Visa, Mastercard Risk Ramped Up Competition

by: Ed Kim March 27, 2008 | about stocks: AXP / MA / V    

Ed Kim

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Visa (V) and MasterCard (MA) are credit card brands that were started by banks to facilitate transaction payment. Their business model is to simply facilitate and process the credit and debit transactions between the bank of the merchant and the bank of the customer and generate revenue from the service and transaction fees. In other words, they were created to add a layer of convenience to the consumers for the payment of goods and services.

As more convenient forms of using credit cards and debit cards are added, the likelihood of consumers using credit card and debit cards increases. For Visa and MasterCard, this is a good thing because, as more Visa and MasterCard credit card and debit card transactions occur, more fee income they will make – a very simple business model.

So Where Is The Risk?

The very simplicity of the business model is also the weakness of Visa and MasterCard. Due to its simplicity and the rapidly changing landscape of commerce, there are risks of increasing competition from retailers and yet to be developed or in development payment facilitation systems. Additionally, credit cards are in danger of reaching full saturation where there will be no appreciable growth of new customers or new ways of using their credit cards for payment. Finally, there are the existing competitions: American Express (AXP) and Discover Card.

Risk From eCommerce

Just as Visa and MasterCard changed the landscape of commerce, there are other companies currently working on and effecting change, this time, in the electronic landscape. Internet commerce, or eCommerce, is now a major marketplace. According to geocart, an eCommerce application and service company, the market size of eCommerce in the U.S. as of 2006 was estimated to be $130.3 billion from 210.8 million online users. CNNMoney reports that eCommerce will grow to approximately $259.1 billion in 2007. eCommerce Journal estimated that in 2007 “about 13% of total US retails sales excluding cars and groceries are processed online.” While it is not a lot, it is amazing given that online sales did not exist 10 years ago.

While credit cards still dominate in eCommerce, PayPal, a payment system owned by eBay (EBAY) is making rapid gains. In 2007, PayPal had $47.5 billion in total payment volume [TPV], out of a total of approximately $113 billion in TPV for eBay, a 33% increase over 2006. PayPal is accepted in other eCommerce sites, making it a major contender to Visa and MasterCard for payment services on the Internet. Another emerging payment facilitator in eCommerce is Amazon Payment, which went live in 2007. Amazon Payment Service will allow payment of goods directly from a bank account or Amazon Payment Account. This service is not limited to purchases on Amazon (AMZN) only but on other eCommerce sites. In addition, there is a growing list of eCommerce payment facilitators that will erode credit cards’ dominance in eCommerce.

Given that eBay and Amazon, two largest online retailers, have their own payment systems to compete with credit cards will be a growing risk to Visa and MasterCard.

Risk From Brick & Mortar Commerce

Credit cards are not only being attacked from eCommerce. The traditional ‘brick and mortar’ businesses have been increasingly offering gift cards as a form of payment. While the appeal of gift cards are limited, their growing use, especially as a replacement of the traditional holiday purchases, will also limit credit cards’ growth in the existing retail market. For traditional retailers, the gift card provided a way to capture loyalty and sale without having to pay processing fees to the credit cards. Bankrate.com notes that the gift card use in 2007 would be approximately $35 billion, an increase of 25% from 2006.

Risk From Saturation

A Bankrate.com article notes this risk.

Simply put, everyone has a credit card who wants one…Credit card issuers now look to cash spending, not other credit cards, as their chief competition.

As credit card uses reach near saturation point, the next step in the evolving use of credit cards is in the smaller purchases. However, the resistance so far comes from the razor thin profit margin that is associated with smaller purchases. Therefore, the growth from adding on additional functions to the credit cards to capture more of the smaller purchases will not be as sizeable as hoped, unless payment facilitating and processing fees come down drastically.

Conclusion

The risk to Visa and MasterCard right now is that they were too successful. Having captured most of the payment facilitation and processing market, their only hope of growing is to increase fees or to figure out a way to wring out more of the smaller purchases.

To accomplish this, Visa and MasterCard are moving to a mobile platform. However, they are not the only ones. PayPal has already moved to a mobile platform. Furthermore, as technology evolves and improves, there will be more competition coming into the market for payment facilitation and processing, especially in eCommerce and Mobile commerce (mCommerce).

It will be interesting to see how Visa and MasterCard adapt to these challenges. However, it seems that investors are already betting that Visa will figure out a way. This is evident by their current trading multiple of approximately 28.75x, based on Wednesday’s close of $63.96 and annualizing their 4Q 2007 net income per share of $0.55. Knowing their model, I don’t think that this is a wise bet.

