It took a blow-out fourth quarter for JPMorgan Chase (NYSE:JPM) to get ahead of Visa (NYSE:V) as the country’s most-valuable banking company.
JPM’s great quarter sent it up 2% to a market capitalization just over that of Visa. But early on Jan. 15, Visa reclaimed its lead.
Why was that victory so brief? Visa is raising the stakes on the whole sector with its $5.3 billion bid for Plaid, a fintech company that gives software access to users’ bank accounts.
Visa was among the companies investing in Plaid. Its bid was twice the latest private valuation of the company. Visa is calling this a defensive move, as its CEO Al Kelly expressed concerns over Plaid’s security recently, but it’s anything but.
The Big Get Bigger
Visa draws an enormous valuation from Wall Street, about 20 times its annual revenue, because it consistently brings half that revenue to its net income line. The company is due to report earnings for 2019 on Jan. 28, and more good news is expected. Estimates call for earnings per share of $1.46 on revenue of $6.1 billion.
Visa dominates and even defines the business of credit and debit card processing. Despite enormous growth over the last two decades, cash still represents 31% of U.S. payments, and 24% of consumers only pay with cash. But debit and credit cards now represent a combined 45% of payments.
Merchant processors take 2%-3% off the top on credit card transactions. There is also a per-transaction “swipe” fee on both credit and debit cards. They also get to keep the balances on their books between the transaction date and settlement, bringing in even more income.
Cards are great for the banks as well. JPMorgan itself has almost 15% of the market, helped by its arrangement with Amazon (NASDAQ:AMZN). Citigroup (NYSE:C) has the largest share, thanks in part to Costco (NASDAQ:COST).
The Fintech Challenge
These cozy arrangements are being challenged, however, by a host of financial technology or fintech companies.
Their software is new and thus carries much less technology debt than that of the big processors. PayPal (NASDAQ:PYPL) is among the bigger challengers with its Venmo digital wallet. But for Venmo to work it must manipulate customer bank records.
It does that with Plaid.
Fintech startups like Plaid and Square (NYSE:SQ) have caused a rush of consolidation in the payments industry. Existing players need scale to hide the fact that many still use mainframes and have very complex software. That’s why Fiserv (NASDAQ:FISV) bought First Data. That’s why Fidelity National Information Services (NYSE:FIS) bought Worldpay.
Fintechs can add more services, like accounting software and even loans, to the merchant mix. They are gaining even more strength from international operations. That market is growing at 7.8% per year and should reach $2 trillion over the next five years.
Then there’s the brokerage business, which is also consolidating thanks to Robinhood. All this consolidation brings huge fees, and huge gains for the companies being acquired. TD Ameritrade (NASDAQ:AMTD) rose 20% after Charles Schwab (NYSE:SCHW) said it would buy it for scale.
The Bottom Line on V Stock
Fintech remains a huge challenge to processors like Visa, because smaller companies can write software for clouds and cut prices for merchants and consumers alike.
But the Plaid deal shows how Visa, and the big banks, will survive. They’ll buy it up, just as the cloud companies buy up new technologies which rise to meet them. The cost is affordable. Visa had almost $12 billion in cash and short-term securities on its books at the end of September.
JPMorgan needs to watch its back.
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 danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in JPM, AMZN and SCHW.
