$6.7 trillion. That is how much
Americans spent using their debit or credit cards in 2019.
More than 60% of those purchases were made using cards from Visa,
a company that has long dominated the payment card
industry. Not only are the majority of all
payment card transactions in the United States on Visa cards, but
there's been lots of litigation over time, including from the
Department of Justice, and the Department of Justice has had
very clear legal decisions that show Visa has, quote, market
power, which is the legal term as a matter of law, so there's
no doubt about this Visa is dominant. As payment cards become more
essential in our daily lives. Visa has quickly grown to become
one of the most valuable companies in America. As of
October 2021, Visa was valued at over $480 billion and reported
net revenue of 21 point 8 billion for 2020. Shares of the
company have also seen an over 170% gain in the past five
years. Really good way to think about
Visa's revenue stream is for every $100 spent on a Visa card
anywhere in the world, they make about a quarter of that meaning
25 cents, an actual quarter, every time you buy a pair of
shoes, that's $100, they get 25 cents of that. As the network
has scaled that's very high incremental margins, and so the
profitability of the business naturally goes up. But Visa's success hasn't always
been great news for merchants who have no choice but to rely
on them for payment. If I can ask Visa for one thing,
it would be for relief in the swipe fee arena. We are paying
way too much. You're making way too much money off of us. And
you know the lack of competition that you have, with all of your
issuing banks, charging the same swipe fees across all markets
across the country. It's really unfair. We don't do business
that way. Other industries don't do business that way so I don't
know how you can get away with it. So how exactly does Visa make
money? And why does it dominate the payment card industry. The Bank of America launched
Visa as the nation's first licensed credit card for middle
class consumers and small to medium size merchants in 1958. Today, the computer is changing
our world the way we do business. By 1970, Bank of America gave up
its direct control over the card, passing the control to a
group of issuer banks that continue to manage, promote and
develop the new network in the United States. The company grew
quickly after, expanding internationally by 1974 and
introducing its first debit card in 1975. Every month British shoppers
signed for one and a half billion pounds worth of goods on
a credit card. In 2007, Visa completed its
corporate restructuring with the formation of Visa Inc, and went
public in 2008, raising $17.9 billion in one of the largest US
public offerings to date. Visa was set up to be dominant.
They started actually as an association of 1000s of banks
across the country. So all these banks came together and
established Visa to have this national credit card. But of
course they had a dominant position because it was
virtually all the banks. There are still Class B shares
of Visa's stock which are actually owned still by those
original banks. Today, Visa has grown to become
one of the world's largest payment processing networks,
saying it has over 3.4 billion cards in the market across over
200 countries and territories. Visa generated over $4 trillion
in purchase volume in the United States, according to the
February 2021 Nelson report. In comparison, MasterCard has over
2.3 billion cards in the market with a purchase volume of
roughly 1.7 trillion. Visa does have a huge number of
cards out there more than MasterCard, without question.
Discover cards a little bit anomalous, they have more cards
than they have transactions. But visa cards in both credit and
debit are the most frequent ones and Visa dominates the
transaction counts in both markets. And it's a profitable business
since going public, Visa has rarely had a decline in revenue,
and its shares have continued to outperform the S&P 500 excluding
just three years, and although the year isn't over yet 2021 is
on track to see Visa underperformed the S&P 500. In
one of those years, 2020, Visa still reported net revenue of
$21.8 billion with operating expenses at 7.8 billion, its
total net income for the fiscal year came to roughly 10 point 7
billion. Their profit margins are huge,
the numbers I've seen over time, but then, gosh, 30 40% profit
margins where to give you a sense in the retail industry,
profit margins tend to be in the two, three, maybe 4% range. So as a business, the reason
it's so profitable is because it's a primarily fixed cost
business is once you've got that infrastructure all in place,
each incremental transaction that's flowing through that
ecosystem comes in at extremely high incremental margins,
because it's just this massive capacity network. And so, as
Visa has scaled their profitability has gone up
dramatically for that reason. So how exactly does Visa make
money? Contrary to popular belief, Visa doesn't make any
profit from credit card interest fees. Instead, those fees are
charged by the card issuer. In most cases, banks, allowing Visa
to face none of the risks that come with lending money. So Visa does not have direct
relationships with individual consumers, the banks do the
banks issue the cards and so you may get your card, or I may get
my card from Bank of America, or Wells Fargo or Citibank or any
number of these other banks, including local banks. But while
many people think of those as Visa cards, they're really not,
they're the bank's cards that happen to have Visa on them. And
Visa is the network on those cards. Visa's business model relies
heavily on what is known as the four party model. When you use a
Visa card to make a purchase, there are usually four entities
that come into play you the customer making the purchase,
the bank that holds the customers money, the merchant
selling the product, and Visa that works as a middleman
connecting all three of those entities together. They're a physical network, not
dissimilar from Telecom network or an internet style network.
It's just Telecom, might carry voice. Internet carries
information. Visa's network carries money, right. So it's a
different type of physical network that connects about
18,000 banks and other types of financial institutions globally.
