Visa Inc. (NYSE:V) Morgan Stanley Technology, Media & Telecom Conference March 8, 2023 12:10 PM ET
Company Participants
Vasant Prabhu – Vice Chair and CFO
Conference Call Participants
James Faucette – Morgan Stanley
James Faucette
All right. We’ll go ahead and get started here with Visa. Very pleased to have CFO, Vasant Prabhu. I was just saying it’s like, is this to the kick-off of the farewell stadium tour.
Vasant Prabhu
Oh my God.
James Faucette
And then you’re a little too modest for that, that’s fine. Before we get started, I do have important disclosures for those please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions please reach out to Morgan Stanley reps.
Question-and-Answer Session
Q – James Faucette
So, Vasant, last week, Visa provided an update on volumes through I guess, the beginning of March or very end of February. Things look great. I mean tell us what you’re seeing. I mean maybe recap that like what you’re takeaways were from that update.
Vasant Prabhu
I think you summarized it. Things look great.
James Faucette
Okay.
Vasant Prabhu
So, look, I think what’s helped us all the way through over the last several years is — all the way through the pandemic, we stayed focused on how our business was doing versus 2019. I think that kept us from becoming manic-depressive like a lot —
James Faucette
Right, right, right.
Vasant Prabhu
And then more recently, we’ve stayed focused on what is our data tell us. And if you listen to talking heads you’d be manic-depressive again as you see with the market. So, our data as you can see has been remarkably stable, right, shockingly stable in a way if you look at our numbers starting all through 2022 quarter by quarter, it’s been stable on almost on a day-by-day, week-by-week basis. And that’s continued as you saw, all the way through February.
January, we had some benefits from Omicron comparisons to last year. But if you look at February nice double-digit growth in the U.S. plus 11, credit growing double digits, debit growing double digits, e-commerce growing double digits, card present almost double digits. You look at the cross-border business, you know that we’ve been hoping for a steady recovery. And we’ve had a steady recovery up, we gave you some of our assumptions, we’re not — it’s not easy to predict this but surprisingly, through the first quarter, we will generally on track.
As you saw, January and February, we’ve seen some more improvement. I just want to caution you, when you look at January and February and now it’s a full-year comparison to 2019, just providing that, we you have to adjust for that, but even if you look at it on a three-year basis, at least in January and February there are some comparability because of the pandemic didn’t really hit till late Feb early March. It’s still — improvement — cross border e-commerce index and 180 which is very strong. So, as I said if you just looked at our numbers, you’d say, everything is great.
James Faucette
Everything is great. I mean, is there anything perhaps within there that you are looking at, and saying, okay, this is a positive indicator or negative like things that come to mind are a lot of times, as people start to feel more stress, consumer start to feel more stress, they shipped a little bit to debit from credit or vice versa.
On the other hand, there has been speculation that well people run through their savings and so they’re turning more to credit especially for nondiscretionary that kind of things. Any other — like things that aren’t as obvious at a high level that would be things to watch?
Vasant Prabhu
Yes. I think first of all, let’s — let me repeat what we’ve been saying for a while that I don’t think we’re leading indicators. Right? We are coincident indicators, it’s what’s happening today. We don’t really know if you’re going to change their spending behavior, two weeks from now, because your bank balances are dropping, or your credit limits are being hit, and all that. If you just look at trends, as you saw through February and you dig below those trends, there really are no surprises. It’s quite intuitive, it would be what you would expect.
James Faucette
Right.
Vasant Prabhu
So, we’ve said for a while that the goods categories had a big boom in ’21, and so in comparisons versus ’21, and now versus early ’22, the goods categories are — the growth rates are not that great. But if you look at on an index basis for 2019 actually, they’re doing just fine, right? They just had a big bump up in ’21, and the comparisons to ’21, and to the early parts of ’22 are not flattering.
But, what’s holding up the business is the shift in spending, which is very evident into travel which is growing extremely fast, and entertainment growing very fast. Restaurants, various kinds of services. So, what the consumer has done is they are spending the same amount of money. And they’re just spending it in different places. And they’re also adapting to whatever inflation is out there.
E-commerce has stayed strong. Cross-border has stayed strong. So, there’s really no leading indicators of changes of behavior, not that we would have a lot of leading indicators but there’s nothing there that you wouldn’t say is it’s intuitive.
