Visa Inc. (V) Earnings Call Transcript & Summary

All right. Good morning, everyone. Thanks for joining. My name is Tien-Tsin Huang. I'm the payments and IT services analyst. And we have Al Kelly, CEO of Visa, Chairman of Visa as well. And I was telling Al, and I mean this, it's like one of the highlights for me. I get to do this conference every year. Grateful for that but super grateful to spend a few minutes talking to Al and got an important role, and he's always a great, thoughtful speaker for the whole industry. So we have a lot of topics to cover. I've gathered a lot of questions from the investment community, Al. And if it's okay, we'll get right into it. Thank you for being here with us.

Great to be with you, Tien-Tsin, and great to be with everybody in person.

So let's get right into it. So the #1 question I got obviously was to get an update on the consumer. And I've been calling it an atypical recovery with the pandemic, improving travel being very, very strong, but you've seen weakness in areas like e-comm, which is pretty well understood. So you tell us, how healthy is the consumer globally?

Well, right now, the consumer seems quite healthy despite inflation, supply chain issues, the war in Ukraine, rising interest rates, et cetera. Where you would think that you would see -- be seeing some impact, we're not seeing it. I think that a lot of this is because there's still so much pent-up demand and people were being -- were sick of being locked up during the pandemic. So it's hard to tell how something like this economic environment coming off of a 2.5-year pandemic. There's really no history and good test case for it. But we saw our volume grow 17% last quarter. It was over 10% in every region around the world. We saw the growth be very strong across card-present and not-card-present. If you look in the U.S., we were up 144% of 2019. Credit started to come back. Credit was up about 120% of '19. Debits remain -- I should say, credit was about 135% in '19. Debit was still very strong at 153% of '19. And overall, we were -- that was 2 points better than the prior quarter. Overall, credit was 4 points better than the prior quarter overall. If you look at the spend categories that represent 88% of spending, they were all at least 120% of 2019 levels. And the 2/3 of them were actually between 140% and 160% of '19 levels. In the second quarter in credit, we saw over 10 points improvement in a number of categories: travel, restaurants, QSR, retail goods. So all of those are obviously very, very good signs. We look at various spend strata. And throughout the pandemic, kind of the lower ends of the spend strata actually remained very consistent with pre-COVID levels. What really dropped off during the pandemic was the higher levels of spend strata. And we're really seeing in the last 9 or 10 months is the affluent customer coming very much back into the market. One example I'll give you is that when you look at restaurant spending, and we look at it at various ticket strata, and the 2 areas where restaurant spending is growing the most is in tickets between $100 and $300 and $300-plus. So tickets that are like $25 have been pretty much flat over the last couple of quarters, but we've seen these rise in the higher end. That's clear evidence of the affluent customer coming back, going to white tablecloth restaurants and buying a good bottle of wine with the meal and et cetera. We're seeing e-commerce start to come across some higher grow overs. So e-commerce remains quite strong. It's just that you have to go back the prior year and understand that it was strong in the prior year. So it just got a higher hurdle to jump over. Card around the world, we're seeing e-commerce be strong. In India, as an example, e-commerce is out -- is at 300% of 2019 levels. But now on the other hand, there's countries in Asia where it's well, well below the average. If you look at card-present versus card-not-present, which is another interesting barometer because during the pandemic, it was all about card-not-present. Card-present is now at about 121% in the United States of 2019 levels. And at the same time, card-not-present remains at about 170%. So even though the grow-over level has seemingly slowed a little bit, I mean, at 170% of 2019 levels, it's obviously extremely healthy. When you look at cross-border travel, which is obviously an important metric, we ran at 82% of 2019 levels in the prior quarter, this quarter ending in March. But March itself was 94%. So we saw an acceleration through the quarter. And when you look at cross-border card-not-present, excluding travel, it remains very strong at about 167% of 2019 levels. So I think there are 3 factors that are going to continue to drive growth. One is debit is really the engine of cash digitization. Number two, the reality is e-commerce is growing, and I believe it's sticky. And number three, as markets open and people feel comfortable in traveling, they're out traveling. The consumer wants to get back on the road. So just a quick look ahead at what we're assuming in the second half of the year. Excluding Russia and Ukraine, we think domestic volumes will remain quite stable. We think that e-commerce levels will stay good and quite stable. We expect no impacts on travel, except for Russia and Ukraine. We're not expecting any spillover into negative travel trends outside of those countries. And we're now expecting cross-border travel to get back to 2019 levels by the end of our fiscal year, which is September 30. So net-net, I gave a lot of data Tien-Tsin, but consumer still feels quite strong, and we're just not seeing these negative impacts in our numbers.

