How Visa Became the Biggest Financial Company in the World

In the previous episodes, we’ve dicussed about currencies and how cash was increasingly playing a smaller role, even in fast growing countries like China & India! The disruptor, that helped transition countries into cashless economies: Credit Cards and Debit Cards.

In 2021, transactions on these plastic cards hit $6.7 TRILLION USD. Like many other technology industries, COVID helped accelerate the shift from cash to cashless. For the average American, more than half of their transactions were done using a credit or debit card!

My first thought on the largest benefactor is the banking industry but there is an even larger player in this field that caught our attention… Payment processing companies like VISA surpassed JP Morgan Chase as the biggest financial services company in America in 2020, boasting operating margins of up to 65%.

Today, on Things Have Changed, we’re going to tackle a question of: How did VISA become the most valuable payment card company in the world?

Helpful Links:

• Average Credit Card Processing Fees
• Retailers call out VISA and Mastercard for fee hikes that could make inflation worse
• Credit Card Marketshare in the US
• Understanding Credit Card Swipe Fees
• How VISA became the TOP DOG in Finance
• Can the Visa-Mastercard duopoly be broken?
• As merchants complain of Visa’s high swipe fees, experts weigh in on the company’s role in the retail market
• How Visa Makes Money‍
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Highlights

How VISA Became the King of Plastic Money

Episode 1: The Rise of Cashless Transactions

In recent times, we've witnessed a remarkable shift towards cashless economies, even in rapidly growing countries like China and India. The driving force behind this transition has been the widespread adoption of credit and debit cards, disrupting the traditional reliance on cash.

In 2021, transactions on these plastic cards hit a staggering $6.7 trillion USD worldwide. Like many other technology industries, the COVID-19 pandemic accelerated the shift from cash to cashless. For the average American, more than half of their transactions were conducted using a credit or debit card!

While the banking industry may seem like the obvious beneficiary, there is an even larger player in this field that has caught our attention – payment processing companies like VISA. In 2020, VISA surpassed JPMorgan Chase as the most valuable financial services company in America, boasting impressive margins of 65%.

Today, on Things Have Changed, we'll explore the question: How did VISA become the most valuable payment card company in the world?

How VISA Changed the Retail Industry

• The King of Plastic: Bank of America launched VISA, the first licensed credit card, in 1958.
  • In 1970, Bank of America gave up control and granted it to issuers.
  • The first debit card was introduced in 1975.
  • Over 10,000 banks collectively owned Visa until it was spun out in 2008.
  • Visa may not be literally "everywhere you want to be," but it's close.
• Global Reach: VISA boasts 3.4 billion cards in the market across over 200 countries and territories.
• Massive Purchase Volume: In the US alone, VISA facilitated $4 trillion in purchase volume in 2020!
• Seamless Transactions: VISA allowed people to transact across different networks, under the security of multiple financial institutions.
• The Middleman: VISA operates as a middleman in a four-party model:
  • Consumer Bank (Your Bank)
  • Consumer (You)
  • Merchant Selling Product
  • VISA - connecting you all as the middleman
• Global Acceptance: You can walk into any retailer in the world and expect them to accept your VISA card.
• Cashless Shift: American consumers used credit or debit cards for 45% of their transactions in 2016; by 2021, that had reached 57%.

How VISA Makes Money

• Infrastructure and Rails: VISA has built the infrastructure and rails for the flow of payments, charging for their use.
• Swipe Fees:
  • Credit card swipe fees, also known as interchange fees, are per-use fees charged by banks to merchants using credit or debit cards.
  • These fees average around 2-2.5% of the cost of the transaction.
  • No risk in lending money.
  • No direct relationship with users (only merchants).
  • These fees can be passed on to the consumer or absorbed by the merchant.
  • In 2021, merchants paid credit card companies $105.23 billion in credit and debit swipe fees, up 25% from 2020.

VISA's Dominance in Payments

• Competition by Credit Card Networks in the US:
  • In terms of purchasing volume, Visa is the clear leader with more than $2 trillion in 2021. Mastercard is the second-closest competitor with over $1 trillion.
  • Over the past 5 years, Visa has consistently maintained at least 50% of the market share among the four major networks, steadily increasing its market share from 50.57% in 2017 to 53.99% in 2020. However, in 2021, it dropped slightly to 52.6%, but still higher than the 2020 percentage.
• Most Valuable Financial Services Firm:
  • In 2020, VISA overtook JPMorgan Chase to become the world's most valuable financial services firm.
  • Traditionally, big banks with trillion-dollar balance sheets were the top dogs in finance. No longer.
  • Unless a rival emerges that is literally everywhere consumers want to be, Visa will be hard to dislodge from its cozy perch.
  • Even better, VISA's operating margins have swollen from a rich 43% to a heart-stopping 65% over the past 12 years.
  • Of the world's 100 biggest listed firms by market value, last year, only a state-run Chinese booze giant and Saudi Aramco, an oil colossus, had higher margins than VISA.
  • Even the juicy 20-25% levels of technology darlings like Apple and Alphabet are meager in comparison to VISA's massive margins.

With its global reach, seamless transaction infrastructure, and impressive profitability, VISA has solidified its position as the king of plastic money, leading the charge towards a cashless future.