James Faucette
And in terms of this mix shift of spend. Where are we in terms of service versus good spending? I mean I know you made the comment. Now a couple of quarters ago that pre-pandemic that services spend was greater than goods but at least in the middle of last year, we still are seeing more goods then spend. Are we back to that pre-COVID level of services versus goods mix?
Vasant Prabhu
Yes, it’s roughly approaching 50-50. And it’s probably heading back to where it used to be, but if you look at travel and once again the index to 2019 is always useful because you want to look at had the pandemic never happened, where would we have been versus where we are. Travel still has recovery left both domestic and cross-border. Entertainment has some recovery, and restaurants, I think are back to where they might have been. Many of the goods categories are generally doing just fine.
So, as we said, which is why we stopped reporting comparisons to 2019 for the domestic business, we’re past the pandemic. We’re pretty much steady state at this point, some recovery left in travel, and cross-border travel is still more to come, which is why we are still providing comparisons to 2019. But in February and March without the Omicron effects, we had a little bit of Omicron effect, let’s say, in the first week of February, it should be a fairly clean comparison.
James Faucette
So, one of the questions that we get a lot is like okay, great. And I repeat or have our own spend on a lot of the same points that you’ve made here this morning. But one of the questions we often get from investors is like are a great, doing that’s awesome, but like, what about in a real recession, and maybe you can help remind us a little bit of how Visa performed during the global financial crisis and how do consumer payments hold up across credit and debit and maybe, more importantly, what’s different about the business now versus while 14, 15 years ago?
Vasant Prabhu
First of all, 2008 was a long-time ago. 15 years is a long-time, number one. Number two, we were just going public. And the Visa of today is vastly different than the Visa of 2008 on many dimensions. E-commerce is a much bigger phenomenon today than it was then. E-commerce is a much larger component of our mix and it was then.
E-commerce is not only a big component of our mix, in general, it’s especially a big component of our cross-border mix, which as you know, prior to e-commerce cross border was mostly about travel. Now, there’s a big chunk of e-commerce in cross-border, which is again a very different thing.
Europe then exists as part of Visa then, and Europe is now almost 20% of our business. The emerging markets have grown a lot in that timeframe. The business is just far more globally diversified than it used to be. Value-added services and new flows are sizable part of our business and growing very fast and growing based on new services, they’re launching penetration of new markets, penetration of new clients, and penetration of new use cases didn’t exist then, right? It was more of a strictly credit and debit business.
Our debit businesses continue to be bigger and bigger. And we do debit in many different ways now, not the traditional way we’re embedded in phones, we’re embedded in wallets, et cetera. So, you really can’t compare the business of today to the business of ’08, that’s one thing. The second thing is ’08 for good reason, it’s called the global financial crisis, right? It was a massive event, it was a credit event.
And a lot of credit was pulled back, unemployment shot up. I don’t think anybody today is suggesting that whatever we may have is going to be like that. If you’ve gone and looked at 40 years worth of recessions and they’re all different. None of them are the same, some have more impact on consumers than others, some have more impact on personal consumption expenditure than others. We have a very big debit business which stayed resilient.
We have an e-commerce business that is growing very fast because of penetration, and we have a higher share of e-commerce than we would have card-present. We have some recovery elements still in travel. So, potentially travel holds up better because there is a recovery element – in travel.
So, you really can’t compare one to the other. Now having said that the data on ’08 for us and definitely for Mastercard is publicly available. So, you can see what happened. I would urge you to look at it with caution. Because that recession and this one are likely to be very different and our businesses is very different.
James Faucette
That’s right. That makes sense. So, turning to travel. This is one where similar like we’ve kind of conducted similar exercise. We go back and we look at historical travel trends during recession, et cetera, but what’s your perception of how international travel spend on Visa cards generally is impacted by macroeconomic conditions? And then one of the big things that we see people say, well, business travel falls by a lot, but like how much is Visa’s volumes on travel really are business related versus tourism related et cetera?
Vasant Prabhu
Yes, a lot, the biggest chunk as we told you during the pandemic as consumer-related travel, right, there’s a lot of business travel often gets charged differently, it doesn’t necessarily show up on our credentials. So, you can assume it’s more consumer than business.
Now having said that, I mean, again I have to come back to we’re still in a recovery mode in travel. And there’s a lot of pent-up demand, there have been capacity constraints in a lot of markets for travel. So, travel hasn’t been able to meet the level of demand, you see the prices have gone up a lot.
