V - Visa

[coc]

I agree with @PeterHK. I will also elaborate a few other points in addition to his.

 

If Facebook or whoever else wants to get into the credit card processing game, they have to be prepared to extend credit. That is a totally different game and I haven’t seen any proposals that any tech company wants to do that. Essentially becoming part bank. Visa/MasterCard is really a front for a cartel of thousands of credit card companies (banks).

 

The “debit” side seems easier to break, but has an important caveat as well: The payor and the merchant must both be on board. This has many implications.

 

Let’s start with the economics. For a merchant taking debit and credit, the economics on a $10 transactions might look like this:

 

Interchange fee (regulated under Durbin): $0.21 + .05% = $0.26

Processing fee (to First Data et al): $0.15

 

Total: $0.41c or 4.1%. Not cheap. However, many of these costs don’t scale if you sell higher ticket items. On a $50 transaction, that’s only 1.2%. (You can see why fast food places, gas stations, etc. struggle the most with payment processing costs).

 

Let’s propose that Amazon wants to “disrupt” payments to save on these fees. They’d need me, the consumer, to let them access my bank account to fund an Amazon Pay account (like a PayPal account). Then they’d need all of their merchants to have an Amazon Pay account linked to their bank accounts. Now we’re outside the V/MA ecosystem. Even then, Amazon Pay would only allow me to buy and sell via Amazon. It would be a specialized Amazon payment system.

 

Now let’s say they do it for free — no fees to the merchants on the Marketplace. Sounds great for the merchant. But why would I, the consumer, go through the hassle of opening an Amazon payments account - just for that one site? It would have to be because Amazon will offer me rewards - better rewards than my bank offers.

 

Great — so now Amazon is taking a hit to its margins on each sale to fund rewards. It will also start taking a hit on fraud losses it must manage, as well as chargebacks for disputed transactions. They would also need staff to run this whole platform, as well as huge IT costs, which would be high as a percentage of all transactions done on Amazon, in the early days before the venture scaled.

 

Even if Amazon did succeed in this venture, they’d only have created a system that can be used to pay merchants on Amazon. In order for Amazon Pay to escape Amazon itself — and become more attractive to me as a user — they would then have to go to merchants all around the world — millions of them — and get them to open Amazon Pay accounts, so I can spend my Amazon Bucks there. This activity is done today by merchant acquirers - not by Visa/MasterCard itself. (First Data, Worldpay, etc.) Huge effort and costs, and many years of work.

 

What’s the attraction to a merchant? As a merchant, I might be willing to sign on if Amazon was taking the economic hit and offering free payment processing. However:

 

(1) Why would Amazon help their competitors?

(2) Why would Amazon’s competitors help Amazon?

 

And another problem arises: Until Amazon has a monopoly, as a merchant I’d now have to manage my Amazon Pay account alongside of my old payment processing account on the V/MA/AXP rails. And until Amazon Pay scaled up huge, only a fraction of my shoppers would be paying using this method. It’s not like I have free payment processing altogether: I only have free payment processing for those payers who use Amazon Pay. (It is the old problem of building a two-sided network - and anyone attempting to do it, including Facebook, would face the same issue.)

 

Of course, even if that is a successful, Amazon is now managing fraud, managing merchants, etc etc.

 

By the end, I’m left wondering why Amazon would attempt this game at all. Yes, it would cut out the interchange fees on debit, but any vertical intergration has huge costs attached, and they are not the best player to manage it. This is Microeconomics 101, and it’s why merchants have not, in the past, been willing to do anything like Amazon Pay.

 

We shall see what happens, but I have a hard time seeing it. We can go through a similar analysis for Facebook, but I think they are in an even weaker position, because they can’t kickstart the network as the first Uber-Merchant, as Amazon would be able to.

 

I think any would- be competitor would be better off buying PayPal given its established user base, but PayPal is already heavily on the V/MA rails to avoid many of these problems, and without those rails, it simply does not have broad merchant acceptance.

[RuleNumberOne]

No credit, just debit. Facebook or Amazon offer a debit card. They leave credit to the existing system.

 

People would save around 1.5% by using the Facebook/Amazon/Robinhood debit card (Merchant Discount - "Rewards"). They get a higher lifestyle and earlier retirement.

 

Credit card users can pay 3-4% extra and collect 1-2% in "rewards."

 

Only people who really really need credit because their bank accounts are empty would use credit cards, the rest use debit.