Great. That was a good summary, and it speaks to Visa and the category's secular strength for sure. So let me -- let's talk about that. We've been studying penetration rates and how it pulled forward perhaps some penetration during the pandemic. We can debate that, if you like. But in consumer payments, your bread and butter, right, the focus has been on driving acceptance on the merchant side and, of course, driving credentials on the consumer side. And so the one thing I've noticed is that credit cards in force, and you provide that metric, has been growing sort of in the low single digits. And you mentioned that debit is quite strong. So how does credit card fit now at this point of either the recovery or where we are in secular penetration? I know we get a lot of questions around alternative payment methods, et cetera. Where do you see credit?

Well, first, if you go back to 2017, and we were growing credentials about 4% on average, 2% for credit and 6% for debit. If you look at the last 2 reported quarters, which would have been -- there's a 1-quarter lag. So the last 2 reported quarters would have been Q4 September month -- September 30 quarter end and Q1 for us, which is December quarter end, we grew credentials 10% and 9%. So actually, much higher credential growth. Last quarter, we grew credit credentials 4%, the biggest growth we've seen in our history. And in terms of debit credentials, we've had very strong growth over the last 8 quarters. So credential growth has been very, very good. A lot of it is coming, I believe, on the back of continued cash digitization. And if you look at Latin America and CEMEA, our Central Europe, Middle East and Africa business, which by the way, for people who don't know the company as well as others, is the region that includes Russia. If you look at those areas, we've seen very, very good growth in credentials. And by the way, coming along with it, is big changes in the mix of spending between cash and PV. So let's -- in CEMEA, in 2019, if you look at the mix of cash for all spending, so cash plus PV, cash represented 59% of all this -- the uses of cards in CEMEA in 2019. In the second quarter of '21 -- our second quarter of '21, that 59% was 50%. And this past second quarter end, it was 46%. In Latin America, in 2019, we were at 56% of all spending was cash. Second quarter of last year was 50%, and this past quarter end, it was 44%. So we have seen 13 and 12 percentage point swing in the mix toward PV and away from cash. That is an enormous amount of change in a relatively small period of time. I mean prior to that, if you would see a percentage point mix change in a year, that would be a lot. So this is clear evidence. And in CEMEA, it's heavily driven by increases in credentials in Kazakhstan, Nigeria and -- I'm trying to remember another good example. But anyway, Saudi, Saudi Arabia was the other one. If you look at Latin America, it's been big growth in Brazil with clients like Itaú and Caixa and Mercado Pago. If you look at Brazil, it's Banco Estado and then a whole bunch of fintechs. If you look at the United States growth, a lot of it is coming from a combination of increase in government-sponsored programs that's either working with states or the federal government on the distribution of funds using debit cards or prepaid cards. But also we're getting good growth with our traditional clients as well as with fintechs like Chime as an example. In Europe, we've seen 6% growth in credentials, double the rate that we had seen over the prior 8 quarters. So very, very strong growth there, and that's driven by a number of good wins on fintech throughout Europe. And in fact, I've talked -- I think the last time you and I talked about Europe, I said that we're planting a lot of seeds, and you'll start to see it. But we now see 30 million incremental transactions from 50 -- across 50 different clients over the next couple of years in Europe based on all of the work that we've been doing with both traditional players as well as fintechs. So on the credential front, credit and debit, I actually think the story, particularly in the last 6 to 9 months, has been very, very strong and better than it had been. So that premise of lower growth has been true historically, but has been much better in the last year.