So, you’re going into a situation where employment levels are still very high, wage rates have been pretty good, the consumer for all intents and purposes, seems to be doing fine, you’ve got pent-up demand for travel, most of the volume on our credentials is consumer travel. Again I don’t think history is a good predictor. I know the conventional wisdom is that travel is discretionary and therefore in a recession, it might be the one to be cut back. I think we’ll have to wait and see, it all depends on what kind of recession this is.
James Faucette
That’s right. Well, I think it’s interesting that you characterized as the conventional wisdom or for us I call it like the — any prejudice that people have is that like travel falls by a massive amount in a recession. But like you said, it’s like as we go back to recessions even back into the 60s, that’s traveled overall has underperformed GDP. Yes. But a lot of times it’s only by 100 basis points or 200 basis points that’s underperforming GDP.
And so then like you said like you layer on like, well, we’re still below unit volumes in passenger volumes and the like. So, to me is– that’s still an important point and on that of passenger volumes I mean we’re still indexing below 2019, obviously because of Asia Pacific but also even parts of Europe, et cetera. Can you help us balance sort of think about what the right relationship is between passenger traffic and volumes, right, because we’re approaching 120% of transaction volumes but passenger traffic itself is still cumulatively maybe only 80%, 90% recovered.
Vasant Prabhu
Yes. Well, the delta is driven by the fact that prices of travel have gone up, right, so you’re paying a lot more for that airline ticket, you’re paying a lot more for that hotel. And so, transactions are still indexing lower than what volumes are, some of that – these kinds of things. In terms of cross border travel, as you look at where that stands today, we have seen nice improvement in Asian travel.
Asia was the laggard, and Asia is improving steadily. I think by the time we get to the end of this quarter, maybe Asia will be back to 2019 levels. That’s the last region that needed to get back to pre-COVID levels. But then you just start pre-COVID levels, there’s still a long way to go to get back to the pre-COVID trend line and most regions are equal to or better than the pre-COVID trend line.
Among the strongest ones, would be outbound travel from the U.S. has been very strong, indexing, probably above the pre-COVID trend line versus 2019 helped by the strong dollar I would imagine. Inbound travel into Latin America, inbound travel into Europe have been huge beneficiaries of a travel out of the Middle East and the U.S. and so on.
They are indexing extremely strongly. Sluggish ones have been Asia, which is now recovering. And then the U.S. inbound has been sluggish as you saw. But it’s recovering steadily and I would hope that by the end of this quarter, I mean that would also be back to pre-COVID trend line. But again, that means there’s still more to go.
And there’s nothing we’ve seen that says, you won’t get back to the pre-COVID trend line or even above that, right, because if the rates continue to be higher, then you would get above the pre-COVID trend line, when transactions get back to the pre-COVID trend line.
James Faucette
Right. That makes sense. So, back on China specifically, can you remind us how big China travel was for you pre-pandemic. And more broadly, how the reopening there can support ongoing recovery in international travel in and out of APAC?
Vasant Prabhu
Yes. I know there were some numbers thrown out by Mastercard and all that, and I don’t want to get into all that. All I can tell you is that the future recovery of travel is clearly dependent on China, right, because China has been the laggard, and China is a sizable market. And we told you to be a little patient on Chinese travel recovery because there are some things that make it slower than you might think.
James Faucette
Okay.
Vasant Prabhu
Airline capacity, if you look at the data was cut-back sharply. Right? I think if I remember right, at one point coming out of the shutdown of China, I think airline capacity and these numbers may be wrong or not accurate precisely into London were at 10% of pre-COVID levels. So, what we’re seeing is, first of all, the Chinese have to get new passports, in many cases that expired. They have to get Visa and that wasn’t always easy, some countries have made it easy. So, those are the ones benefiting earlier.
Prices are very high for travel because there was very little capacity. We’ve seen a big pickup into the — obvious places, going into Hong-Kong and Macau and so on, then into Southeast Asia especially Thailand. Travelling to Canada has picked-up faster than other parts of the world. I guess because maybe airline slots have opened up more in Canada faster and so there is more capacity coming online faster. So, what you should be watching is how airline capacity buildup coming out of China.
And there will be travel going into China now as the COVID situation there settled down. We are very bullish on the Chinese travel recovery, we see it happening, but it’s going to be more of a second-half event. It’s not yet happening to Europe and the U.S. because there were initially COVID testing requirements, I think, Visa issues have to be resolved.
