Visa Inc. (NYSE:V) J.P. Morgan Global Technology, Media and Communications Conference Call May 15, 2019 3:40 PM ET
Al Kelly – CEO
Conference Call Participants
Tien-Tsin Huang – JP Morgan
Thanks everyone for joining back again. My name is Tien-Tsin Huang, I cover Payments and Processors, and IT Services at JP Morgan. And I’m so thankful to have Al Kelly, CEO at Visa Inc. back with us again. I know he’s super busy. He just came back from the Payments Forum in Chicago, which I know is a big event for a lot of the players in the ecosystem.
So I thought maybe I’d start with that if that’s okay, Al. Just to have you give us a quick rundown on why you host that? And what were some of the big themes? I’m assuming the rush in your head, because you’re just coming back from that. And thanks again for joining us.
Tien-Tsin, great to be with you and great to be with everybody, thank you. So we’ve been doing it for a number of years. And we move it around the United States. It was in Chicago, which is still ongoing in Chicago. We have about 2,100 clients from Canada, all the way down through Chile in South America. And these are the people who work with us on a day-in and day-out basis, so it’s not the sea level people, it’s the people who are on the working level.
We may have I think the biggest was one partner has about 21 or 22 people. There are in some cases it’s a single person from an organization and our intention is twofold. One is to try to be a bit thought provoking, tell people what’s happening from our eyes in the industry and give them certain things to be thinking about. In fact, in my plenary opening speech, I actually closed with about a dozen questions that if I was in your shoes, I’d be considering and thinking about. The other thing is education. Very similar to this we’ll have, yesterday afternoon and this afternoon, we’ll have five or six concurrent sessions going on, which is why a lot of companies sent at least half a dozen people so they can cover the more.
And they’ll be a broad range of subjects. There could be a session on B2B, there could be a section on Visa Direct, there could be a session on CyberSource, there could be a session on branding, a session on our value-added services of different types. So our objective is coming out of this that people; A, are leaving with some things they ought to be thinking about on a day-in and day-out basis as they proceed through the rest of their year; and then secondly, hopefully we’ve encouraged them to use some of our capabilities, have gotten them smarter about what we have.
And I’m actually will head for Dublin on Sunday, and we’ll do a very similar thing. We just got it — it’s the first time since we just bought the Europe. We started — we called it Visa futures last year, we rebranded, and so it’s Visa Payments Forum again for Europe. They will have about 700 or so clients in Dublin on Monday, Tuesday, Wednesday of next week. And we’ll do — it’s not exactly the same, because Europe is different, but it’s similar thing.
So maybe we’ll touch on some of the themes, I’m sure you guys went over there. So just to get it out the way, I figured I’d ask a lot of people asked me to ask you. So, the quarter you just reported, the volumes did slow as expected. But you’re still guiding for revenue to accelerate through the balance of year exiting fourth quarter back in double-digit. So what’s driving this confidence, Al, and what macro conditions are required to do it?
So I think when we look at the first half of the year, particularly the second quarter, there were number of factors that influenced our volumes. Firstly, United States, we had this odd phenomena of less processing days. Secondly, gas prices were pretty low in this second quarter. We continue to see less than ideal situation in the UK in terms of their economy, and the UK is very, very important to us. We had odd Easter phenomena. We probably had the widest spread you could have at Easter. So Easter, in 2018, fell on April 1st and Easter in 2019, so on April 21st. So, Eastern volume and people being off et cetera, it’s tended to happen in our fiscal second quarter, the first quarter of the calendar year.
And you probably would expect that, I’m not going to talk about post March 30th, but the volume would fall in there. And then we’ve got less — continue to run off on dual branded cards in China, although, that doesn’t impact revenue very much. If I look at those things, obviously, Easter phenomena has passed us. We’re seeing gas prices increase. The processing day phenomena is actually going to turn and we’re going to have the opposite impact in the fourth quarter on the positive side.
The China team doesn’t really impact revenue. And then in the UK, while I’m not necessarily — we’re not building into an outlook a major improvement. The fact of the matter is that they have kicked this Brexit can down the road, and it’s quite a bit down the road. And I think that we’ll — I think it’s possible you could see some pick up as a result of that.
