The best bank stock to own isn’t a bank. It’s Visa (NYSE:V), the payments processor. V stock is up 178% over the last five years. Its market cap entering trade Dec. 18 was $412 billion. JPMorgan Chase (NYSE:JPM), by comparison, is worth $433 billion. During the last two years gains at Visa have more than doubled those at the big bank.
All payment processors, like rival Mastercard (NYSE:MA), have proven to be great investments this decade as consumers have moved away from cash, toward credit and debit cards. Merchants pay a roughly 2.5% “discount” to take credit cards, often with a per-transaction fee, and consumers pay to use the cards, too.
The question investors are asking is whether this can continue. Signs point to “yes” but watch out for the warnings.
Visa and its rivals spent this decade rolling out chip-based cards, a Europay, Mastercard and Visa (EMV) standard with more security than magnetic stripes. They’re so secure the processors quietly pushed through a “liability shift,” putting businesses rather than card issuers on the hook for fraud.
But the cards, and readers, cost more than mag stripes. Many gas stations have been slow to install EMV readers at gas pumps, which encrypt transactions as they occur. Scammers have gotten into some gas station networks to steal credit card numbers. Beware.
One reason progress was slow on security is that losses are manageable. Credit card fraud has been increasing, but it still represents a small part of the whole.
Management and shareholders should heed another warning: the growing use of surcharges and cash discounts by merchants. This became legal only in 2013 but is spreading rapidly, with many charities now seeking to impose extra charges on donors who contribute via card.
The market is also starting to press in on payment charges. Systems like Alipay from Alibaba Group Holding (NYSE:BABA) and India’s Unified Payments Interface are chipping away at credit card growth in the developing world. Phone technology can be updated quickly. It’s estimated banks could lose up to 15% of their card revenue to fintech startups over the next few years.
But phones also represent a potential growth market. It’s estimated 1.7 billion people still only use cash. Visa has a plan for that, dubbed Visa Partners, supporting phone-based payments and accounts.
Visa has a tiny dividend, preferring stock buybacks. This year it has averaged $2 billion in share repurchases per quarter. Visa has also been on an acquisition binge in 2019, buying cross-border payment services company Earthport, payment gateway Payworks, and dispute resolution company Verifi.
Buybacks mean Visa is a stock for growth investors, despite revenues increasing only 10% per year. For the 2019 fiscal year, which ended in September, Visa reported earnings of $12.1 billion, $5.32 per share, on revenues of $23 billion.
Good times, however, make for expensive stocks. At its Dec. 18 opening price of $185.71, Visa shares were trading at 35 times earnings, and almost 20 times revenue. Mastercard is even more expensive.
Bottom Line on Visa Stock
My wife, who has worked in the payments industry most of her adult life, tells me she likes working on software that makes money. Maybe it’s just a penny or less each time her programs run, but it adds up.
It has certainly added up for Visa, and the other processors, during the 2010s. If I owned Visa stock, I’d be taking some profits, given how expensive it is. But keep some money on the table.
My wife’s usually right.
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in JPM and BABA.