And the big roadblock would be slots opening up for airlines to travel to the U.S. and Europe from China. So, it will take some time, but it’s going to come and when we said that cross-border travel will recover through the year, it was based on things like China, opening up.
James Faucette
Got it, got it. So, I want to look at turn to new flows and new revenue streams for Visa. And there’s a list of them that we can talk about, but I want to make sure to hit some of the more important ones. Let’s start with Visa Direct that seems like it’s contributing a meaningful amount of — to growth right now, but for a lot of investors, they may not be completely up to speed-up, like what are the most recent developments there and growth within Visa Direct and what are the use cases that are seeing the most traction that at least you’re most excited about?
Vasant Prabhu
Sure. Yes. I mean, usually Visa Direct as not a product or a capability. So, Visa Direct is really something that can serve use cases that are not our traditional use cases. So, in that sense, Visa Direct I think is a platform that you should be watching for the next decade. Right? This is the future of Visa outside of our traditional consumer payments business, it is the platform that will allow us to develop use cases that we’re already doing like B2B, like cross-border remittances, like the revolutionizing of payroll to on-demand pay. Like marketplace payments, like disbursements of all kinds.
James Faucette
Right?
Vasant Prabhu
What Visa Direct is something that allows us to put into effect. What we call our network or network strategy. So, it isn’t just that you move money on your own network. But we’ll get your money where it needs to get to. Visa Direct connects to I believe 60 plus ACH networks, 10 plus RTP networks, I think 15 card networks. So, essentially, whatever your needs are card-to-account, account-to-account, account-to-card, we can do it.
And what it brings is this extraordinary ubiquity, I think there was 7 billion endpoints. Second is, it’s relatively easy to connect to people tell us the APIs are easy to use, and if you can set themselves up pretty fast, we allow a whole bunch of intermediaries who are offering these services to scale by using our network. It offers what our network offers, which is extraordinary reliability, extraordinary security which you don’t normally get.
A whole range of value-added services that we can layer on top of it, whether that’s dispute resolution, identity, various forms of risk management and so on. It’s global in scope. It’s real-time, you remember that ACH networks and RTP networks are not global.
James Faucette
Right?
Vasant Prabhu
Most ACH networks are not real-time. Most RTP and ACH networks are not as secure by a wide margin compared to what we are. So, the value of Visa Direct is quite extraordinary. B2B is normally the first use case, we are very, very excited about cross-border remittances, which is a huge, huge market and we have an incredibly compelling solution. We are excited about marketplaces. This is — these are businesses where people sitting in Turkey can sell you a service here and then they have to be paid or payer be and be host has to be paid.
James Faucette
Right.
Vasant Prabhu
Then there’s the whole on-demand payroll, which we started with the gig economy, and now we’re extending to traditional businesses and we are working with a whole range of partners. We’re working with all the remittance providers, we’re working with all the new payroll platforms, we’re working with insurance companies and disbursements.
These are early days, but the momentum is great. It is already a meaningful part of our volume that you can see in our debit volumes. It’s been growing at a very hefty clip. We give you what the transactions are and what the growth has been. We’re expanding it globally, we are going into new use cases and there — deepening penetration of existing use cases. So, this is just the first or second inning, in fact, it’s the first inning and we think this is the — one of the key legs over the long-term growth of Visa?
James Faucette
So, there within Visa Direct, you laid out a lot of the impressive capabilities and differentiating capabilities of Visa Direct save versus traditional ACH networks, et cetera, but I’m sure you get the question as much as we do, which is what about the role or the position, especially as we start to talk about imminent launch of FedNow or real-time payments more generally, how do you play within that space? And what are the implications of FedNow rollout for Visa in terms of potential volumes or how are you seeing that ecosystems — those ecosystems fit together?
Vasant Prabhu
Well, our view is that everybody is a potential partner. Nobody really is a competitor. Anything that makes payments more ubiquitous, anything that’s causes consumers to adopt digital forms of payment, anything that makes merchants accept digital forms of payment is a good thing because it expands the market and maybe we have — a large share of a market that’s 5 times as big than a large share of market that’s one-tenth the size.