When I look macro economically around the world, if you look at Europe ex the UK, they grew over 10% in the second quarter. If you look at Asia ex-China, it grew over 10% in the second quarter. Latin America grew in the mid-teens. In the second quarter, our Central Europe, Middle East Africa division grew over 20% in the second quarter. So other than the UK and a little bit, I’d say, of softening in Brazil, the economies around the world continue to look good. The United States looks very good. The fact, the equity markets have been post, excluding this low recent China U.S. trade talk impact, but have been pretty good. The unemployment level is quite low. We’re seeing some real wage growth. So I think the U.S. is in pretty good shape. When you put all that together, our view is that revenue come in a little bit above where it was in Q2 and Q3, and then we get back to double-digits in Q4.
Okay, that’s a good summary. So I think pricing is a part of that equation. But you do still have to finalize U.S. merchant litigation and others getting close. You have some regulation changes going on in Europe, including the changed caps for some of the International cross border. So curious by now on pricing and maybe just a refresher on your philosophy around pricing?
Well, our prices philosophy is fairly simple. The actual execution of it’s a little more challenging. But we look at a combination, the value we bring and what the competitive situation is. And those are the way we look at it by market.
Now, the implementation by market differs with each market is different, and there’s different realities associated with it. I continue to think — we don’t talk a lot about pricing, we’re not going to do any big reveal on pricing here this afternoon. But it continues to be a lever for us. We have dozens of people, and maybe it’s a 100 people who just work on pricing. We have a global pricing team in San Francisco and that we have regional pricing teams out across the world. So we have dozens of people who come to work in the morning and leave at night thinking about prices.
So it’s not as if it’s something that we’re not paying attention to. And it’s that group informed by a combination of regulation, value and competition in the markets that determines what our pricing is on core products, what our pricing is on value added services products, what our pricing is on any new product that we’ll put out in the in the market. The MDL thing really hasn’t impacted our thinking. Right now, we’re in the — that’s been with us and 15 years. We’re in the situation now where we’re in the opt-out period for merchants. Hopefully, a judge in November will put this to bed after we’ve gotten through the opt-out. But there’s going to be people on opt-out, there’s the potential of an appeal and that show could go on for quite a while, who knows.
Yes. Well, on the pricing side, look, I mean authorizations have gone up, security levels have gone up, you’ve thrown out a lot of new power to Contactless, which has driven more volume. So I get that. And so one way to measure that value we look at incentives. And incentives have been trending a lot better for the last several quarters, striking better again this year. Is that — should we view that as a sign that the pricing situation as you renew or win business with issuers is getting better, maybe you can comment on that and just deal flow, in general, Al.
So let me start at the last one. So our deal flow has been good. I mean, very good. It’s been in range of our expectations. We renewed Air Canada. We did a deal with BBVA. We did renewals with both SBI and ICICI in India. We renewed with HSBC in 27 markets around the world. We won Citibank’s commercial card business. We once in a flip, we won Scotiabank’s business in Mexico. And we renewed our business with one of the big upstart banks in Russia, Tinkoff Bank. That said our incentives in the first half of the year were lower than we expected and probably you expected, that’s the combination of — there were a few deals where the level of incentives that we thought we might have to give was actually ended up being less than we thought. And that’s a good thing, because it’s sustainable over time.
Secondly, we had some small deals get delayed out of first half into second half. And thirdly, in some cases, we just had lower volumes and we pay less incentives, so that’s not necessarily always a good thing. You rather have to buy, but in some cases, incentives were down. There is some relationship between volume growth and incentives, obviously.
This is just for people who haven’t heard this before. Forecasting or coming up with an outlook for incentives is really challenging, because we have to answer four questions, they come up with four different assumptions. One is what renewals are going to come up? Secondly, what level of incentive will we have to put on that renewal? Thirdly, when will the renewal actually take hold in the marketplace? Like how quick — if it’s a conversion, how quickly will the conversion happen, or how quickly will the lawyer and get done and the deal. So that’s actually inked in official. And then the fourth question, last assumption is what will be the actual volume flow? And we have to predict all of those, by market, by region globally. And it makes it somewhat difficult.
