters cross-border will have a more significant share than it did in the past. As we're starting to diversify into other flows, you'll see those have a greater share, and I think travel will come back. So we're hopeful that we have a very robust cross-border business going forward.

Yes. That's a great recap. And then when we think of -- I was thinking of 3 buckets, I think of dollar volume, cross-border volume and the number of transactions. And so we'll kind of round out with transactions a little bit here. Through the pandemic, right, we've got more e-com. We've got higher ticket, higher dollars per ticket. We've got more debit and now we'll kind of come back to more credit, more in-store, just all that will start coming back. How does all of that translate into the number -- the number of transactions growing? Should we get some hyper growth in number of transactions? Or just maybe talk through that.

Yes. So there's been a lot of, obviously, not normal dynamics that have happened during the pandemic. I think the biggest 2, as it relates to transaction levels is, dynamic number one is, people just haven't been out and about, right? And they're not out like you and I. They haven't been out as much buying coffee before they go into the office. They haven't been out as much buying a sandwich at lunch at the office. And so what happened was for a meaningful period of time, a lot of the smaller ticket transactions that we typically see, especially in the face-to-face world haven't been happening, which all else equals driven transaction size up. The second thing that's happened during the pandemic is because you haven't -- the combination of the stimulus programs, the lack of ability to spend on travel and entertainment, which tend to be larger purchases, and you had a lot of people spending the money they had available on higher retail durable goods. So flat screen TVs, large home improvement projects and those types of things, which all else equal, also driven transaction sizes up. I think as we emerge from the pandemic, the relationship between the factors that you mentioned, most likely normalizes. I think all else equal, the relationship between transaction growth and PV growth probably reverts back to something close to what it was pre-pandemic. One thing, not the only, but one, I guess, kind of wildcard in all of that, I mentioned this a little bit earlier is tap to pay. I do think if people get out -- back out there in the world, they're going to use less cash, Americans especially, but others around the world for a longer period of time. They just come to love tapping. That could accelerate sort of ticket transaction growth a bit and maybe adjust that ratio. But I think for the most part, big picture, it probably reverts to more pre-pandemic ratios.

Yes. No, that's great to hear. And then if we look at incentives, kind of one of the last kind of parts of the revenue model, do those start to normalize back to where they were like? Can they actually come down as a percentage of gross as cross-border really comes back? Or how do you see that relationship and just incentives over time?

Yes. Listen, I think all else equal, as cross-border grows, incentives should at least remain steady. As cross-border improves, we should see gross revenue increases faster than incentive increases. But as you know, well, all is rarely equal, I guess. So all else equal, that's how the math works. But all else is really equal, especially these days. And I think there's a few factors to consider with all of that. One is we have multi-period incentive arrangements with our clients, where our clients are incentivized to meet milestones over in multiple periods of time. And this year, as payment volume improves and clients meet these targets, maybe that they didn't meet last year, we'll pay them incentives, which would put upward pressure all else equal on incentives. And there's also just the timing of the cross-border recovery with a question of when that comes back and what that means for the relationship. As you're thinking about kind of the incentive equation, there's also -- for us, we have the service fee lag impact. So as long as payment volume is upward sloping, there's kind of this mismatch, right, between the service revenues and the incentives in any given quarter since service fee revenues are recognized based on prior quarter, incentives are recognized based on current quarter. That's just a dynamic that will exist for a period of time until payment volume finds its more run rate level -- post-pandemic run rate level. And then we always have renewals. We expect to renew 15% to 20% of our client deals in 2021. So you put all that together, I think we believe as the world recovers and cross-border recovers, we should see the percentage, as I said, kind of stable to maybe down. But how much will depend on the service fee impact, the multi-period incentive deals, the renewals that we have, what happens with cross border? So all else equal, yes, it should be stable. But like I said, all else is not always equal these days.

