How Visa Makes Money: Data Processing, Service, and International Transactions

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Visa, Inc. (V) is one of the dominant digital payments brands globally, providing services in about 200 nations to individual consumers, merchants, financial institutions, and governments. While best known for its Visa credit card used by millions of consumers, the company provides an unusually broad range of services. That includes authorization, clearing, and settlement services for financial institutions and merchants; and credit, debit, and prepaid card services to consumers and businesses.

Visa makes its profits by selling services as a middleman between financial institutions and merchants. The company does not profit from the interest charged on Visa-branded card payments, which instead goes to the card-issuing financial institution. Visa so dominates the market that it has only a handful of big rivals, including Mastercard, Inc. (MA), as well as digital payments companies such as PayPal Holdings, Inc. (PYPL).

Key Takeaways

  • Visa is a digital payments company providing transactions between financial institutions, consumers, merchants, and banks.
  • The company’s data processing operations generate the largest portion of revenue.
  • Visa’s strategy is to aggressively expand its presence in contactless payments, e-commerce, and other digital vehicles.
  • The company in January agreed to acquire for $5.3 billion fintech startup Plaid, a network allowing individuals to securely connect financial accounts to apps.

Visa’s Financials

Visa generated $29.2 billion in gross revenue in FY 2019, ended September 30, a year-over-year (YOY) increase of 11.6%. After accounting for $6.2 billion in costs associated with client incentives, Visa generated $23.0 billion in net revenue during the same time period. Net revenue has posted consistent gains in recent years, rising 11.4% in FY 2019. Visa gets the majority of its sales abroad, generating $12.7 billion from its international operations and $10.3 billion from the U.S.

The company’s profit growth outstripped its revenue gains last year. In FY 2019, Visa reported net income of $12.1 billion, up 17.3% YOY. In the most recent quarter, growth slowed but remained strong. Visa reported a 10% year-over-year increase in both net income and revenue.

Visa’s Business Segments

Visa reports as a single segment, which is Payment Services. But it routinely divides its revenue into four subsegments, which are the major generators of revenue for the company. Visa describes these subsegments both as “components” of net revenue and also as part of the larger gross revenue number. For our purposes, we break down in the pie chart above by showing the share that each of these four segments comprises of the company’s $29.2 billion in gross revenue: Service Revenue, Data Processing Revenue, International Transaction Revenue, and Other Revenue. Visa does not provide net income figures for each of these subsegments.

Service Revenue

Visa’s service subsegment consists of revenue from services provided to support client usage of Visa’s payment services. This is separate from the authorization, clearing, and settlement related to the company’s payment services, which is included elsewhere. For FY 2019, Visa’s service revenue was $9.7 billion, or about 33% of the company’s gross revenue. This is up 8.8% YOY.

Data Processing Revenue

Visa’s data processing revenue includes all revenue generated as a result of the company’s clearing, settlement, authorization, network access and similar services. In FY 2019, data processing revenue accounted for the largest portion of the company’s gross revenue: $10.3 billion or more than 35%. This figure is up 14.5% YOY.

International Transaction Revenue

Visa is heavily involved in cross-border transaction processing and currency conversion, and these activities generate revenue in the subsegment of international transaction revenue. For FY 2019, international transaction revenue was $7.8 billion, or nearly 27% of gross revenue. Up 8.2% YOY, this was the subsegment with the smallest percentage growth.

Other Revenue

Visa also earns revenue from license fees, value-added services, account holder services, and more. These sources are grouped together as Other. At $1.3 billion or nearly 5% of Visa’s FY 2019 gross revenue, Other accounts for the smallest portion of revenue. However, it is also the fastest growing. This subsegment grew by 39.1% YOY in FY2019.

Visa’s Recent Developments

Visa is rapidly moving into new digital payments areas. The company announced in mid-January that its Visa Token Service, a security technology helping to facilitate e-commerce, had achieved combined e-commerce payments volume of $1 trillion across its participants. Visa also announced in January that it had signed a definitive agreement to acquire fintech startup Plaid for $5.3 billion. Plaid is a network allowing individuals to securely connect financial accounts to apps they use on a regular basis.

Source: Investopedia

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