I think as we look at the second half of the year, we expect a few large deals. There are few surprises that on the positive side the fact that TSP and the UK decided not to flip their debit portfolio to MasterCard, and keep it with us, was not something we anticipated. But it’s a positive thing, in terms of volume and a positive thing for us overall, but that will have an impact on incentives. There’s one or two other deals that I know of right now that we didn’t take what happened in the second half that likely will happen and close in the second half. So when we look out into the second half, I think the level of incentives will grow, but I think it will be within the range of guidance, Tien-Tsin that we provided, which is 22% to 23% of gross revenue.
So, extending this little bit further, so thinking about incentives and how you engage with clients. It doesn’t feel like the clients are changing a little bit, a lot more fintechs. We’ve had from here present, whether it’d be Square Card or the Apple card that’s out, Monzo, Revolut lot of companies that have well funded. So does Visa have to do something differently or other contracts different when you’re engaging with these types of fintech issuers versus the traditional banks they chase?
So, the way I think about it, partnerships isn’t part of our business model. It’s fundamental to our business model. We want to be in business with our partners. And a lot of the fintechs that are coming up now are really value-add to the payments infrastructure. Some of them are helping with acceptance, particularly the long tail, some are bringing in people into the financial mainstream who the traditional banks wouldn’t have necessarily banked or gone out and reached for. Some of them are bringing in new payment flows. And that’s expanding the payments market and I think that’s a very good thing. And we will continue to try to work with anybody about anything at any time if they could be added to the payments ecosystem.
That said to your point, a fintech is not the same as a traditional bank and we’ve had add account people to cover fintechs. We’ve got to give them a different textbook. We’ve created a fast track program for on-boarding fintechs, so that we’re not putting them through the same bureaucratic ringer that we might put a larger company through where our risks might be, frankly, higher if we’re not careful. We’re obviously continuing to open up our technology through making API’s available. And we’ve announced a number of months ago a $100 million investment fund to invest in fintechs.
We’re not a fintech investment company but our philosophy is that — and our philosophy is we will not invest in a fintech specifically an investment perspective. But if we can do a commercial agreement with a fintech that we think is good for Visa, and it’s important to that fintech that our name is on the door with them as an owner. And we’ve got a commercial agreement that we’re comfortable with, we will be happy to make an investment in those particular cases. So I think they’ve added a lot of noise to the system but I think much of it is very positive.
Okay. So, e-comms sticking with the digital theme. E-comm has been growing at a premium to growth for a while to traditional card grow their face-to-face growth for some time. We just heard from Peter [indiscernible] giving some big valuations in some of these e-comm platforms. You guys — Visa have a nice asset in CyberSource. We don’t hear that much about or maybe we don’t study it enough. So what is CyberSource’s role in this whole e-commerce opportunity, and could it be under appreciated by the outside?
Certainly, if I look at it in terms of how often I’m asked about it, it’s underappreciated, because I rarely am. So CyberSource is our gateway product. It has a couple of really terrific advantages to it. It’s got very strong fraud prevention capability, it’s got some really unique capabilities for our acquirer partners and it can support omni-channel, which is becoming increasingly important. In a world where people have migrated heavily now to EMD in the face-to-face world; in fact, somebody who’s completely got EMD built-in — merchants got it completely built into their infrastructure, probably have seen fraud drop as much as 80% in the face-to-face world. And on average, if you’re not even fully implemented, probably you’ve seen 50% drop in fraud, so unfortunately, all the frauds running over to the e-comm side of things.
And CyberSource, for example, has this terrific capability called decision manager, which takes a boatload of data and puts it together to try to help make really good determinations of whether a transaction is fraudulent or not fraudulent. And we now have 5,500 clients, I think its 68 countries, using cyber source. And last year, $200 billion worth of transactions went through the decision manager pipes and we prevented $11 billion of fraud, so it’s pretty compelling.
