Visa Inc. (V) Earnings Call Transcript & Summary

Yes. I mean there are about 4 factors that you can look at that could drive the yield of a cross-border business. One is, of course, whatever our pricing is. So if you take pricing, certainly, that helps the yield. The second is corridor mix. By and large, the corridor mix is not a big factor. Yes, there are some differences across corridors in yield. Some are a little lower than others, some are a little higher. We do talk about the U.S. inbound being important because it is higher-yielding and it is one of the larger ones. So mix has a small impact. It's not a huge impact, but it does have an impact. Then there are 2 other big factors. One is volatility. Higher the volatility, the greater the spread in some of these currencies, and therefore, potentially more revenue from our FX operations. And the other is FX itself, right, the translation impact. The strong dollar has hurt our cross-border yields right now because a lot of our cross-border business, as you would expect, is in nondollar-denominated currencies. And if you look at all the lines in our P&L, the international revenue line where the cross-border revenue hit has been the hardest hit from the strong dollar. Fortunately, right now, offsetting that to a meaningful degree are these very high volatilities. And volatilities are high, we think, because of the tremendous uncertainty about relative interest rates, right? People don't know how far the Fed is going to go and when are they going to stop, and what is the relative difference going to be between interest rates available in Europe and Japan and elsewhere relative to U.S. rates. So a variety of things are going on right now. Some are helping us, some are hurting us. So helping us is, of course, the volatility being high. Hurting us is the dollar being strong on the cross-border yield. Hurting us to some degree is the fact that the U.S. corridor is not performing at the same level relative to some other corridors. The best -- sort of the best set of circumstances for yield would be a weak dollar, high volatility and the U.S. corridor outperforming, for example. But at any point in time, not all of them work in your favor. And right now, some are, some aren't.

But in general, it sounds like you feel like the yields will go a little bit higher from where they are today going forward.

I don't want to make a prediction on yield because, as I said, there are many variables there...

So many factors, yes.

Mix may help us going forward if the U.S. continues to recover and gets back to its overall levels of performance. On the other hand, volatility may go down, right? But then if the dollar weakens, that may help us. So there's a whole range of factors here.

Got it. Want to ask about Visa Direct. And despite the loss of Russia, which I know was a decent chunk of the business in Visa Direct, it's still growing fairly nicely. And maybe you could just talk about the outlook there in Visa Direct for outsized growth.

Yes. Look, I mean Visa Direct is a big part of our future. Visa Direct is a reason why people should be excited about Visa in the long run. And I would emphasize that Visa Direct is not a product. It's a capability. And what it really is, is if you think about our future, we're going -- sort of we've got 2 vectors of growth, right? We've got our traditional consumer payments business that you all know well and has been the heart of our business for most of our history, but we have got sort of 2 vectors for growth in the future. One is expanding use cases beyond consumer payments, and that's what Visa Direct does for us. It is our capability that takes us into a whole host of new cases that digitize cash. And then the other vector is our value-added services, which increase the yields on any transaction we already have by adding more services on top of that transaction. So those are the 2 vectors. And so Visa Direct is a very, very important vector of growth. And what we bring to Visa Direct is all the capabilities that we brought to consumer payments, we're bringing to other use cases, right? This is global reach, the 100 million merchant points of contact, the 3 billion to 4 billion card credential -- card credentials we have out there, the reliability and the security that we bring. Our ability through Visa Direct to be network-agnostic, in other words, to allow you to get your money wherever it needs to go regardless of a network. Visa Direct connects with a whole host of ACH and RTP networks, including other card and proprietary networks. So it allows us to do a whole range of things to bring in use cases in P2P, use cases in B2B, use cases in governments paying consumers, use cases in businesses paying consumers. So that's the heart of Visa Direct. Just in terms of numbers, transactions have been growing 35% ex Russia. So Russia was unfortunate. We lost 17% of our transactions. Most of them were P2P. But we now have 30 use cases that are operational, meaning our network can service those 30 use cases with whatever that use case needs. So you have to tailor what that use case means. Not every use case is similar. Every use case is different. Every use case requires something unique. Our network is the only one that can offer a dispute resolution, for example. You can get your money back. That's very important in some use cases, not as important in other use cases. We have 500 programs that are already been launched. We have 550 enablers. We're very dependent on partners here because we are a B2B enterprise. So we need people out there going out and developing use cases -- new use cases, whether it's in remittances or earned wage access or insurance disbursements or tipping. So we have a whole range of partners, as you would expect, in all these areas. So it's early days. Visa Direct, we're very excited about the growth we are seeing there. We're very excited about all the potential we're seeing there. And this is one of the sort of engine of growth that will carry this company for a long period of time.