[mjm]

not sure i understand your post.  how do CC users pay 3-4% more. TIA

[coc]

No credit, just debit. Facebook or Amazon offer a debit card. They leave credit to the existing system.

 

People would save around 1.5% by using the Facebook/Amazon/Robinhood debit card (Merchant Discount - "Rewards"). They get a higher lifestyle and earlier retirement.

 

Credit card users can pay 3-4% extra and collect 1-2% in "rewards."

 

Only people who really really need credit because their bank accounts are empty would use credit cards, the rest use debit.

 

If you issue a debit card, have to come up with a mechanism for merchants to accept it and consumers to use it. I still don’t understand what the value proposition is for a Facebook or Amazon card. Credit card users don’t pay more. I already have a debit card. Why do I need a new one? Zero fees - why would Facebook/Amazon try to replicate everything the processors do and lose money on it?

 

I think you’re making the (incorrect) assumption that the payment processing ecosystem is just a bunch of rent seekers - which has been common in Silicon Valley, and why all of the players who have entered have failed to disrupt the current system — only augmented it. (See PayPal, Square, etc.)

[peterHK]

Not to mention other issues with debit:

 

Visa Direct and MasterCard Send can send things 24/7/365; is AMZN going to spend on that tech? If not, then why not just use ACH.

 

Visa buying Earthport let them plug into ACH networks around the world, and push funds to and from accounts that are non-Visa linked. Will AMZN be able to do this without massive tech spend?

 

How do you get funds to your AMZN debit account? Lets say you want to take them from your bank, well you might just Visa Direct it over there, in which case, AMZN has to plug into the V rails, and V gets a transaction fee there. Lets say you want to take them back to your bank, again AMZN needs to be connected. Lets say you want to use those funds in the real world, well as we've been over in this thread, what merchant is going to accept that?

 

I liken it to Amex: people have to ask if merchants accept Amex. Nobody asks whether they accept Visa, it's presupposed that they do. Creating that level of ubiquity is obscenely challenging.

 

People seem to think V/MA just process things, but think of the complexity of moving these funds around, checking for fraud etc. I mean it's massive, the scale of what they do. It'd be almost impossible for someone to out-scale them at this point, and so where's the incentive?

[Liberty]

Like most industries that operate in the shadows, most people who aren't familiar with them assume that they must be fairly trivial to operate, replicate, or modify.

 

Oh, the power grid? Yeah, I'm sure we can make massive changes to it in a few years..

 

Oh, the financial plumbing of the whole world? Just a bunch of databases, right?

[Spekulatius]

Like most industries that operate in the shadows, most people who aren't familiar with them assume that they must be fairly trivial to operate, replicate, or modify.

 

Oh, the power grid? Yeah, I'm sure we can make massive changes to it in a few years..

 

Oh, the financial plumbing of the whole world? Just a bunch of databases, right?

 

I don’t think it’s simple or other, it would have been done already. However, now, we have a bunch of very savvy  and well capitalized tech tech companies which have already established their own network effects and know a lot about their customers. This is not something that existed 10 years ago.. I any case, the discussion has been quite helpful, for me at least.

[Liberty]

Like most industries that operate in the shadows, most people who aren't familiar with them assume that they must be fairly trivial to operate, replicate, or modify.

 

Oh, the power grid? Yeah, I'm sure we can make massive changes to it in a few years..

 

Oh, the financial plumbing of the whole world? Just a bunch of databases, right?

 

I don’t think it’s simple or other, it would have been done already. However, now, we have a bunch of very savvy  and well capitalized tech tech companies which have already established their own network effects and know a lot about their customers. This is not something that existed 10 years ago.. I any case, the discussion has been quite helpful, for me at least.

 

Even for big tech it's not that simple. It's a question of focus. Visa has 15,000 employees and MasterCard has 13,400 employees, and all they think about is this. Facebook and Google have 87 other priorities and some big other distractions.

 

Google Wallet hasn't exactly taken over the world, and while Apple Pay has done better, even that is built on existing rails. If they had to get acceptance for every point-of-sale from scratch and do the fraud detection and auditing from scratch and deal with every problem that comes up, etc, I doubt they'd have gotten anywhere. Even the upcoming Apple Card that "reinvents" the credit card is on existing rails.

 

Amazon has been better at entering new industries, but even that might be a tough nut to crack for them. 15bps doesn't leave a lot of margin umbrella to try to do better at a lower cost, and since most costs of such a network are fixed (hence the crazy operating leverage), they'd lose money forever before they got to critical mass, if they ever got there.