The other thing that’s happening with all this change that’s happening in the ecosystem, whether it’s fraud moving over to from face-to-face to e-comm, or whether it’s tokenization, whether it’s advances in risk capabilities, et cetera. Some of this is hard for acquirers to keep up with it. And so increasingly they’re looking for partner versus build options. And CyberSource gives them a partner option. In fact, SMCC, which is one of the top acquirers in Japan, has come and done a partnership with us on CyberSource where they’ve integrated CyberSource into their acquiring technology stack.
So as they go out and acquire merchants, they’ve got new capabilities overnight to talk about, because they had what they had and now that they have — what they had plus CyberSource. And they’re seeing their merchants — their merchants are seeing a reduction in fraud, which is helping them continue to tell the story and therefore pick up market share. So we’re going to continue to use this asset, which I think over time as omni-channel becomes bigger and bigger and bigger, I think CyberSource is a really strong asset for us that can help our acquires and help us and obviously drives revenue through per transaction fee that we get for providing to acquire us.
So how about on the checkout button front, I know it was a little bit of a reboot, if you want to call it that with the SRC or network button, next version of Visa Checkout in collaboration with the other networks. So where do we stand today with that, any update?
Well, we’re getting closer. A knock on wood, I think we’ll start converting some Visa Checkout merchants to the SRC button towards the back end of the summer in the United States. So we’re going to focus in the United States first where I think it makes the most sense. I mean, I don’t think this is something we have to experiment with. The reality is that the Checkout experience in e-comm is terrible. The shop to buy ratio is lousy. The confusion at the point of buying is lousy and the authorization rates are way too low. So to me this is — and I think EMVCo agrees as do I think my network competitors agree that it’s a lousy experience. So this isn’t where we should go to a small market and test our way in. We should go to a big market and make a difference, and hence starting with the United States.
And look not only does this make the checkout experience better, because you hit this checkout — this network checkout button, it’ll bring up your wallet, which could have multiple cards in. You select the one you want and you hit buy and you’re done. And this confusion of all of these different symbols that could be dozens at the point of purchase, which by the way, it’s analogous to being dozens of POS devices in the face-to-face world goes away. And so I think it’s a needed advancement. We’ll get going in the United States. We’ll see from there. I think it’s a little too early to tell just what the velocity of the adoption is. I think we’ll be better off. We’ll know that more probably four to six months into it.
Right. But this doesn’t change the relationship with, say the Apple Pays and the PayPal’s of the world…
No, it’s a good follow up. Look, honestly, those are great user experiences. Google Pay, Apple Pay, PayPal, I’ve respect for what those guys have done in creating user experiences. I’m being different. If that’s a good user experience, what I just simply want is the Visa credential at the top of the wallet. And I don’t think we can — we can’t just rely on PayPal, for instance, to simply try to fix this friction in the e-commerce point of purchase, the older networks got to step up and play their role. So this is all about just, making for a better experience for the consumer. Therefore, hopefully, more volume runs through for everybody. But whether somebody chooses Apple Pay or PayPal, or the SRC button is as long as it’s a Visa credential, I’m fine with it.
Yes, another horse in the race. So sticking with U.S., let’s talk about Contactless then. So it stood out to me in the call that Visa did see an acceleration in volume, where Contactless went up, including the UK. I think you mentioned. So I think you said and others, including Chase, has said that this is a big year for Contactless in the U.S. So tap and pay your card. So could we expect U.S. growth accelerate from Contactless penetration going up in the U.S.? I see it in the New York City subways, they are not live yet, but they’re putting in the hardware.
So I’m actually going to Lexington Avenue Subway tomorrow afternoon to actually see this in-person myself. But I happen to believe if I can go to your last point on the MTA. I think that transit is extremely important application, not only for tap and pay but for building the habit of getting greater engagement from customers on electronic or digital payment forms. It’s the use case that you use 10 times a week going on your five commutes to work and your five commutes home from work. And we’ve got — we now have — and obviously we’re advocate that these systems should be open systems, not closed systems. We now have stood up to 20 transit systems in 12 countries around the world. We’ve got 250 active transit projects on the table right now around the world, the MTA is obviously huge.