Okay. No, great. I mean I know you're getting a lot of throughput on the consumer side with the growing credentials. But on the merchant side, which I know there's a lot of investment focused on the merchant side, thanks to companies like Square and Stripe, you pick it. So growing acceptance here, you mentioned the high penetration of cash. What's it going to take to keep growing acceptance on the merchant side from here? I know the Visa Cloud Connect I thought was a big deal, basically enabling phone -- any phones to become an acceptance device. So -- and I think you guys have branded it, what, Visa Tap to Phone, and I know Apple has a tap-to-pay product. So a broader question here is what's going on in the acceptance side?

Well, growing in the acceptance footprint is kind of one of those really core things that we pay a lot of attention to. 10 years ago, in 2012, we had 25 million acceptance points around the world. Now we officially have 80 million. But when you look at the small businesses behind payment facilitators like Square and Stripe, we're over 100 million. So in the last decade, 4x increase in acceptance points. And how is it happening? One is we're focusing on new categories: rent, parking lots, unattended vending machines as crazy examples. We're focused on geography. So a lot of what is happening and the changes that I mentioned in CEMEA and Latin America is because geographically, we're focusing more resources on those markets. And then to your point, Tien-Tsin, technology is playing a role, and you mentioned Cloud Connect and Visa Acceptance Cloud. So let me talk about each of those a little bit. So the Cloud Connect is a new way to connect with us. The way traditionally people have connected with us is that it's been a data center to data center connection, where Visa puts equipment in the data center of the issuer processor or the issuer, depending on what it's processing. And there's a direct connection data center to data center. It's kind of the gold standard of connecting to our clearing and -- authorization clearing and settlement system. As we're seeing more and more new types of players come into the issuing world who are actually operating in the cloud, doing a data center to data center connection is somewhere between expensive and impractical. So we really needed to come up with a different solution. So we're working with a cloud provider to facilitate the connection through the cloud. And over time, we'll add more capabilities and more cloud providers so that this becomes kind of a standard way to connect. Visa Acceptance Cloud is -- let me again provide a little bit of context. If you're a merchant and want to connect with us, you need 4 things: You need a device to accept payments. You need some kind of telecommunications connection, which is either broadband, WiFi or a dedicated line. You need software, kind of a kernel of intelligence. And then you need certification. What we're doing with Visa Acceptance Cloud is we're taking those latter 2 things, the kernel of software and certification, and moving them up into the cloud. And what that's allowing to happen is a number of really good things. Number one, it allows the merchant to have a dumber terminal. They don't need a smart terminal, which saves them money. Secondly, it facilitates changes because changes could be made one time in the cloud as opposed to multiple times across multiple point-of-sale devices. And thirdly, it provides an easier mechanism for delivering value-added services to our clients from the cloud. And it's opening up new use cases. You talked about it's going to facilitate tap to phone. It's going to facilitate Internet of Things, where kiosks and smart mirrors will be able to be facilitated from the Visa Acceptance Cloud, and that will allow retailers to create more immersive experiences. I was just in -- a couple of weeks ago, I was in our Innovation Center in Dubai. We just opened up a new office there. And I didn't do this, but one of my female colleagues who was with me. In literally about 60 seconds, was able to go through a demonstration of trying on like 10 different outfits inside of 60 seconds and being able to say, didn't like red, like to see it in green, like to see it in white, and it instantaneously changes on the mirror. And that kind of immersive retail experience is what retailers are going to need to draw people back into stores when people have gotten used to shopping from their pajamas at home. So net-net, a lot of progress here, and we're going to continue to push hard because at the end of the day, more connections on the credential side being used at more points on the acceptance side is kind of a core element of the consumer payments part of our business.