May your trading be profitable!

Disclosure: None

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This article has 62 comments:

  •  
    Mar 27 09:02 AM
    YOU forgot to mention that china india and all developping countries are just starting to use credit card.so there is no saturation.people do not like gift certificate any more....ect
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  •  
    Mar 27 09:06 AM
    Another negative article about VISA. What is it with you guys? So you missed the boat on the IPO and now the only thing you can do is spin negative info trying to get some cheap shares? I can understand that everyone has an opinion but it is very odd that every article that Seeking Alpha puts out is negative. Things that make you go mmmmmm. Considering the that Visa was the largest IPO in American history and they have a proven business model one would think that you guys could find some POSITIVE to write about once in awhile. It is for this reason that I and many others who read Seeking Alfpha articles have lost respect for the true intent of the writings from their authors.

    Good luck with your investing and keep trying to get those cheap Visa shares:)
    Reply | Link to Comment
  •  
    Mar 27 09:15 AM
    Only EUROPE is out of "V"; ASIA and rest of the world are in the "pipe". Your analysis missed 5 billion wallets !?
    Reply | Link to Comment
  •  
    Mar 27 09:19 AM
    Ya, water is free but somehow people are still willinging to pay $100 per bottle for it.
    Visa and Mastercard are good buys for any investor. Your negative comments are not helpful. You are not telling us anything we dont already know.
    This stock will go up and up and up.
    I say STRONG BUY.
    Reply | Link to Comment
  •  
    Mar 27 09:57 AM
    Securitization is the achilles heel to watch - This article misses the point of what makes the credit card industry work; it's called securitization. Visa and MasterCard are merely back room operations for clearing and settlement amongst banks. However, what happens at the banks, that creates the need for Visa and MasterCard, are the loans originated on credit cards. Banks make money by charging loan fees, and over limit fees. And while these are pretty good income streams, they are small on an account basis and costly to manage over time. That changes, though if the loan is packaged with other loans and sold in the stock market: Securitization.

    Given the present low appetite for buying collaterized backed securities, another way of saying Securitization, it may be that the golden goose may soon be out of eggs. Which is a long way to say that there will not be as much need for back room operations from the likes of Visa and MasterCard.

    Until you understand how Securitization will survive, I would stay away from these stocks.
    Reply | Link to Comment
  •  
    Mar 27 09:58 AM
    How do you think most gift cards are bought? What do you have to have to open a Paypal account? Get real!
    Reply | Link to Comment
  •  
    Mar 27 10:02 AM
    I am concerned that you post only negative comments about Visa. Don't get me wrong. Investors need to know about the inherent risks involved with putting their money behind Visa, but how about commenting what you think Visa is actually worth? Be a little more balanced in your approach. That is what good journalism is all about. Yes Visa may be overvalued as of today, but what is a fair valuation if it does what it hopes to do? That is what people are buying....Visa's future earnings potential. Why not comment on what you believe Visa will earn in this recessionary environment? Any people care to comment?
    Reply | Link to Comment
  •  
    Mar 27 10:08 AM
    Danger of reaching full saturation? You've got to be kidding me. Unless the entire world of almost 7 billion people - including those in emerging markets - has a debit and credit card then this statement could be true. But where do these baseless assumptions come from? Are we forgetting the rest of the world? What about new generations? Will they not use cards to facilitate transactions? Also, Discover and Amex are not really competitors since they provide lines of credit of which Visa and Mastercard do not - thus shielding V and MA from the current credit turmoil.

    The point made on eCommerce is also flawed in that eventually the threats the Visa and Mastercard will wither once M & A starts rolling when they start gobbling up the smaller players in that arena. The synergies are evident in that these new financial facilittators are very similar to Visa and Mastercard's current business model. It makes absolute sense in this market driven global economy.