We get a lot of questions about the real-time networks. And obviously, the Fed now was -- had some comments that was out there this week that they'll be ready to roll out and pay by bank, open banking. How do you think about those competing networks? Are they partners to you and how it connects in with Visa Direct?

Sure. So the fact that there is a pipe, right, doesn't mean there's going to be traffic of volume on that pipe. Because as I said earlier, use cases have specific needs. And if the pipe doesn't serve those needs, the pipe will not be used. RTP networks have been around for a long time. They're used for certain things, but they've never really made inroads into pay by bank or consumer payments, for example. RTP in the U.K. has been around over a decade. There have been many attempts to do pay by bank. It has not worked, including the most recent effort. And there's -- and it's just an example of why having a network in itself, having, let's say, a set of pipes, doesn't mean there's going to be certain use cases on those pipes. So if you look at the merchant use case, which is the heart of our business, from a consumer standpoint, they're very happy with the experience, right? It's ubiquitous. They can use it at every merchant. They don't have to think about it. It's very easy to use, frictionless, especially now with tap to pay. It's very secure and very reliable. The network is always up and it's very secure. And most important, it has dispute resolution, where they don't have to worry if they make a mistake or they're victims of fraud or they want their money back because they want to return the item. And it has incredible security so that they don't have to worry about a whole range of issues that they might have to worry about as they're giving people bank account numbers and so on. So consumers are really happy, and they don't want to switch. So they have to have a compelling reason to say, "Okay, why should I go from what I'm used to do some pay by bank kind of way of doing it when there's nothing in it for me?" And in many cases, they also have rewards or loyalty points where they, in fact, have a financial incentive to use what they're using, which this alternative may not even offer. So there's a real issue with, like if I'm happy, why do I change? And consumers are creatures of habit, and they're also very conservative when it comes to their money. So that's issue number one. Issue number two is, if I'm a bank, I do make some interchange if it's a debit transaction. I might make even more if it's a credit transaction. So I do have some incentive for having my customer use a debit or credit credential rather than an RTP network, where I may make less money. So the banks certainly have an incentive to not want people to change, unless that is what consumers want to do. So then you might say, "Well, the merchant is a potential beneficiary here." But then the merchant has to give the consumer some reason to change, some reason why they should want to use another way to pay. And it's hard to do that. It's expensive. You need to make a huge effort. Just you doing it is not enough. A lot of merchants have to do it because otherwise, consumers won't use one form of payment in one place and another in another place. So there's lots of reasons why just the existence of an RTP network doesn't mean much. Having said that, we are network-agnostic. We will use RTP networks and do use them. We will use ACH networks and do use them. We will provide our value-added services on some of these networks as a source of revenue for us. For example, we provide tokenization on some of these networks. We have the ability to provide dispute resolution on some of these networks. Often, it's for our own transactions that travel on those networks, but we'll do it for other transactions, too. So we generally view all these things as potential partners who we are happy to work with for mutual benefit, and we'll do the same with RTP networks.

Is there maybe a better use case? Obviously, you made the argument on the consumer side. It's just hard for adoption and for all the things you laid out there. But what about on the B2B side? Is there a better use case potential there?

Well, I think when you have a transaction where the network largely meets the needs of that particular use case, then you're more likely to get usage on it. And so if it is, for example, a high-ticket transaction that is done between 2 parties who know each other where speed is not important, immediacy is not important, that could be more usable as -- and maybe more worthwhile on an RTP network just because it's a cheaper way to do it. And that's where ACH networks are used a lot, too. We've said it for a very long time that we think there's a large opportunity in B2B. We see a lot of it still in the traditional carded B2B business. We see it in cross-border B2B. We think large enterprise B2B, which we know others have talked about, that's hard nut to crack. That's going to take some time, right? Because the movement of money itself is not one that has a lot of yield associated with it. You sort of have to go beyond it. So yes, it's possible that large enterprise B2B finds RTP networks attractive. And then the question is what value added can we bring to all that so that we can do something in that space, either using RTP networks or a mixing and matching of our network with RTP networks. So there will be use cases that work better on RTP networks. There's no question about it. And our intent would be to then use them for those use cases where we can provide everybody a one-stop solution, where some of their transactions may not be usable -- may not be able to travel on RTP network, some may. And they connect to us once, and we'll just get their money where it needs to go. Sometimes it's on an RTP network, sometimes it's on our network.

The other big headline that's come out over the last few months is potential new Durbin legislation on credit. I want to ask you to speculate on the likelihood of it passing, but trying to understand how they would implement something like that if alternative networks don't have a lot of the capabilities that are necessary.

