Visa's Growth Strategy: CFO Christopher Suh Insights

The recent Goldman Sachs Communacopia + Technology Conference provided a platform for Visa's Chief Financial Officer, Christopher Suh, to share valuable insights into the company's performance, strategies, and outlook. This post delves into the key takeaways from the conference, offering a comprehensive analysis of Visa's position in the evolving payments landscape.

Current Market Trends and Consumer Behavior

Suh began by addressing recent market trends and consumer behavior, particularly in light of the post-COVID economic environment. Despite various economic challenges, Visa has observed remarkable stability in consumer spending patterns.

"When we look at our data, the thing that I just said and the thing that we've really said through the course of the year is that underlying trends have been stable, which is another way of saying consumer has been held up remarkably well."

This statement underscores the resilience of consumer spending, even in the face of economic uncertainties. Suh further elaborated on the current state of U.S. payment volumes:

"U.S. payment volumes quarter-to-date through August, up 5%, which is consistent with Q3. Cross-border excluding intra-Europe in total, up 13% quarter-to-date, which is exactly in line with the expectation that we had for Q4."

These figures suggest that Visa's business remains on a steady growth trajectory, with consistent performance across key metrics. The stability in payment volumes, particularly in the U.S. market, indicates that consumer spending habits have largely normalized post-pandemic.

The Future of U.S. Card Spend Growth

A significant portion of the discussion focused on the future growth prospects for card spending in the U.S. market. Suh painted an optimistic picture, highlighting several factors that contribute to Visa's positive outlook:

1. Ongoing Cash Digitization: Despite the maturity of the U.S. market, there's still significant room for growth in terms of cash-to-card conversion.
2. Tap-to-Pay Adoption: The U.S. market lags behind global averages in contactless payment adoption, presenting a clear growth opportunity.
3. E-commerce Expansion: The continued growth of online shopping naturally favors card payments over cash transactions.
4. New Payment Flows: Visa is actively targeting traditionally non-carded payment areas such as rent and loan repayments.

Suh quantified the opportunity:

"Recently, we shared an updated view, the consumer payments opportunity globally. It's a $20 trillion opportunity still in front of us. And that $20 trillion is comprised of cash and check, which is roughly half that volume, half that addressable opportunity, ACH and other forms of digital payment as well, makeup and other domestic schemes make up sort of the remainder of that. About 1/4 of that -- $20 trillion is a ginormous number, and about 1/4 of that opportunity is still in the U.S. by our estimation."

This $5 trillion opportunity in the U.S. alone underscores the significant growth potential that remains in Visa's core market.

Value-Added Services: A Key Growth Driver

One of the most exciting areas of growth for Visa is its Value-Added Services (VAS) segment. This division has been consistently delivering impressive results, as Suh noted:

"For value-added services, Q3 $2.3 billion, growing 20-plus percent, again, for the -- every quarter this year, we've grown north of 20%. And so there's durable consistent growth in a business that $2.2 billion was 25% of our business in Q3."

The VAS business is strategically important for Visa for several reasons:

1. Deepening Client Relationships: By providing additional services, Visa strengthens its partnerships with financial institutions and merchants.
2. Innovation Pipeline: VAS serves as a conduit for introducing new products and services, helping Visa stay at the forefront of payment technology.
3. Expanding Addressable Market: These services allow Visa to tap into new revenue streams beyond traditional transaction processing.
4. Geographical Expansion: VAS provides opportunities for growth in markets where Visa's core business might be approaching saturation.

Suh emphasized the complementary nature of VAS to Visa's core business:

"I don't think about it as a shift away. I don't think about it as an ore. I think about it as an and. It's much more complementary in that nature."

This perspective highlights how VAS is not cannibalizing Visa's traditional revenue streams but rather augmenting them, creating a virtuous cycle of growth across the entire Visa ecosystem.

New Flows: The Next Frontier

Beyond consumer payments and value-added services, Visa is aggressively pursuing opportunities in what it terms "New Flows." This category encompasses a wide range of payment types that have traditionally been outside Visa's core business, particularly in the B2B space.

Suh quantified the immense potential of this market:

"New Flows for us is maybe the biggest addressable market opportunity. It's early days, but it's really one of the biggest. We've sized that at $200 trillion."

To put this number into perspective, Suh added:

"My partner and friend, Chris Newkirk, who runs -- who's the leader of our New Flows business at Visa, he likes to point out that $200 trillion, that's 44x the total U.S. federal tax income in a year."