[SlowAppreciation]

Like most industries that operate in the shadows, most people who aren't familiar with them assume that they must be fairly trivial to operate, replicate, or modify.

 

Oh, the power grid? Yeah, I'm sure we can make massive changes to it in a few years..

 

Oh, the financial plumbing of the whole world? Just a bunch of databases, right?

 

I don’t think it’s simple or other, it would have been done already. However, now, we have a bunch of very savvy  and well capitalized tech tech companies which have already established their own network effects and know a lot about their customers. This is not something that existed 10 years ago.. I any case, the discussion has been quite helpful, for me at least.

 

Any would-be competitor would have to invest billions of dollars in networking infrastructure so that transactions can be processed in real-time and with practically zero failures. They would need to establish relationships—one by one—with 16,000 banks worldwide. Then they’d need to write complex software that works with each of those banks, as well as millions of payment terminals. And they would need to ensure compliance with financial laws and regulations by working with regulatory bodies in over 200 countries.

 

Or they could just partner with Visa for 15bps.

[RuleNumberOne]

Why does Google offer free Gmail, search, Youtube, Maps. Facebook a free social network?

 

Why do Google and Facebook offer free authentication to the entire Internet? This is the "login with Google" and "login with Facebook" buttons you see on websites.

 

How does all of this happen in "real-time", "24/7/365"?

 

How does Xoom wire transfer 1000s of dollars (international) for a $3 flat fee?

 

 

 

[RuleNumberOne]

Why is GOOG being investigated for antitrust for providing a free service?

 

Combined V-MA has one-fourth the number of employees as GOOG, but the same enterprise value.

A fraction of the expenses - be it operating or capex, but the same enterprise value.

 

GOOG hires 4 times more people and spends tens of billions on capex and R&D. Yet it cannot get a higher enterprise value, but instead gets investigated for anti-trust.

 

 

Like most industries that operate in the shadows, most people who aren't familiar with them assume that they must be fairly trivial to operate, replicate, or modify.

 

Oh, the power grid? Yeah, I'm sure we can make massive changes to it in a few years..

 

Oh, the financial plumbing of the whole world? Just a bunch of databases, right?

 

I don’t think it’s simple or other, it would have been done already. However, now, we have a bunch of very savvy  and well capitalized tech tech companies which have already established their own network effects and know a lot about their customers. This is not something that existed 10 years ago.. I any case, the discussion has been quite helpful, for me at least.

 

Even for big tech it's not that simple. It's a question of focus. Visa has 15,000 employees and MasterCard has 13,400 employees, and all they think about is this. Facebook and Google have 87 other priorities and some big other distractions.

 

Google Wallet hasn't exactly taken over the world, and while Apple Pay has done better, even that is built on existing rails. If they had to get acceptance for every point-of-sale from scratch and do the fraud detection and auditing from scratch and deal with every problem that comes up, etc, I doubt they'd have gotten anywhere. Even the upcoming Apple Card that "reinvents" the credit card is on existing rails.

 

Amazon has been better at entering new industries, but even that might be a tough nut to crack for them. 15bps doesn't leave a lot of margin umbrella to try to do better at a lower cost, and since most costs of such a network are fixed (hence the crazy operating leverage), they'd lose money forever before they got to critical mass, if they ever got there.

[Liberty]

Why does Google offer free Gmail, search, Youtube, Maps. Facebook a free social network?

 

Why do Google and Facebook offer free authentication to the entire Internet? This is the "login with Google" and "login with Facebook" buttons you see on websites.

 

How does all of this happen in "real-time", "24/7/365"?

 

How does Xoom wire transfer 1000s of dollars (international) for a $3 flat fee?

 

Apples and oranges.

 

Comparing free email and trillions in worldwide credit/debit transactions is like comparing a chain of dollar stores and running a bunch of airlines. The stakes and regulations and complexity are very different.

[Liberty]

Why is GOOG being investigated for antitrust for providing a free service?

 

Combined V-MA has one-fourth the number of employees as GOOG, but the same enterprise value.

A fraction of the expenses - be it operating or capex, but the same enterprise value.

 

GOOG hires 4 times more people and spends tens of billions on capex and R&D. Yet it cannot get a higher enterprise value, but instead gets investigated for anti-trust.

 

That's a strange way to think about all this, and I don't think it really elucidates much.