Well, I think there's a lot of unknowns on this. So I don't know the answers that people who are promoting this have to the unknowns. All I can say is, from our standpoint, we don't think this is necessary. There's a ton of competition in the credit space. All you have to do is look at your own wallet, right? Most Americans carry more than one credit card, which means fundamentally most American consumers are already using multiple networks. It is not at all uncommon to see 2, 3 cards, right? I mean people will have an Amex and a Visa or a Visa and a Mastercard or a co-brand card with one -- with an airline, a co-brand card with a hotel, maybe a co-brand card with a merchant, and they're all different networks. So -- and only that. I mean there's a whole other way -- many other ways that people are offering credit now that you all have been talking about, like buy now, pay later, et cetera. I mean there's tons of competition in the space anyway. So this idea that there is no competition is, in our view, flawed. Yes, you bring up a very big question, which is the one of feasibility. So unlike debit, which was always set up to have at least 2 networks on a card even before the legislation -- remember, all that Durbin did when it came to debit was took choice away from consumers, right? Before Durbin, consumers could decide whether they wanted signature or PIN. And what Durbin did was said, "Okay, consumer, I'm taking your choice away. I'm giving it to the merchant." That's really what happened. But debit always had multiple networks. Credit has never had multiple networks. So the entire infrastructure in credit is set up for a single network, right? So as the merchant, once they see what your card is, if it's a 4 or a 5, it goes to one or the other, or if it's Amex, et cetera. So it's never been set up to have multiple networks. So you've got a massive amount of like work to be done to figure out how do you set up the credit infrastructure for multiple networks all the way from what happens at the point of sale to what happens to your card, right? Your card now is going to have multiple networks, a massive reissuance of cards. You've also got to figure out what you're going to do at the -- with the hardware and the software at the point of sale. So there's a whole technological question here on how do you prepare the infrastructure for multiple networks that nobody really has worked through at this point. So there's that whole issue of what do you do and who will be this alternate network that has the capabilities that consumers are looking for that we offer, the security, the reliability, the dispute resolution, et cetera. Then you go beyond that to say, "What parties are really going to be impacted by this?" And there's a lot of impact here. The biggest loser here potentially is the consumer because presumably, the only reason this is being done is to reduce interchange. And if that's the case, then consumer loyalty programs will most likely go away. And so the biggest loser is going to be the consumer in that sense. And if you have 2 networks and let's say, you have a United miles card with Visa, and the merchant chooses another network on that card, do you lose your rewards? We don't know the answer to that question today. And that's one question. The question -- the other question is if interchange goes down because of this and you lose your rewards, then that's a big impact on consumers. There's also large industries that have depended on this as an ecosystem. Airline co-brands are very big, and airlines make a lot of their profits from these co-brand cards. Some would say it's the most profitable part of their business. It could severely hurt the airline industry. A lot of merchants are impacted by this from their co-brand cards. The biggest beneficiaries may only be a few merchants even, not all merchants. And then what about the smaller banks that are issuers of cards that may no longer find the revenue stream available here could affect credit unions, community banks and so on. So there's a lot of issues at stake here. Look, in the end, we'll see how this all plays out. We just think that there are many things here that are concerns and issues that go beyond just us. We've seen interchange go down in other parts of the world. In general, we take a very small piece of the pie. And because of the value we add, our small sliver of the whole pie tends to be relatively robust. But we'll see how it all plays out.

Got it. I do want to ask you one last question. I think we have about a minute or 2 left. Just thinking about the deal pipeline for new deals and renewals, I know sometimes that can have an impact on incentives and how we think about that. Just thinking about the pipeline going forward, any call-outs that we should be aware of?

Yes. I mean this year is a relatively normal year for renewals. We'll tell you more about next year. As you know, that percentage, which everybody focuses on, you have to be careful about interpreting it because of the numerator and denominator and as you saw during the pandemic, mix shifts can cause changes in the percentage. From a renewal cycle standpoint, this year is relatively uneventful. We'll tell you more about next year as we get to October. That percentage, as you saw, has stabilized a bit as the cross-border business has come back. We'll give you our best sense of next year in a few weeks.

And does that -- should the percentage -- if you're looking at the percentage of incentives to the revenue, should that continue to kind of grow as the business grows and volumes continue to increase?

Yes. I mean, historically, it's grown. And remember, I mean, what really matters in the end, what you take to the bank is net revenue growth, right? This percentage is sort of a derived number with a numerator and a denominator. It's how we decide to raise our prices and deal back things and so on. Historically, it's tended to go up. The issue really is how much net revenue growth are we driving. And as long as we're driving great net revenue growth, that's really what counts.

Got it. All right. Vasant, really appreciate it. Thanks so much for doing this, and have a great rest of your summer.

Have a great conference. Thank you.

All right. Thanks.

Bye-bye.