Sure. So we've got 60 minutes left. Let me ask a couple more, then we'll open it up. So let me do interchange. So think about the economics that balances the 4-party system and makes everything work, and Visa balances that. You did recently update these interchange rates after a period of pause, I call it, in the U.S. And I know it was a topic at some of the congressional hearings. So tell us about the climate for interchange, regulation in general. Where do you see the pendulum swinging?

Well, it's an ongoing topic in many parts around the world, and particularly here in the United States right now. It's not really new. We've been kind of dealing with this 2-sided market and who pays what. Again, for people less familiar with the business, we have the fabulous opportunity or responsibility to set interchange, even though it's not our revenue, it's the revenue of the banks. And if we tweak it up just a little bit, our phone rings off the hook with merchants who are unhappy. And we tweak it down a little bit, issuers, like some of your colleagues at JPMorgan Chase, will call us not terribly happy with us doing that. That said, I think that we take that responsibility extraordinarily seriously. We have a philosophy that our job is to be extremely balanced, objective, thoughtful and pragmatic in setting that interchange in a way that is good for the entire ecosystem and ultimately good for the end consumer and small businesses that operate in that ecosystem. And I'll come back to the changes we just made in a second. The other thing I would say about interchange is it is critical because it drives innovation. It fuels security advances. It provides the economics to allow credit to be extended to the level that's extended here in the United States. It provides services. It provides protections for consumers in terms of dispute resolution, et cetera. So if you didn't have interchange at an acceptable level, the reality is all those things I just said will become compromised. Innovation will go down. Security won't be as good. The protections for consumers wouldn't be as good. Obviously, rewards would be diluted tremendously. All of that would be bad. And if you think about all the investments that were made in the payments world in the 10 years prior to the beginning of the pandemic, if those changes were not made, the reality is the pandemic would have been a lot more difficult for commerce, without question. And nobody is standing up and clapping for us for having put ourselves in a position where consumers were able to operate safely with reduced levels of fraud, although fraud is still not where it needs to be in the online world, where security is still very good. And really, really important, all this stuff is fueled by what comes out of interchange. We made 3 changes. And I think this is a perfect example, going through these 3 changes of our thoughtfulness, at least I believe our thoughtfulness. You can ultimately judge whether you agree with me. Number one, for any merchant that did over the prior 12 months $250,000 or less of volume on Visa credit cards, $250,000 or less of volume on Visa credit cards, which probably means the merchant does between $1.5 million and $2 million of overall spend because you have credit cards issued by Mastercard, you have cash, you have debit cards, et cetera. We lowered interchange 10%, and that impacted over 90% of the merchants in the United States. Why did we do that? Because merchants were getting killed by a lot of the big tech companies, particularly small businesses, I should say, were getting killed by the big tech companies taking volume from them before the pandemic. And then obviously, during the pandemic, we all, I'm sure, have our stories of boutique stores in our main street and our hometowns or restaurants, et cetera, that closed during the pandemic because they weren't omnichannel-ready and they, therefore, didn't have the capability. That was the first change. Second change we made is that we increased the price for card-not-present transactions that were not tokenized. So if you tokenize, you don't get the price increase. Or if you choose to now tokenize, you won't get the price increase. Again, I think a very responsible option because we want people to tokenize. So we, in fact, try to drive that incentive. And I'm more than happy to have all those transactions become tokenized and not get the increased interchange. The third thing we did is we raised the rate for inaccurate submissions of transactions. The ecosystem gets a lot of bad transactions, poorly formatted, missing fields, missing data and that kind of thing. They cost extra money to process. We're far better off with cleaner transactions. People have the option to clean their transaction up. If they clean their transaction up, they're not going to get the extra increase. So those are the 3 changes we made. By the way, during the pandemic, we lowered rates for categories like supermarkets and grocery stores. And by the way, if you look at our interchange rates going back prepandemic to now, they're about flat in the United States during that period of time. Now you mentioned, obviously, Senator Durbin had a hearing on The Hill, the Senate Judiciary Committee on May 4. We participated in that. We'll continue to feed information to the regulators and the legislators. I spent a lot of time in Washington on these subjects. The reality is that Senator Durbin has a bill before -- well, it's not before anything. It's sitting on his desk. He'd like it to be for consideration. All it is, is it's, underneath everything, it's an attempt by the government to get involved in pricing in private markets. That's not the job of the government. Market should determine price, not governments. And I feel very strongly about that, and that's something we will continue to make our case for. In terms of the rest of the world, clearly, regulation, whether it's interchange or data localization or data privacy, open banking, there's all kinds of action. We'd have to be here through dinner. But the reality is we spent a lot of time educating governments, working with regulators. I talk to central bankers all the time around the world. I was in Europe a couple of weeks ago and met with the head of the central bank in France. I met with the head of -- the Deputy Governor in Bank of England in the U.K. So we spend a lot of time on this subject. It's one of the things we manage in the business. It just -- it's a reality, and we'll continue to manage it.