[Guest eatliftinvestgolf]

I think the hardest part about investing in Visa is not the valuation, underlying returns on capital, or the business quality, it's assessing the duration that these factors will persist in the future.  There are some excellent arguments in this thread about why the medium-term outlook looks strong, but I haven't seen anything that convinces me that the long-term outlook can be projected with a high degree of confidence.  It is truly a wonderful business today, but it's in the 'i don't know' category for me with a 30 year horizon.

[Jurgis]

I think the hardest part about investing in Visa is not the valuation, underlying returns on capital, or the business quality, it's assessing the duration that these factors will persist in the future.  There are some excellent arguments in this thread about why the medium-term outlook looks strong, but I haven't seen anything that convinces me that the long-term outlook can be projected with a high degree of confidence.  It is truly a wonderful business today, but it's in the 'i don't know' category for me with a 30 year horizon.

 

Please tell me a single business where you know the outlook for 30 years with high degree of confidence.

[Liberty]

I think the hardest part about investing in Visa is not the valuation, underlying returns on capital, or the business quality, it's assessing the duration that these factors will persist in the future.  There are some excellent arguments in this thread about why the medium-term outlook looks strong, but I haven't seen anything that convinces me that the long-term outlook can be projected with a high degree of confidence.  It is truly a wonderful business today, but it's in the 'i don't know' category for me with a 30 year horizon.

 

Please tell me a single business where you know the outlook for 30 years with high degree of confidence.

 

Fax machines and paper cheques are still around... Things tend to change both faster and slower than people expect.

 

The best way to predict whether Visa and Mastercard are at risk of being disrupted, is, IMO, whether they keep moving fast and adapting to the times, and whether they create a price umbrella under which new entrants can come in. At 15 bps, there's no space, and so far they've made a lot of the right moves (Visa has been turning its rails into a platform with bidirectional APIs that have allowed many other companies to build on top of it, strengthening its moat).

[Guest eatliftinvestgolf]

I think the hardest part about investing in Visa is not the valuation, underlying returns on capital, or the business quality, it's assessing the duration that these factors will persist in the future.  There are some excellent arguments in this thread about why the medium-term outlook looks strong, but I haven't seen anything that convinces me that the long-term outlook can be projected with a high degree of confidence.  It is truly a wonderful business today, but it's in the 'i don't know' category for me with a 30 year horizon.

 

Please tell me a single business where you know the outlook for 30 years with high degree of confidence.

 

banks

[Guest eatliftinvestgolf]

“if you think you know what’s going to happen to payments systems 10 years out, you are probably under some state of delusion.”  - munger

[Liberty]

 

banks

 

The same banks that blew up and were bailed out all around the world 10 years ago? You can predict them 30 years forward with "a high degree of confidence"?

[Jurgis]

I think the hardest part about investing in Visa is not the valuation, underlying returns on capital, or the business quality, it's assessing the duration that these factors will persist in the future.  There are some excellent arguments in this thread about why the medium-term outlook looks strong, but I haven't seen anything that convinces me that the long-term outlook can be projected with a high degree of confidence.  It is truly a wonderful business today, but it's in the 'i don't know' category for me with a 30 year horizon.

 

Please tell me a single business where you know the outlook for 30 years with high degree of confidence.

 

banks

 

Both you and Liberty are just punting: you are not naming a single business and you are not providing outlook. Taking banks: in 30 years there will be at least 2-3 financial crises. If you pick a single bank that exists now, it might be bankrupt in 30 years.

[Guest eatliftinvestgolf]

 

banks

 

The same banks that blew up and were bailed out all around the world 10 years ago? You can predict them 30 years forward with "a high degree of confidence"?

 

 

Yes, you can easily predict there will always be a bank that gathers deposits and lends money in 30 years.

 

Your point about blow ups is flawed because it assumes business model includes the derivatives / investment banking side and we had a once in 100 year crisis.

 

I don't know if the favorable features of the payments industry and Visa's business model will continue that far away.  It certainly could.

[RuleNumberOne]

I don't pick banks, Buffett picks them for me.

 

I think the hardest part about investing in Visa is not the valuation, underlying returns on capital, or the business quality, it's assessing the duration that these factors will persist in the future.  There are some excellent arguments in this thread about why the medium-term outlook looks strong, but I haven't seen anything that convinces me that the long-term outlook can be projected with a high degree of confidence.  It is truly a wonderful business today, but it's in the 'i don't know' category for me with a 30 year horizon.

 

Please tell me a single business where you know the outlook for 30 years with high degree of confidence.

