Why the Visa IPO is so hot
Posted
Mar 19 2008, 12:32 PM
by
Anthony Mirhaydari
The real reason Wall Street is downright giddy over the historic $18 billion Visa IPO this morning isn’t because the banks that own it are in for a big payday or that it represents a safe haven in a time of market turmoil. Instead, investors want to profit from the slow death of physical money. Cash is no longer king; Long live the charge card!
Already, a majority of retail transactions are done with a card instead of cash. This is up from less than 30% a decade ago. People love the convenience: Visa estimates that contactless card transactions are twice as fast as cash. For all their complaining about interchange fees, retailers love the fact people tend to spend 20% more when using plastic. Americans alone now possess some 1.5 billion credit cards.
The demise of paper notes and coins will only continue. The last refuge of cash has been small transactions like paying a bus fare. Now, even this is threatened. Interchange rates continue to fall. Card terminals are becoming less expensive and more ubiquitous. It’s only a matter of time before just about any purchase can be settled electronically.
Visa is by far the dominant player in this space: According to The Economist, not only are Visa’s interchange rates lower than its competitors, it holds a 60% share of the global payments market—twice that of Mastercard. As for Discover and American Express, since these two issue cards in addition to operating the clearance network, they are exposed to growing levels of consumer credit risk. Mastercard and Visa avoid this since member banks issue the cards.
But this doesn’t mean Visa is totally resistant to the recession. While it’s true that consumers are increasingly turning to plastic for non-discretionary items like groceries, gasoline, and even the electricity bill, card profitability is on the decline. No doubt, as rising credit card defaults squeeze margins, new card issuances will slow. Already carrying an average of 10 cards in their wallet, the American consumer is quickly reaching the point of plastic saturation.
With this in mind, global growth in card purchase volumes is expected to moderate from the 14% rate posted over the last few years. Global transaction growth will slow to 11% through 2012 according to Nilson Report. The United States will slow even more, down to 8%.
And there are some legal issues too: Since 2003, for every dollar of revenue Visa generated, 28 cents was paid out in settlements. Most of the litigation centers on the interchange rates Visa charges to merchants on each transaction and various other antitrust issues.
Given the great multitude yet to be armed with credit cards, especially in Asia, the Middle East, and Latin America, I’d throw in with the herd on this one. After all, in Uganda you could still make tax payments with cowrie shells a hundred years ago. By all indications, the same fate awaits the C-note.
(Disclosure: I don't own any shares of the companies mentioned in this post.)