    Also, it's obvious the author doesn't know much about the Visa and Mastercard business model since you name competitors who aren't really competitors and he fails to see that this industry is still growing and projected to grow further still. Buy Buy Buy - and scratch the Cramers of the world. Forgive them for they know not what they do...
    Reply | Link to Comment
  •  
    Mar 27 11:21 AM
    I found the comparison to Paypal odd to say the least.
    Paypal takes Visa as one of the payment methods for those of selling online and eBay.
    So Paypal must pay Visa some fees.
    Reply | Link to Comment
  •  
    Mar 27 12:02 PM
    Visabox, good call. Heaven forbid someone write something about Visa that isn't overwhelmingly bullish. I've never seen so many rabid Visa fan boys.
    Reply | Link to Comment
  •  
    Mar 27 12:37 PM
    Hey Guys, I hate to burst your bubble, but we have a problem. Yes, I bought Visa @$58.04 with expectations of a 400% return like Mastercard. However, I've been doing my homework after hearing Cramer saying "Buy Mastercard it's cheaper". Book value of Visa is only $20/share & "NO" Visa Inc. does not have access to European customers. "Visa Europe" is a different company owned by 4600 European Banks !!!!!!! Look at the numbers ! I'm short now !!
    Reply | Link to Comment
  •  
    Mar 27 12:51 PM
    wow I must say that you missed a HUGE factor. South American and Asia have not been captured. Big opportunity for growth there ( a lot of ppl in china and indina ) and to poster moneyguru, what are you talking about? -_- you making that trade based upon those thought are very freightening.
    Reply | Link to Comment
  •  
    Mar 27 01:06 PM
    Being intimately familiar with Visa's corporate culture, I find it exceedingly difficult to believe they will be nimble enough to effectively counter competitors. I'd say it may look like a good investment now, but I think in the long run, you'll take a bath on it.
    Reply | Link to Comment
  •  
    Mar 27 01:09 PM
    i bought visa at 59.5 and im glad i did. i feel their fair value by the end of the year is arround $80. plus visa has A LOT more cash than mastercard. lets see 2.7 B on its balance sheet now + 19B in ipo - 10B that goes to member banks that makes about 11B - 12B in cash. what are they going to do with that much cash. even setting aside 3b for lawsuits they will have 9 billion in cash. now lok at mastercards cash. plus there is a possibility that visa europe will join v down the line. what will that do to earnings. i agree with the general consencus. there are too many visa bears who are mad they missed the ipo
    Reply | Link to Comment
  •  
    Mar 27 01:38 PM
    Ed Kim, why would you write an article on future prospects of a company without doing proper research in advance. Now we see backtracking and CYA stuff from you. You should just retract this article because it's misleading and inherantly incorrect. Do your research, Kimmy and get back to us. In the real world, this is called half-assed. uhhhh... other half please...
    Reply | Link to Comment
  •  
    Mar 27 01:51 PM
    Wow Kim...your information is way in left field...I don't think you will hear any Visa stock holders complaining about their position new investment. I've made $4k in a week!!! The last thing I'm worrying about is paypal or amazon bucks (excuse me as I laugh to myself) knocking visa off of the map.

    My advice Kim...get as many share as you can now...this puppy is going exponentially higher
    Reply | Link to Comment
  •  
    Mar 27 01:56 PM
    Do you know Paypal has credit and debit cards? It has the Mastercard logo on it :p

    I'm beginning to wonder if Seeking Alpha is the Chicken Little of the financial world. I haven't heard one positive article about anything.
    Reply | Link to Comment
  •  
    Mar 27 01:57 PM
    I would rather of not waste my time reading this babble. Wow everyone who wants a cc has one???????? China does not know what credit is???? I guess the trade between china an other countries is a all cash deal! was this stuff put on here by a second grader???
    Reply | Link to Comment
  •  
    Mar 27 01:59 PM
    Hello noneyabiz. Not a CYA. If you and others can actually comprehend the purpose of the article, which is on the risks facing V and MC. I am not doing an equity analysis; rather a risk analysis focused on the current valuation, not projected valuation or fair valuation. I commented back to User 168884 specifically since what he is suggesting is that a valuation of V in the current market and future growth would also be helpful.

    As for good journalism, it does not necessitate a balanced view. Rather it necessitates a position based on facts. However, my blog is not a substitute for mainstream media; it is my analysis of risks facing the market. That's the difference. If you want to call that 'half-assed', then so be it. It is your opinion and you are entitled to it. As for calling me 'Kimmy', I do take exception since only my girlfriend calls me that and you would not qualify to be my girlfriend.