 

banks

 

Both you and Liberty are just punting: you are not naming a single business and you are not providing outlook. Taking banks: in 30 years there will be at least 2-3 financial crises. If you pick a single bank that exists now, it might be bankrupt in 30 years.

[Guest eatliftinvestgolf]

I think the hardest part about investing in Visa is not the valuation, underlying returns on capital, or the business quality, it's assessing the duration that these factors will persist in the future.  There are some excellent arguments in this thread about why the medium-term outlook looks strong, but I haven't seen anything that convinces me that the long-term outlook can be projected with a high degree of confidence.  It is truly a wonderful business today, but it's in the 'i don't know' category for me with a 30 year horizon.

 

Please tell me a single business where you know the outlook for 30 years with high degree of confidence.

 

banks

 

Both you and Liberty are just punting: you are not naming a single business and you are not providing outlook. Taking banks: in 30 years there will be at least 2-3 financial crises. If you pick a single bank that exists now, it might be bankrupt in 30 years.

 

My position is that it's too hard of a question in Visa' case. I don't think I need to name a single business to support the point that I made.  You are applying a higher standard because you disagree with me.  That's fine, you are welcome to disagree.

 

Anyway, I do have a large chunk of WFC as a 'single bank' pick and I don't think the odds of bankruptcy in 2-3 financial crises are anywhere near as high as you are suggesting.

[Jurgis]

I think the hardest part about investing in Visa is not the valuation, underlying returns on capital, or the business quality, it's assessing the duration that these factors will persist in the future.  There are some excellent arguments in this thread about why the medium-term outlook looks strong, but I haven't seen anything that convinces me that the long-term outlook can be projected with a high degree of confidence.  It is truly a wonderful business today, but it's in the 'i don't know' category for me with a 30 year horizon.

 

Please tell me a single business where you know the outlook for 30 years with high degree of confidence.

 

banks

 

Both you and Liberty are just punting: you are not naming a single business and you are not providing outlook. Taking banks: in 30 years there will be at least 2-3 financial crises. If you pick a single bank that exists now, it might be bankrupt in 30 years.

 

My position is that it's too hard of a question in Visa' case. I don't think I need to name a single business to support the point that I made.  You are applying a higher standard because you disagree with me.  That's fine, you are welcome to disagree.

 

Anyway, I do have a large chunk of WFC as a 'single bank' pick and I don't think the odds of bankruptcy in 2-3 financial crises are anywhere near as high as you are suggesting.

 

I am pretty confident that you don't know where WFC will be in 30 years: what size it will be, what profitability it will have, and even if it will exist at all.

 

However, this argument is not resolvable, so let's leave it at that.

[Guest eatliftinvestgolf]

I think the hardest part about investing in Visa is not the valuation, underlying returns on capital, or the business quality, it's assessing the duration that these factors will persist in the future.  There are some excellent arguments in this thread about why the medium-term outlook looks strong, but I haven't seen anything that convinces me that the long-term outlook can be projected with a high degree of confidence.  It is truly a wonderful business today, but it's in the 'i don't know' category for me with a 30 year horizon.

 

Please tell me a single business where you know the outlook for 30 years with high degree of confidence.

 

banks

 

Both you and Liberty are just punting: you are not naming a single business and you are not providing outlook. Taking banks: in 30 years there will be at least 2-3 financial crises. If you pick a single bank that exists now, it might be bankrupt in 30 years.

 

My position is that it's too hard of a question in Visa' case. I don't think I need to name a single business to support the point that I made.  You are applying a higher standard because you disagree with me.  That's fine, you are welcome to disagree.

 

Anyway, I do have a large chunk of WFC as a 'single bank' pick and I don't think the odds of bankruptcy in 2-3 financial crises are anywhere near as high as you are suggesting.

 

I am confident that you don't know where WFC will be in 30 years: what size it will be, what profitability it will have, and even if it will exist at all.

 

However, this argument is not resolvable, so let's leave it at that.

 

Fair enough. Look it always comes back to price or it's not investing.

 

At the current price for Visa, I think you need to have greater certainty about the long-term durability of its business model than I am able to build conviction on.  It sounds like Liberty has built that conviction.  I'm not even saying that this is wrong, just that I personally can't get there.

 

Visa is a wonderful business that everyone knows about and I feel it is to some extent reflected in the price.  At a different price, I wouldn't apply such a high bar to the long-term durability.

 

It's not possible to know with certainty an exact projection of a single company, like you are posing to me as a counterfactual.  But I have a much stronger view on the long-term durability of WFC's ROE than Visa relative to its current price.