And every time that you use a card, a series of messages have
to run back and forth between the cash register or the website
or wherever you're making a purchase. Going back to your
bank that issued you that card to see whether you are who you
said you are, and whether you have the money, right, to do an
authorization and then also to go back and kind of clear and
settle the transaction, meaning actually move the money from
your bank's bank account over into the merchants bank account. A majority of Visa's gross
revenue, about 39% comes from data processing fees that are
required to complete this practice. Roughly 34% consists
of service revenues, a fee that Visa charges, card issuers like
banks for working with Visa branded payment methods. They charge a set of fees
associated with that kind of brand network that creates the
trust in the ecosystem, the trust that enables it so that
you can just walk into any merchant anywhere in the world
and hand them a piece of plastic. But if it says Visa on
it, and the merchant takes Visa, then the transaction works. And
just imagine if you had a card that didn't have that audit
right, it wouldn't work. International transaction
revenues take up about 22% of the company's gross revenue.
Beyond the three main sources of revenue. Visa has also been
continuously investing in other types of payment that could
bring more sources of revenue for the company in the near
future. This is like B2B payments,
business to business payments. This is like disbursements.
That's when a business pays think like an Uber driver or
Lyft driver or an insurance payout, things like that there's
a lot of person to person payments to people to
individuals exchanging money. If you're really taking a long term
view of Visa like 5 10 20 years, increasingly other forms of
payment are going to be an increasing part of their
business. Visa's success in the payment
processing industry has also led to a series of legal cases and
investigations over the years. The Department of Justice has
sued Visa multiple times has entered into consent decrees
over everything from you know Visa used to have rules that
said any bank that issued their cards could not issue any cards
from Discover or American Express and that was found to be
an antitrust problem. Visa had rules tying together credit
cards and debit cards so that merchants if you wanted to
accept a credit card had to accept a debit card, and vice
versa. Almost it's hard to think of other industries that have
had more antitrust litigation than this one. In December 2019. Visa and
MasterCard agreed to pay $5.5 billion to settle against
merchants who had accused them of charging excessive fees. The
largest ever class action settlement of an antitrust case,
according to the co lead counsel of the case, Berger Montague.
Visa also notably abandoned its $5.3 billion takeover of Plaid. Visa and Plaid are terminating
their $5 billion merger. After the Department of Justice
filed an antitrust lawsuit on the grounds that it would limit
competition in the payment industry. Most recently in
August 2021, a federal judge certified a class action lawsuit
accusing Visa and MasterCard for charging excessive ATM fees to
consumers and operators. Visa declined to comment on the
matter. Meanwhile, retailers argue that the swipe fees and
incured by Visa are simply too high for smaller businesses to
survive. I don't think the average
consumer thinks about swipe fees when they're using their credit
or debit card. Business owners certainly do because for me,
swipe fees are the second highest expense line item on my
P&L right after right after labor. And right after our
payroll expense ahead of rent. In 2009. swipe fees collected by
Visa and MasterCard sat at $25.6 billion. A decade later, it more
than doubled to $67.6 billion in 2019, according to the National
Retail Federation. The overall processing fees paid by us
merchants to accept all card payments totaled $110 billion in
2020. It tends to be somewhere in the
range of 10% of what merchants pay on a transaction. I know a lot of business owners
and it saddens me because so many people have come to accept
it as it is what it is. And like No, I mean these these prices
are so ridiculous. The amount we pay in swipe fees is so high
that we have to do something about it, somebody has to do
something about it. This is a central part of the
problem with their dominance is that this is the banks acting
collectively, and setting prices where they should be competing
on price like all other American businesses do. Meanwhile, those in support
argue that Visa stands on the side of merchants rather than
the banks. The Visa's business structure is
very balanced. And if anything is actually skewed, believe it
or not toward the merchants, they actually get the majority
of their revenue from the banks and the ecosystem that's
supporting the merchants. So they really are pretty agnostic
in the ecosystem like they are there to serve as this central
party that facilitates effective digital payments kind of
balancing both sides. What certain is that visa has
effectively changed the world of commerce forever. Visa at some level is a victim
of their own success in the sense that they're so ubiquitous
and so secure and so easy to use that people begin to take it for
granted. For the consumer, it's fantastic just enabler of their
of their life. I mean, I just always tell people imagine if
you didn't have it, and you literally had to pay for
everything either with cash in the check what your life would
be like. On the merchant side, though the same thing is true. I
mean, cash is expensive for merchants, they have to have
cash drawers, they have to have armored trucks, they have to
have managerial level people that count the cash and make
sure that there's not theft at the end of every shift. There's
always of course debate and griping about the kind of cost
of taking card payments. The reality is that the alternatives
are also extremely expensive. And it's a very quick, easy,
especially with like contactless payments nowadays where you can
just tap it and go like it speeds up your checkout lines
just facilitates the whole world of commerce.
They've tried nothing and they're all out of ideas!
Nano have a huge potential. and crowds are distracted by dog coins.
The merchant is the weakest link, he is paying the other parties of the transaction,
Issuer Bank, Acquirer Bank, Payment Network, Customer gets some cash back
everyone in taking from his share
If they could get consumers to use it, yes.
Merchants are the somewhat easy part (though how many want to publicly share their revenue in real time?)
Getting consumers to give up privacy, credit card rewards points, buying with credit and paying later, etc is the harder challenge.
Just need to create a killer nano pos/transaction app. Right now nano is too hard to adopt.
Some are trying, though mods in this sub don’t seem interested in helping.
Xerox invented GUI computers in the early 70's, but GUI computers were not released to the commercial (retail) market until 1983 with the Apple Lisa. So, this shows that great technology that is objectively superior can often take many years, even a decade, to catch on and become widespread
I'd definitely consider making purchases with nano if anywhere I shopped had that option.
I use credit now because i pay it off every month and if it gets stolen I have recourse.