Yes. That's a fair point. And maybe we can spend the last 5, 6 minutes or so just talking about new fintechs. And some investors view some of the new fintechs as risks, some view as opportunity. How do you see the different types of new fintech offerings as risk and opportunity? Maybe what are the biggest opportunities for you? What are the biggest risks? Just talk through all of that.

Well, in general, we see it all as significant opportunity. I mean our approach to fintech as a broad segment over the last, well, 8 years since I've been with the company, has been to lean in, to invest and to become the preferred partner of choice for any fintech really on the planet. And our goal has been to open up our network and become the platform of choice for fintechs to build their products and services on. And we've rolled out a number of programs to strongly encourage fintechs to want to partner with us. We rolled out a program called Fintech Fast Track, as an example, with streamlined onboarding, turnkey access to hundreds of ecosystem partners. We've got more than 300 partners, I think, now in that program, which is growing kind of 40% to 50% year-over-year. We've done a lot of work to make it easier to build on our platform and partner with us. We have now more than 600 APIs that developers can access and build directly on our platform. We're receiving over 1.5 billion API calls per month now as fintechs have built and integrated with us on our platform. We've launched new kind of cloud connectivity platforms. I mean, we've really kind of invested in our product pipeline to become the partner of choice for fintech. And for a lot of the various segments that are out there, there's always threats that come with them, that's for sure. But again, we invest in it and try to create an opportunity that where 1 plus 1 equals 3 for all these types of partners. And I think if you look at the results in the market, you look at buy now pay later as an example, I think Visa has clearly emerged as the partner of choice for buy now pay later players around the world. We've invested in some of the leading players. We've partnered with them in lots of different ways. We also become the partner of choice for, I think, the blockchain community in general and crypto specifically. We have leading partnerships with all the leading players that are on that space. We've, I think, shown that the closed-loop digital wallets that emerged 4, 5 years ago, starting in China and Southeast Asia and started around the world, can become great partners for Visa. And we've really shown that we can create issuance and acceptance partnerships with Ali and We and Paytm and Rappi and Gojek and many others around the world. And the same thing with the emerging RTP space. We're absolutely leading into that space via our network strategy, bringing value-added services to the RTP networks around the world and creating a global money movement network using kind of our products, but also our network of networks to bring a money movement solution to partners that leverages all available networks to optimize on speed, value and cost. So I mean, the list could go on. But as I said, we see it as a lot of opportunity and we're leaning in and investing significantly in trying to help our clients and partners in all those spaces.

And is the crux of it often that to reach, what is it, 4 billion or so consumers and millions and millions of merchants, maybe you pay a 1% all-in fee to reach that level of scale by yourself without Visa would cost way, way more. Is that kind of just the crux of it all?

Yes. I think all of these different partners, like the scarce commodity for a lot of these fintech players is engineering resources. If you go talk to the CEOs and the founders of a lot of these fintech, like you say, what is your single most scarce resource? And they will say engineering resources. And so when they're thinking about where to invest their engineering resources, we can provide them a global turnkey platform that enables issuance and acceptance with a world-class brand. And they can focus their engineering resources on delivering great experiences to their consumers, to doing what they need to do, whether it's delivering food or delivering groceries or delivering new types of buy now pay later experiences, what have you. I think we have shown that they prefer to partner with us, then, to your point, try to go invest significant engineering resources together with dollars and capital and money and resources at a time in trying to replicate what we build and made available to them.

Yes. Yes. Not to mention all the risk of not having you behind them.

Yes. And I think we've got some great partnerships and many and all of the companies we partnered with have found that partnering with Visa and having our brand behind their products and behind their services gives their users confidence and helps them grow their business.

Yes. Well, that was great. 30 minutes goes really fast. So we've reached the end. But thanks so much, and we'll host a breakout session with you coming up in about 5 minutes as well.

Great. Look forward to it. Thanks for the time today.

All right. Thanks so much. We'll see you.

Bye.