    Cheers.
    Reply | Link to Comment
  •  
    Mar 27 02:18 PM
    Yikes! Hit a nerve. You are probably right. I would make you my girlfriend. But on to the real jist. If you are really writing an article on current risks, why do you include as facts industries that don't exist yet? "there are risks of increasing competition from retailers and yet to be developed or in development payment facilitation systems." LOL. Loaded statement to say the least.. Certainly sounds projected to me. Name a current payment facilitation system that's a real threat to V or MA. Statements like this are baseless. You also just ignored the fact the Discover and Amex are not competition because they follow a totally different business model. How's that for position based on facts? Face it Kimbo, your article is lacking... Do your homework and come back when you get it right...
    Reply | Link to Comment
  •  
    Mar 27 02:32 PM
    Stop fighting kids ! With all the volume & hype slowing down on VISA, I see it at $55 in two months !!
    Reply | Link to Comment
  •  
    Mar 27 02:46 PM
    thanx for reiterating everything we have read already.
    Reply | Link to Comment
  •  
    Mar 27 02:59 PM
    V and MA too succesful??? its not as powerful as MA yet b/c the banks r selling off their shares. when thats all done, it'll climb past 120 in a flash. 55 moneyguru??? ur nutz!!!
    Reply | Link to Comment
  •  
    Mar 27 03:20 PM
    cachfu, Why would the banks be selling their shares if they thought V would be at 120 ?? The "Big Boys" are selling at these prices, not buying. The public won't be able to sustain this current price, most are already in. Lower 'buying' = Lower price, the EPS just isn't there.
    Reply | Link to Comment
  •  
    Mar 27 03:24 PM
    I spend each year on the average $35,000 a year on my one cc because I get free $100 gift cards of my choice to retailers, restaurants, sky miles, and numerous products; all free for just using their card for everyday purchases that I normally make anyhow on groceries, gas, and other various discretionary purchases. I use it to purchase even small $2.00 items just to get those points and the convenience of not carrying bunch of cash in my pocket. They do have a business model that works. Your article forgot to mention VISA’s promotional items it uses to get repeat customers. Kind of like a Kroger card; you get rewarded for using it. Last time I checked, I didn’t get any $100 gift cards or sky miles from using paypal. I have traveled to Asia’s emerging markets and yes it is a cash society. The reason is most don’t have bank accounts because they don’t trust the banks. They don’t have FDIC insured banks like we have here, but it’s just matter of time that issue gets fixed and VISA will flourish in those emerging countries. They all want to be westernized and flourish like America. VISA has lots of potential and I’m glad I have shares of it.
    Reply | Link to Comment
  •  
    Mar 27 03:34 PM
    Read the article. It appears this article combed through the message board of another Visa article for writing inspiration.

    That said, it seems to me these SeekingAlpha articles are nothing more than unedited, entry level "opinion" pieces - so be it. However, they present a far cry from the proper rigours of journalism - a discipline for which objectivity is a hallmark.

    I use PayPal for on-line purchases myself. But surprise, surprise - it's connected to my Visa card. E-payments in all their various forms can still not offer the level of protection that established brands offer. Sure I could pay via Amazon's access to my bank account - not gonna happen - but really, why would I pay immediately when I can purchase with a delayed loan from my credit card? Most of us will stick with the clout of the bigger players to protect our purchases and let the Amazons of the world stick to retailing. For those of us archaic types who still use credit cards, and like paperbooks in our hands when reading in the bathtub, they already know what I mean regarding consumer protection via the MCs and Visas of the world. Incidentally, my most consistent monthly purchases continue to be fuel and groceries...sorry, Amazon just can't help me there.
    Reply | Link to Comment
  •  
    Mar 27 03:35 PM
    Ed, ignore the haters and stock promoters in here. Some of us do appreciate counter points to the flood of bullish noise surrounding this stock. The reasons to buy this stock are many and we all know them, its the reasons why you might think twice that I'm interested in hearing. I for one am still wondering what keeps V and MA from being considered a middleman and given the boot. How hard can it be to open data centers to handle transaction processing when the incentive is so high at the moment?
    Reply | Link to Comment
  •  
    Mar 27 03:41 PM
    Oops - I see that SeekingAlpha looks to post "opinion" rather than "journalistic&quo... pieces. Whew! Now I know to keep my bias detecting red flag up even further.
    Reply | Link to Comment
  •  
    Mar 27 03:43 PM
    VISA has 406 million outstanding shares with no EPS. MA only has 130 million shares with an EPS of $8 !! Visa short term is going down !! Asia is a very LONG TERM scenario, 10yrs + !!
    Reply | Link to Comment
  •  
    Mar 27 03:49 PM
    Visa's $10 billion stock buyback will only take 16 million shares off the market @ $60/share !!
    Reply | Link to Comment
  •  
    Mar 27 04:02 PM
    V closed down $1 ?? No buyers are left, only sellers, $55 soon!
    Reply | Link to Comment
  •  
    Mar 27 04:08 PM
    moneyguru, where do you get your info?.. no buyers left? lol... there is always a buyer. who's buying if i'm selling?
    Reply | Link to Comment
  •  
    Mar 27 04:14 PM
    you'll be selling at the BID price, the people buying at the ASK are already in, & with more selling price goes down .. DUH ! $55 soon !
    It's called "shorting" the stock !!
    Reply |