Payment Services

Payment Services

21 April 2016

Important legal information

Investors who bought into the US blue chip payment service providers (e.g. VISA “V” and Mastercard “MA”) have enjoyed stellar share price returns over the past years.

For starters, V and MA are enjoying c. 10% annual growth in global payment volumes driven by the “war on cash”, which effectively means that there is a trend towards reduced use of cash in today’s societies and electronic payments (e.g. card and on-line) are gaining traction. In addition, States and Government around the world are promoting electronic payments as it provides traceable, taxable income.

However, growth is not the only reason for the stellar share price returns, it also has to do with profitability and scalability of these business models. Starting with profitability levels, VISA and MA are indeed operating at high profitability by any industry comparison. In terms of scalability, V and MA are able to grow (e.g. process additional transactions) at very little incremental cost. Effectively this means that capital expenditures have increased at much lower pace compared to revenue growth, which in return has enabled V and MA to generate lots of surplus cash-flows. This combination of high growth and low capital expenditure is favorable but quite rare. For instance, if retailers or industrial companies want to grow, it normally means increased capital expenditure to open new stores or build new factories.(Source: V and MA annual reports)

In terms of earnings, both V and MA have produced mid-teens earnings growth per share over the past years. The surplus cash-flows mentioned above, have been used to fund sizeable share buyback programs and a strongly growing dividend. For instance, last 5 years cumulated net dividend growth rate is 30% for V and 60% for M.

Can the payment industry (and V & MA) sustain these kind of growth rates ?

The industry is likely to continue to benefit from strong growth years to come as:
- 85% of global payments are still done in cash and only 15% by card/electronic
- Governments supporting implementation of electronic payments as it makes it easier to collect taxes as all transactions become traceable
- Still over 2,5 billion people globally without access to any formal financial services
- Urbanisation increases, people in cities are more inclined to use electronic payments

If V and MA should be able to continue generating mid-teens earnings growth, they are likely to continue be favored by investors. This could be particularly true in a recessionary environment where many companies report negative earnings growth. However, the future developments remain to be seen.

Potential investment risks include (but are not limited to) “disruptive technologies” and unfavorable regulation (e.g. reducing fees).

Below we are doing a quick review of the key global players in the payment industry:

Operates the largest payment network globally (excl. China) with over 2,4 billion cards in force today. V has a clear leadership position in US today. V recently announced the acquisition of V Europe, which will increase number of cards in force to 2,9 billion as well as enable V to better compete with MA in Europe. V processed over 70 billion transactions last year, representing a 100% increase since 2008. V also recently announced couple of big customer wins, such as the “Cost-Co” deal in US (taken from AMEX).

MA derives c. 60% of revenues outside of US and consequently offers investors greater exposure outside US and to Emerging Markets. As a result of the strong USD currency over the past years, MA reported results been more negatively impact compared to V. However, this trend is likely to abate as USD currency has weakened lately. One of MA’s key strengths lies in its Emerging Markets exposure, where payment flows are growing 1.5x times faster than in US (source: VISA annual report). This has the potential to setup MA for many years of growth. However, the future development remains to be seen.

AMEX has underperformed operationally vs. V and MA lately. While V and MA is focused on the consumer, AMEX is more geared towards Corporate spending, which generally has been under pressure since 2007/2008 (e.g. the financial crisis) as Corporates are constantly looking for ways to reduce travel costs. AMEX also recently lost a couple of big customers deals, such as “Cost-Co” to V. As a result of these factors, AMEX share price has lagged the two US rivals. However, it should be noted that AMEX operates a broader business model vis-à-vis V and MA, including taking credit risk, which makes a direct comparison more difficult.



26/11/2022 10:17:32