Every bank is a fintech now. In this world, having money matters less than being able to move it. That’s why Visa (NYSE:V) is worth more than JPMorgan Chase (NYSE:JPM), with its nearly $2.7 trillion asset base.
It’s not even close. After rising about 11% for 2019, Visa is now worth nearly $100 billion more than the country’s largest bank.
But the crown hangs heavy. Smaller, nimbler, cloud-based start-ups keep chipping away at Visa’s leadership. They can move money for less than Visa charges, and in ways foreign to Visa’s card-based business model.
The question for investors is, should you stay with the new money, or switch to the newer money, like PayPal (NASDAQ:PYPL).
Problems Hang Over Visa Stock
In 2020, the answer was PayPal.
PayPal, founded in 1998 by a now-legendary crew that included Elon Musk of Tesla (NASDAQ:TSLA) and Peter Thiel of Palantir (NASDAQ:PLTR), has nearly doubled in value over the last year. It is now worth $251 billion, against Visa’s $463 billion. It provides an alternative payment system, which costs consumers less and small merchants much less than swiping a customer’s Visa card.
During the September quarter, PayPal payment volumes grew 38%, while Visa’s grew just 4%. Payments across borders, which bring in big revenue for Visa, were down 16%, and processed transactions grew just 2%.
Behind PayPal rides Square (NASDAQ:SQ), whose cloud-based system lets it do things Visa can’t dream of. These include accounting and business loans. Then there are the privately held unicorns like Chime, SoFi and Robinhood, each of which is taking apart a different piece of the old banking system.
That’s where the real threat lies.
Holding Back From the Future
The assumption going into the last decade was that banks, and by extension payment processors, could snap up the fastest-growing fintechs and absorb them. The sky-high valuations, enabled in part by fintech technology, placed on these companies have prevented it.
Visa, for instance, can’t justify the cost of buying Chime, with its $200 billion of revenue, and Chime wouldn’t sell. Chime is worth $14.5 billion now, and with each funding round that goes up. It would take a minimum of $25 billion to take out the neobank, adding just 1% to Visa’s revenue base.
The antitrust police wouldn’t let Visa buy Chime anyway. The Department of Justice is already fighting Visa’s planned $5.3 billion takeover of Plaid, whose money-moving tech underlies apps like PayPal’s Venmo.
Even before the ink is dry on that deal, Visa is plotting support for new forms of payments using Plaid. But without Plaid, or something like it, Visa could have its duopoly with Mastercard (NYSE:MA) bypassed by customers paying merchants directly.
Visa is left trying to cobble together alternatives, through joint ventures like Singapore’s Razer Card, which leaves the fintech with most of the profit.
At the same time, as the largest payments player, Visa finds itself increasingly the target of hackers. Hackers with quantum computers could easily break the network’s strongest encryption. Chasing the future costs money.
The Bottom Line on Visa Stock
The clouds surrounding Visa, and its vast global ecosystem of payment processors, are only going to grow, casting a shadow over Visa stock.
Moore’s Law means change accelerates in all directions, so no lead is safe. Visa and its allies can switch processing to the cloud. But they’re still dealing with massive technology debt. That debt consists of software written over decades for business models that apps can make obsolete.
The investment case for Visa, then, rides on what happens with Plaid. Unless the processors can buy the future, or create alternatives to patented business models, they could be just what JPMorgan Chase is in five years, obsolete.
That’s the real risk in Visa stock today, not the pandemic slowdown.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn.