Visa’s recent performance highlights a crucial distinction in the financial sector: its robust revenue growth, driven by transaction volume rather than credit risk, reveals why payment processors are uniquely poised for success, even as overall credit card debt reaches historic highs.
Amidst ongoing economic uncertainties and rising financial strain, Visa (NYSE: V), a global leader in credit card processing, has not only demonstrated remarkable resilience but is also strategically positioned for significant future growth. While headlines often focus on the challenges faced by consumers and lenders during economic downturns, Visa’s unique business model offers it a distinct advantage, turning potential headwinds into opportunities for its investors.
Visa’s Business Model: A Shield Against Economic Volatility
Unlike traditional banks and credit card issuers who lend money and bear the brunt of credit risk, Visa operates primarily as a payment intermediary. It manages a vast network connecting merchants and cardholders, earning a small fee from every transaction it facilitates. This “toll taker” approach means Visa is largely shielded from direct exposure to potential pitfalls such as rising interest rates, record-high credit card balances, and loan delinquencies or charge-offs, which are absorbed by the issuing banks.
Despite a challenging economic environment, Visa reported processing 54 billion transactions in a recent quarter, generating an impressive $3.8 trillion in commerce and yielding $8.1 billion in revenue, marking a 12% increase year-over-year. The company’s stock has shown notable strength, bouncing back over 36% from bear-market lows since late September 2022, signaling investor confidence in its robust operational model.
The Paradoxical Benefit of Downturns for Payment Processors
Paradoxically, economic downturns can, under certain circumstances, even prove beneficial for payment processors like Visa and Mastercard. As consumers face financial strain, they often lean more heavily on credit cards to manage everyday expenses, which can lead to an increase in transaction volume. While this increases the risk for credit card issuers (banks) due to higher revolving balances and potential delinquencies, Visa’s revenue stream, based on the sheer number of transactions, can actually grow. This dynamic allows Visa to emerge as a net winner in many economic downturns, provided they are not excessively prolonged.
This resilient performance is further supported by a generational shift in payment preferences. Data from the Federal Reserve indicates a significant shift from cash to card payments in the United States, with only 18% of payments being cash-based last year compared to 60% completed with credit or debit cards. This continued trend ensures a strong underlying demand for Visa’s processing services.
Mounting Credit Card Debt and Shifting Consumer Behavior
The broader credit card landscape paints a picture of consumers navigating financial pressures. U.S. credit card debt has reached an all-time high of $1.14 trillion, according to the latest data from the Federal Reserve Bank of New York, marking a $27 billion increase in Q2 2024 and a 5.8% rise year-over-year. Credit card delinquency rates also remain elevated, with 9.1% of balances transitioning to delinquency over the past year.
In response to financial strain, consumers are adapting their credit card usage. A recent J.D. Power study revealed a rising trend in switching to cash-back cards as primary credit cards over miles and points cards, often due to higher annual fees associated with rewards cards. Experts suggest that cash-back or balance transfer cards become more attractive options when money is tight. Credit card issuers are also responding by emphasizing interest-lowering options like balance transfer promotions, built-in buy now, pay later (BNPL) features, and the ability to borrow against credit limits at fixed, lower rates.
Innovation and the Future of Digital Payments
Visa’s strategic investments in innovation further solidify its long-term growth prospects. The company has established innovation centers globally to foster advancements tailored to local markets, such as its Africa innovation center launching a small business card-acceptance solution and a digital wallet compatible with any bank.
Moreover, Visa is actively venturing into cryptocurrency partnerships and has launched a new platform through its Currencycloud arm to simplify cross-border payments. This area is projected by the Bank of England to grow substantially, from $150 trillion in 2017 to an estimated $250 trillion by 2027, representing a significant opportunity for Visa’s transaction-based revenue model.
The acceleration of digital payment adoption, especially among younger generations, provides an additional tailwind. A survey by Interac Corp. highlights that 69% of Gen Z Canadian adults have adopted mobile wallets, with 63% leaving physical wallets at home for short trips. This preference has driven a 27% increase in Interac debit mobile contactless payments in the first half of 2024 compared to the same period in 2023, underscoring the irreversible shift towards digital and mobile-first payment solutions.
Investment Outlook: Why Visa Remains a Strong Contender
While U.S. banks, including major players like JPMorgan Chase & Co. and Citigroup, are experiencing an upturn in credit card borrowing and benefiting from consumers allowing balances to revolve and incur interest charges, Visa’s position remains distinct. As noted by Reuben Gregg Brewer for The Motley Fool, Visa and Mastercard are “toll takers” that face little to no credit risk, making them generally more resilient during economic fluctuations compared to companies that both issue cards and carry customer loans on their books, such as Capital One or American Express.
For investors seeking long-term growth and stability within the financial sector, Visa’s business model, its consistent transaction volume growth, and its strategic embrace of digital and cross-border payment innovations make it a compelling choice. Its resilience amidst economic downturns is not just a fortunate outcome but a fundamental aspect of its design, positioning it as a bedrock investment in the ever-evolving landscape of global commerce.