Good. No, I think we all take for granted the dial-tone quality of payments and what Visa does. And I remember one of the first conversations you and I had. I think you asked me what I worry about. And I think the answer I had was nationalism and just that governments and regulators are increasingly looking at payments and coming up with alternative payments. And we're looking at things like -- I wrote down as a reminder, what Brazil PIX, India UPI, all examples I think, of more nationalism in certain countries. The Russia sanctions, I think, has helped UnionPay drive some traffic on their side, which I understand the situation is very unique. But what do you think are the TAM implications of all this? Having said what you said earlier around the balancing power and the value of the network, is there a changing in the TAM?

I think the TAM grows, and let me tell you why I feel that way. You mentioned PIX and UPI. Interestingly enough, our business in India in the second quarter was 180% of 2019 levels, one of the better-performing markets. One of the other top-performing markets, a top 3 or 5 performing market in the last quarter was Brazil. So they are the 2 countries where PIX and UPI sit. We believe that both PIX and UPI are actually processing transactions that are generally not carded transactions. They're new transactions. And we think that's -- the reality is that if these guys are helping be catalyst for digitization, as long as the playing field is even, that's a good thing for the ecosystem. I was in Brazil and Chile 3 weeks ago, and I talked to the CEOs of probably about 6 different traditional banks and fintechs in Brazil. They all to the person said exactly what I just said: We think PIX is attracting different types of transactions, and it gives us the ability now that these people are getting into payments in a different way other than cash. It gives us the ability to go cross-sell other products and bring them into our bank to do -- or our fintech to do other things with us. So the bottom line is, I think it actually grows TAM over time. And people still realize -- by the way, when you think about these kind of RTP systems, people still realize, the governments and issuers, the values of Visa. I mean the fact that we can do dual messaging, the fact that we could do domestic plus cross-border, that we have world-class security. We have tremendous risk products. We have good funds guarantees and 0-liability promises to consumers and those kinds of things, that we're still a very, very important player. I'd also add that these systems are helping our network of networks, that we are -- adopted a philosophy a couple of years ago now, where we had been -- like everything had to run on VisaNet. Now we're saying we're much more interested in routing things in the most efficient way around the world. And if the first or last mile of the journey of a transaction goes on an RTP network or a card network or a gateway, that's perfectly fine with us. It actually allows us to route transactions in the most efficient way we possibly can. It also creates an opportunity for us to sell value-added services, sell authentication from CardinalCommerce, sell tokenization from Token ID, sell our alias directory from YellowPepper, sell dispute resolution capabilities from Verifi. These companies that all -- most of them, companies we've bought in the last 5 years. So I think it's a TAM expansion opportunity. And I think India and Brazil, the 2 you asked about, is a great example to, in essence, prove that out.