This staggering figure underscores the transformative potential of New Flows for Visa's long-term growth prospects. However, it's important to note that this is a long-term opportunity. Visa is still in the early stages of penetrating this market, as evidenced by Suh's comment on their progress in the B2B space:

"So the most mature piece of that opportunity is our carded B2B business in DCS, that's $20 trillion. So it's 10% of the total opportunity. And that $20 trillion opportunity, in 2003, our payment volume was $1.6 trillion of that. So it's less than 10% of a sliver, of -- that is less than 10% of the whole opportunity."

Visa's strategy for capturing this opportunity involves leveraging its existing strengths:

1. Network Scale and Reach: Visa's global network provides a robust foundation for expanding into new payment flows.
2. Trust and Brand Recognition: Visa's established reputation in consumer payments can be leveraged to gain traction in B2B and other new segments.
3. Technological Capabilities: Visa's investments in areas like blockchain and real-time payments position it well to address the unique needs of these new markets.
4. Partnerships: Collaborations with fintech companies, ERP providers, and other relevant players will be crucial for success in New Flows.

Cross-Border Trends and Outlook

Cross-border payments represent a significant and high-margin portion of Visa's business. Suh provided insights into the current state and future outlook of this segment:

"Today, when we look at the business, there's been sort of a permanent structural shift. We have e-commerce that is now about 40% of the business. And it's continuing to grow at a very healthy clip."

This shift towards e-commerce in cross-border payments is particularly noteworthy, as it represents a more stable and potentially higher-growth component of the business compared to travel-related spending.

Regarding travel-related cross-border spending, Suh noted:

"Travel is the one that has been harder to predict, like it's continued to be elevated in a bunch of regions. It's lagging in AP. We talked about that. I think anyone who's been in an airport recently see it's busy. Travel doesn't look like it's abating."

The uneven recovery in travel spending, particularly the lag in the Asia-Pacific region, presents both challenges and opportunities for Visa. As travel patterns continue to normalize globally, there's potential for further growth in this segment.

Addressing Legal and Regulatory Challenges

The conference also touched on the ongoing legal challenges facing Visa, particularly regarding merchant fees. Suh addressed this topic diplomatically:

"We are obviously disappointed with the judge's ruling to reject the settlement. We thought the settlement was fair and provided for a meaningful relief to all merchants. And we think the decision actually failed to take into full consideration the complexity of the multisided ecosystem that we operate in."

While legal issues can create uncertainty, Visa's approach of pursuing settlement and continuing to educate stakeholders about the complexities of the payments ecosystem demonstrates a proactive stance in addressing these challenges.

Long-Term Growth Outlook

Throughout the conference, Suh consistently conveyed confidence in Visa's ability to maintain strong growth over the long term. This optimism is rooted in several factors:

1. Large Addressable Markets: Between the remaining opportunities in consumer payments, the growing VAS business, and the vast potential in New Flows, Visa has multiple avenues for expansion.
2. Technological Innovation: Visa continues to invest in cutting-edge technologies that enhance its value proposition to clients and consumers alike.
3. Global Expansion: Many international markets, particularly in Asia and Africa, are still in the early stages of payments modernization, providing significant growth runways.
4. Diversification of Revenue Streams: The mix of transaction-based revenues, value-added services, and new payment flows creates a more resilient business model.

Suh summarized this outlook:

"Looking at consumer payments, this is the business we've been in for many years, and we know how to operate there and continue to grow value-added services, execution, the size, the breadth, the momentum and the opportunity of New Flows. When you put all that together, you could see sort of the reason why I'm bullish about our growth."

Conclusion

The Goldman Sachs Communacopia + Technology Conference provided valuable insights into Visa's current position and future prospects. Despite economic uncertainties and evolving market dynamics, Visa appears well-positioned to capitalize on the ongoing digitization of payments globally.

Key takeaways for those following Visa's stock include:

1. Resilient Core Business: Visa's traditional consumer payments business continues to show strength, with stable growth in key metrics.
2. Value-Added Services as a Growth Engine: The rapid expansion of Visa's VAS segment provides a new avenue for growth and deepens client relationships.
3. Enormous Potential in New Flows: The $200 trillion opportunity in B2B and other new payment flows represents a significant long-term growth driver.
4. Cross-Border Recovery: While uneven, the recovery in cross-border payments, particularly the shift towards e-commerce, bodes well for this high-margin segment.
5. Proactive Approach to Challenges: Visa's handling of legal and regulatory issues demonstrates a thoughtful approach to navigating potential headwinds.

As the payments landscape continues to evolve, Visa's multi-pronged strategy and strong market position suggest it is well-equipped to maintain its leadership role in the global payments ecosystem. However, as with any investment, it's crucial to continue monitoring the company's execution against its stated goals and any shifts in the competitive or regulatory environment that could impact its growth trajectory.