And that’s historically proven to be the case because once people get used to, let’s say, a digital form of payment because they use Pix or RuPay in India, UPI in India, they get used to digital payments. That means they use digital payments for lots of things when it comes to higher-value payments, they often come to us, for a all those reasons, they are most secured. It’s more prestigious to use a Visa card.
Lots of reasons that we benefit, and we’ve seen this in other parts of the world. We saw it in Europe. So, and then we co-op them, right, we don’t view these other networks if necessarily, competitors, they are open to us. We partner with them, we send transactions to them. They send transactions to us, we may offer value-added services to them. We’re happy to help them in any way we can. We just think that the rising tide just lifts all boats, and it’s a good thing for the industry and that’s how it’s played out.
If you look at Latin America, through the pandemic, payments volumes have doubled, which is much more than consumer personal consumption expenditure. In the Middle East and Africa, consumer volumes — our payment volumes have doubled, in India they’re almost doubled. Brazil has been one of our strongest performing markets. So, we actually think these are good things for the digital payments ecosystem in general.
And auto, for sure, things has been really the philosophy of everybody is a partner, we said that about the wallets when they came around. And they’re all our partners right now. And that’ll be the case with RTP networks, we are already working with most of them, it will be the case with the phone networks in Africa. We are working with many of them. I think it’s a win-win for all parties.
James Faucette
Right, right, right. Makes sense. Another common question that we get, I’m sure you also get is like consumer card penetration, generally. So, outside of newer flows, how much runway is there from your perspective to keep driving growth in the consumer card and which countries and regions is Visa able to get more aggressive, and particularly as we think about like how much further for the U.S. and how much for developed markets?
Vasant Prabhu
Yes. I think this concern that they’re going to run out of room is somewhat premature and misplaced. If you just look at our data, our credential growth has never been stronger. I mean, we’re growing credentials double-digits, which is quite astonishing. 60 years after we started doing it, right, I mean which business can grow like a basic credential amount, right, like we are adding people at a double-digit rate, 60 years into what we’re doing. That’s because we are now embedding our credentials in normal cards, in wallets, in phones, in all kinds of devices.
And so, there is no evidence whatsoever anything credential growth has accelerated. Usage has accelerated, right, through the pandemic, people are using their digital credentials for just about everything. I mean there are lots of you who probably never use cash, that wasn’t true even five years ago. We’ve made the friction of payments dropped dramatically with tap to pay. Tap to pay still has a long way to go in the U.S., for example.
Merchants, we have 4 billion credentials today versus 2 billion, a decade ago. We have over 100 million merchants accepting and that’s growing at a very fast clip. We think there are still extraordinary runway here, penetration levels in emerging markets is still extremely low, there’s still a lot of just $1 volume of cash in developed markets. There is no reason why penetration levels can’t go well north of 90%. We’ve seen that in many markets.
We’ve had more success in building penetration than others have had in coming after these kinds of use cases. We’ve had more success in doing new use cases than — and penetrated new areas. There’s just many, many more users that people are putting their credentials to. So, I don’t think we have any risks that we’re running out a lot of runway in our consumer payment. And our belief is that our new flows and value added services businesses can grow much faster than our consumer payments business and just raise our overall growth rate.
James Faucette
Got it. And in the last minute here, let’s talk about B2B. You’ve got Visa’s B2B Connect, but what’s your assessment of where the opportunity is for that product and service and are making progress there, what’s — just like, can that start to move the needle?
Vasant Prabhu
It is already big. Right? We are — so I’ll do the one minute to answer, two parts of B2B, don’t underestimate what we call traditional cardable B2B because it’s high yielding, we know how to do it, we have great solutions with virtual cards and other kinds of products. It’s growing very fast, we’re twice as big as anybody else, it’s a sizable business today, and growing at a very healthy clip.
Cross-border B2B with B2B Connect, Visa Direct, and other things is going to be a big business, is already a big business and high yielding. AR and AP will be down the road, we’ve always said that the harder nut to crack maybe big PV, but moving money there isn’t where the money is you have to find more value to add.
But there is plenty of room to grow in the traditional areas that we are advantaged in delivering that are very attractive and growing extremely fast as you saw in our numbers last quarter. So, we are very favorable B2B, it is a decent size price part of the business, it is very much a priority, and there’s a lot of growth left there.
James Faucette
Well, that’s great. Well, that’s all the time we have to chat with you this morning Vasant. Thank you very much for joining us.
Vasant Prabhu
Thank you. Bye.