Every time you pay for something with a debit or credit card, chances are good that Visa (V) is profiting from your purchase.
The payment processing sector is dominated by just a few players, but among them, Visa is the largest. Transactions made with Visa account for more than 60% of the world's market share.
Unlike its smaller competitors, American Express and Discover, Visa has no credit risk. If you don't pay your Visa card bill, that's not Visa's problem. Visa only processes payments for the banks that issue its cards.
The banks themselves are the ones that profit from the card's interest charges or lose out if someone defaults on their payments.
Visa and its main rival MasterCard (MA) are more like toll takers. Banks pay them a small fee based on the number of transactions that consumers make.
The flow of consumer spending has been strong. As a result, Visa has also been a strong performer. In the quarter ended September 30, Visa's profits rose by 14% over the same period last year. Visa processed roughly 13 billion transactions in the quarter, up 9% from last year.
Roughly 45% of Visa's revenues come from overseas. Visa's fastest growing areas are the emerging economies in Latin America and Asia. This can be a challenging area as more of the population is unserved or underserved by large banks -- traditional issuers of Visa's cards.
That's probably why Visa recently announced a new mobile payment product for 12 developing countries. The product will enable financial institutions and mobile network operators to offer Visa prepaid accounts for consumers to access through their mobile phones.
Visa also understands that payment processing is evolving in the developed world. It wants to be part of the growing number of people who are looking for new ways to make person-to-person payments or access a payment processor through a myriad of devices, including their phones and tablets.
To expedite these new payment platforms, Visa has opened a new development center, allowing outside companies an opportunity to develop new tools and applications that can be offered to Visa users.
Visa's new emerging market mobile payment product and its new developer initiative should help the company continue to profit from consumer spending as we head toward a� less card-reliant future.
Risks to Consider: Recently rules were changed relative to the fees that could be charged on debit card transactions. While this has little direct effect on Visa's profit, it could have an indirect effect.
If banks start charging fees to debit card users, people may opt out of using a debit card for transactions. Some banks considered charging users a monthly debit card fee, but quickly changed their minds amid consumer backlash.
In Visa's recent earnings announcement, the company reported a marked increase in the incentives it offered merchants to choose its network to process transactions.
Since the passage of the Durbin Amendment in October, merchants have more flexibility in how transactions are processed, and it appears that Visa went out of its way to ensure merchant loyalty.�� �
Wall Street is a little nervous about Visa's increased incentives to merchants. But I tend to believe this was a little pre-emptive insurance to secure merchant loyalty with the passage of the Durbin Amendment. And it is a relatively small cost in view of the strong trend that Visa is profiting from.��� �
Even though the world's economies have yet to see a robust recovery, consumer spending is strong and growing.
Rather than try to sort through the retail winners and losers, the simplest and surest way to profit from this strong trend is with the company that profits from the vast majority of credit and debit card purchase.
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