Visa is the outright leader in a duopolistic payments industry with market share two times that of its closest rival Mastercard.
Deep strategic competitive advantage and formidable barriers to entry
Visa’s ubiquity is indisputable, with over 3.3 billion cards in issue and relationships with thousands of financial institutions and millions of merchants globally. The scale of Visa’s global acceptance enables thousands of real time global transactions that are reliable, secure and accurate. The powerful network effect from global acceptance has proven to be enormously difficult to replicate by many competitors who have tried and failed or realised Visa’s position and instead, chosen to partner them. The nature of Visa’s global acceptance creates a virtually insurmountable barrier to entry for new competitors.
Figure 13. Dominant market position. Source: Bloomberg.. March 2019.
Attractive structural industry growth
The market opportunity for Visa remains enormous and should grow rapidly, driven by a long-term secular shift from cash to digital payments. The Consumer-to-Business (C2B) payments market is still only circa. 48% penetrated. Even when this market becomes saturated, there are two adjacent market opportunities which are the Business-to-Business (B2B) and Person-to-Person (P2P) / Business-to-Consumer (B2C) markets to capture that are virtually unpenetrated. The B2B market is only at card penetration levels of 2% and incumbents have only recently begun building capabilities to serve this large market.
Competition and regulation: friend or foe?
The attractive characteristics of the payments landscape such as size, growth potential, low capital intensity and high profitability has inevitably attracted competition as well as the attention of regulators. Some of the most commonly debated threats to Visa and Mastercard’s duopoly status stem from increased competition, innovation and regulatory intervention by governments.
Threats from a regulatory perspective are focused on either providing and incentivising the use of alternative payment methods and/or encouraging more competition. That said, there are compelling incentives for governments to work with existing players to encourage the adoption of cashless payments and to grow the market. These include reduced financial crime and increased tax revenues. This will ultimately benefit incumbents and, given the large cash opportunity, regulatory induced competition might result in the market growing faster.
Figure 14. Penetration rate of payment method by payment flows. Source: Mastercard Investor Presentation. March 2019.
The potential re-entry of internet giants like Amazon and Google, and competition in emerging markets where cardbased payments are still in their infancy, compared to developed economies, pose competitive threats to entrenched players. This presents an opportunity for new competitors such as Alipay and Tencent Pay to enter into geographies where existing participants are still in the process of entrenching themselves. Having said that, it is important to bear in mind that payment systems/platforms are technically complex, which is often underappreciated.
Many internet giants have tried and failed to disrupt Visa and Mastercard with multiple offerings, often choosing to partner, rather than take them head on. With regards to the emerging market threat, although the landscape will undoubtedly be more competitive, incumbents have the global scale and technical expertise to compete and are steadily growing market share in these regions.
Cash the number one opportunity?
Considering the dynamism of the payments landscape, the aforementioned threats bear close monitoring, despite not posing a near term risk to the market leaders’ competitive positions. Ultimately, the long growth runway ahead, driven by a secular shift from cash to digital, means that most competitors and governments, have and will continue to prioritize attacking cash as a means of payment, rather than fighting each other for market share.
In conclusion, we believe that the cash to card secular tailwinds outweigh the increasing competitive dynamics being felt in the industry and consequently, we remain happy shareholders of Visa.