And I think it becomes a real accelerant to tap and pay. I don’t think it’s going to impact our numbers in fiscal ’19 when we have six months to go. But we do expect to have 100 million cards in the United States that have Near Field Communication capabilities built-on them. I have four visa cards in my wallet, one of them does, three of them don’t. But hopefully over time they will convert as the card renews unless I lose it and then hopefully it gets renewed with it on it.
The United States is completely different than the rest of the market, in that the U.S. is ready from a merchant side, from an acquire side, from a POS terminal side. They’re ready for tap and pay. 80 out of the top 100 merchants are totally tap and pay enabled. 60% of I think all transactions in the United States could be done with tap and pay. Right now, it’s simply a matter of getting the issuer side, the credential tied to catch up.
And I think in New York, for example, once this thing goes on to the MTA I think that becomes a very powerful use case for trying to drive it, because you need some stimulant to get this going. And our experience would tell us that when we look at Contactless around the world, the reality is once you get past that first 10%, it really becomes a snowball that really starts to take off. And you can start to see 3, 4, 5 points of increased penetration each quarter as it takes off.
And it’s one of these things that generates a whole bunch of peer pressure on both sides of the two sided markets, because if I see you with a tap and pay card and I don’t have one, all of a sudden you just say why is your life easier than my life. And on the merchant side, if you have a store next to mine and you’re bragging about how it’s helped throughput and your customers love the experience, and I don’t have it I’m going to feel like, I’m at some business disadvantage and I’m going to press to make sure my terminals are enabled for it. In many cases, by the way, you don’t have to replace your terminals. You have to just simply get a software change to get it to be able to handle the Near Field Communication capability.
So I remain really bullish about the United States finally catching up to the rest of the world where we have 30 countries that more than a third of the transactions are tap and pay today and face-to-face. And where nearly half of the transactions last quarter, excluding the United States were tap and pay globally. And there is lot of small, even emerging markets that are in better shape and further along on this than the United States. I would set into a group of investors early — I don’t know whether this the U.S. gets to some scale in two years, three years, four years, five years, but it’s somewhere in that window. I just think it’s the matter of really how quickly the cards get out of market.
So maybe there’s different points in then. So questions from the audience, happy to take any, I mean, otherwise, I can keep going, going to the B2B side. Yes, front. If you don’t mind you’re the mic, Lexington Avenue. Okay, maybe I’ll see you there and I’ll be up here. But I do catch that train.
It’s interesting, by the way that the MTA chose that, because it’s one of their most popular and busy routes. They didn’t go to the outer stretches of the Staten Island and stop that 32 people that they delve in the deep end of the pool.
Q – Unidentified Analyst
Al, you mentioned $100 million investment fund that you’ve established. Are there any technology teams that you’re dominating in there that’s looking forward into the industry that you’re pursuing?
Well, I think that if you look at across the continuum of what matters to us, certainly capabilities in the fraud area, capabilities in the risk area. Certainly, people who are bringing more players to the financial mainstream, so wallets and platforms to the backend, people that are help adjudicate claims when they might crop up for an issuer. So I think across the continuum, if we see the continuum of the value we bring, if we see an interesting company we’re reaching out to them. And again, our objective isn’t to reach out to them to say, we’ll give you money. Our objective is to reach out to them and say, hey, let’s talk, you’ve got a great interesting tool.
We bring incredible scale across 3.3 billion of payment credentials and 54 million merchants, which by the way, I’m just going to get this as soon as inside. Our 54 million merchants so understated, because we’ve got Stripe, PayPal and Square account as one each. So it’s a lot bigger than that. So I think this is often a marriage of somebody needs capability and us being very established scale, globality, security and brand to the party. And we can strike a cool commercial agreement. And as I said earlier, if they feel they want us to do an investment, we’ll do it. Sometimes we’ll want to do the investment, but I’d say more than half the time we do the investment, because the founder or the company asked us to.
