Visa Inc (NYSE: V) sports one of the most iconic brands in the world. The 2017 BrandZ Survey of Top 100 Global Brands determined Visa had the world's seventh most valuable brand. In truth, it would be hard to find a consumer anywhere in the developed world who doesn't recognize the company's name or immediately identify it as the emblem that is emblazoned across most of the beloved plastic rectangles we carry in our wallets. Savvy investors might know Visa just represents the payment network used to transfer funds from the issuing bank to the merchant bank when a purchase is made. However, here are five things you probably don't know about the world's largest payment network.
1. Bank of America played a role in Visa's founding
In September 1958, Bank of America Corp (NYSE: BAC) launched BankAmericard, the first consumer credit card, as we would recognize it, that could be accepted and used by any type of merchant. At the time it was common for consumers to have separate credit accounts with each merchant they regularly did business with, making for a very inefficient and cumbersome experience for customers. Bank of America piloted the program in Fresno, CA because of its large market share in the California suburb and its desirable population for such an experiment.
In a move that now seems simply incredible, Bank of America decided the best way to launch this program was to mail unsolicited cards with a $300 credit limit to all its customers in the municipality. Mind you, these were the actual credit cards, not applications. By the end of 1959 more than two million cards had been mailed across California and more than 20,000 merchants accepted the card. At this time, a whopping 22% of all accounts were delinquent and credit card fraud was rampant. Yet, Bank of America saw the potential for the platform and set about fixing the problems instead of scrapping the program.
2. Licensing agreements lead to Visa's conception
While Bank of America's original goal was to blanket the state of California with cards, other banks soon wanted a piece of the action. In 1966, BankAmericard began signing licensing agreements with other banks who wanted to use the card system because regulations at the time prohibited Bank of America from directly launching the card in other states. In just a few years, the net effect was a large payment network with an international presence but with dozens of localized brand names. In 1976, Bank of America and the card's licensees formed a new corporate structure for the card under the Visa name.
3. Amazing stock returns
Since going public on March 19, 2008 -- just five days after JPMorgan Chase offered to buy what was left of Bear Stearns -- Visa's returns have trounced the market! Nor do the company's shares show any sign of slowing down either as, year-to-date, Visa's stock price is up 22%.
4. Visa's many litigation risks
You would be hard-pressed to find a pair of companies that have faced more lawsuits than Mastercard Inc (NYSE: MA) and Visa. Late last year, the U.S. Supreme Court ruled an antitrust lawsuit brought by consumers against the credit card network operators could proceed after a lower court had previously dismissed the case. The lawsuit alleges Mastercard and Visa conspired to keep ATM fees high and is still working its way through the legal system.
In the summer of 2016, a federal appeals court threw out an eye-popping settlement of $7.25 billion rewarded to retailers in 2012. The settlement stemmed from a lawsuit brought by thousands of merchants against Mastercard and Visa for artificially keeping credit and debit card negotiation fees high. Despite the record settlement, many parties in the lawsuit were not placated and fought to overturn the decision. The settlement will now either be renegotiated or the case will go back to trial.
Visa faces similar legal battles across the globe.
5. Visa's unique business model
Since some confusion exists on this point, it is important to understand that Visa does not actually loan money to any consumers. Rather, Mastercard and Visa stand as middlemen that enable money to move from the consumer's card-issuing bank to the merchant's point-of-sale to the merchant's bank. In return for facilitating these purchases, Mastercard and Visa earn a tiny sliver of revenue from each transaction.
Service revenues are what Visa earns from the card-issuing financial institutions that use Visa's products and services. This revenue is primarily based on payment volume, meaning the higher the dollar amount spent across each transaction the more Visa makes. Data processing revenues are the fees Visa collects for the authorization, clearing, and settlement of each transaction.
There are pros and cons to this model. On the negative side, consumers pay lots of interest on their credit card debt each year and none of this money flows into Visa's coffers. On the plus side, Visa faces none of the corresponding loan default risk associated with lending money. Because Visa is not liable for any credit risk, the market has generally assigned it a much higher valuation than its card-issuing peers.
Visa has a history dating much further back than the relatively short time it has spent as a publicly traded company. While past returns never guarantee future results, Visa's spectacular success and the returns it has provided its investors speak well of its business model. Although the company is not without risks -- what company is! -- its future could be as richly rewarding as its past to shareholders given its moat and long runway of growth.
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