Yes. No, perfect. Once you get introduced to electronic payments, hard to beat Visa on tech and safety, security, all that good stuff. We have 5 minutes left. Happy to take questions. There's a mic, if you don't mind waiting for that. I think we have a couple up front. So we maybe can do 1 or 2 with under 5 minutes.

Your initial commentary on the consumer was really helpful. I was wondering if, considering there have been a number of data points since the quarter closed that really kind of raised questions about consumer spending, can you talk about how consumer spending has trended since the end of the March quarter?

No. We're going to -- we'll put out an 8-K shortly as we have kind of intra-quarter to give you a sense. But my SEC attorneys would crush me if I commented on it. So I can't.

Month's not quite over yet. So let's the month play out.

But we will be putting an 8-K out shortly.

I thought there was one more, otherwise, we can keep going. So like I mentioned, right, hard to beat Visa from a tech, safety, security standpoint. We talk about that all the time. You work with all. You have a seat at the table with all the players: regulators, tech players, fintech. So I know you've been talking about new flows for a while, right, Al, with Visa Direct. And again, value proposition on that, hard to beat some of the real-time payment networks is how we talk about it. I was surprised to see that article, if you don't mind me mentioning, that the banks were considering using Zelle, right, which is really a bill payment, P2P transfer network across the big banks and their online banking apps to compete against Visa. What was your response to that?

Well, Zelle is a partner of ours. And we're working with them on their technology road map in a very collaborative and active way. And in short, I see them as a partner and not a competitor. You may or may not know that in P2P on Zelle, it's Visa Direct that's behind the scenes, facilitating movements of money from most of the medium and smaller banks to -- across those medium and smaller banks and to the larger banks. So in Zelle, the larger players, JP and Bank of America, Wells, et cetera, have all created direct connections to one another to facilitate the movement of funds on Zelle. But a lot of the medium and smaller banks haven't -- can't afford to create those connections. So it's behind the scenes, it's Visa and Visa Direct that's making those connections. So that's a very real example of us working with Zelle. And to your point, I think Visa Direct is a differentiating, incredible asset. I mean start with reach. We can reach 5 billion end points around the world, either bank accounts or card accounts. Our using our network-of-network strategy, we can route in the most efficient ways. We have incredible operating scale because we use VisaNet as the platform for Visa Direct. So we haven't had to create a new technology platform. So every transaction is at a very low marginal cost for us. On top of that, our APIs are easy to consume. People tell us it's very easy to implement and connect with us. You've got all of our Visa services available to you, whether they're AML or authentication or a good funds guarantee. And lastly, we have the ability to consume our value-added services. So we think it's a very differentiated and very strong tool.

Yes. And I know you get that. We have 1 minute left, so I promise we'll keep it really quick. So with that in mind, Al, so a lot going on. We didn't talk about crypto. There are so many places we could have gone. With value-added services, and you just mentioned Visa Direct, of course, growth in credentials, Visa Cloud, what are you most excited about? I know you're fielding a lot of questions around the consumer and the macro. What should we be focusing on instead to power through that?

Well, it's been an interesting last number of -- maybe even last year, not only because of the pandemic, but an awful lot of attention focused on "disruptors". And I think there needs to be a lot more focus on opportunities. And the reality is that there are a lot of different ways to pay. We're an enabler for the different ways to pay. Those different ways to pay don't compete with us. We enable them to be able to operate in the marketplace, whether it's crypto or buy now, pay later, et cetera. And we don't -- we're not in the business -- we're in the business of enablement. We're not in the business of picking winners and losers. So we'll enable anything on our network. And ultimately, the consumer, based on the experience and the value, will decide what wins. But we're going to continue to work with all the BNPL players and create our own option in terms of Visa Installments. We will continue to work with all kinds of crypto players. We're creating off-ramps, on-ramps, for all of the various crypto types of transactions. So I think the opportunities for us are very wide.

Agreed. Amazing, Al. It's always a pleasure to have you. Thank you so much.

Thanks, Tien-Tsin. Thank you. Nice being with everybody.