Thanks. So I think I have to ask a B2B question, because there’s a lot of those companies here and we’ve been talking about it. How do you organize B2B or prioritize it, because you have the commercial card opportunity, which is well established and has been pretty long in terms of being in market. And then the accounts payable space, which is also a legacy market with a lot of inertia, a lot of fragmentation. And so how would you organize or prioritize it for us here as we’re trying to study the opportunity?
Well, the first thing I’d say is that this has always been an area of focus for us. But I would say that about 18 months ago, we got much more serious about it, and it’s a top five investment area for us. And we stood up — we try to manage our business and I have a philosophy, because the business is so local. I want to put as many resources into local market and empower them as much as possible. But when we want to stand something up and we feel like it’s got to get some momentum, we actually establish a global business unit. So we have a global business unit for Visa Direct. We got a global business unit for CyberSource. Now, you’ve hit on another one. We have — we 18 months ago stoop up a global business unit for B2B, the head of that reports to Ryan McInerney, our President. So we’re taking it very seriously. We’re investing more in it.
And when we stand something up like a business unit like that, when we do our monthly business reviews prior to standing that up, B2B might work its way into the different regional presentations. But now we’re having a two hour review solely dedicated on B2B. So it’s forcing up through me much more of a spotlight on it. To your point, it’s two markets. It’s a carded market, which as we think about $20 trillion. We’re the leading player in the world. It’s 12% of our overall purchase volume. It’s approximately $1 trillion. We built a very good business around it. We think there’s a lot more upside, especially if it’s $20 trillion business. We feel like we’ve got a lot of the good tools and commercial cards, getting much more into virtual cards, Visa Direct is a tool there.
On the other side is that integration as you said into AR/AP systems, we think that’s 4 times the market, I think Ajay might say it’s $100 trillion, we think it’s $80 trillion, it doesn’t really matter, it’s been huge. That’s something we don’t have to arm wrestle over. There’s a lot there for everybody. But that, as you said, has historically been a wire transfer ACH market. It’s more complex. It’s going to take more time to break through on it.
So just first, a couple more let’s drill down a little bit on each of them. So in the commercial space, one of the biggest things we got to do is we need more banks active in the space, because they’re our conduit into the market. And one of the messages I had in Chicago yesterday in my speech was that I need more of you to become serious commercial card issuers. And you should be incented to do so, because the opportunity is huge. And that means more than just slapping the word business or slapping the word corporate on a existing consumer card. It’s actually really coming up with tangible value that works.
We’ve got to grow acceptance. There’s still a lot of acceptance gaps in B2B. So there’s a lot of hard work to do in that particular case. We’ve got to continue to grow virtual cards. We’ve done deals now with [XRS] in Europe, Sabre after doing a very good deal with WEX we announced earlier in the year. So, we’re committed to build this position, this leading position we’ve had in the B2B client space. And I think it’s got upside potential for us over the next decade, at least.
On the other side, I think it’s going to be much more about experimentation, figuring out how we can get past the inertia of these embedded wire transfer instructions and ACH, and get to a point where we can actually add value and get paid for it in a level that’s interesting to us. The one thing we prioritize right out of the shoot is high value cross-border transactions. And we’ve announced a B2B connect product but now we’re going into market. We’re past the rhetoric of its coming, it’s actually going to market. And we’ve got three great early distribution partners, FIS has signed up to distribute it, Bottomline and Billtrust, have all signed up to be distributors of it.
We think it’s a great product. It uses our rails. It takes a corporate player out of the business of having to build a network of correspondent banks. It leverages our security. And it has really neat reporting capability in terms of giving somebody exact information on when the transaction will settle. And a very clear transparent view of what was the total amount, what were the FX impacts of the transaction, what were the fees of the transfer and then what’s the next settlement amount. So we’re excited about it. We’ve — just that launch, it’s going to take a while to see how it catches fire. But we’re dedicated to try to continue to grow the distribution partners for this. And we’re committed to this as our first big jump into this AR/AP side of the B2B space.
All right, great. We will continue to track it. I think we’re out of time. I wish we had more time out, but thanks again for joining us.
Thank you, everybody. Thanks so much.