Visa Inc. (V - Free Visa Stock Report), a newcomer to the Dow-30 composite, operates the world’s largest retail electronic payments network, providing processing services and payment platforms in more than 200 countries. Headquartered in San Francisco, California, the company offers a suite of payment solutions, including credit, debit, and prepaid cards under the ubiquitous Visa brand name, as well as the Visa Electron and Interlink monikers. In addition, Visa/PLUS offers cash access to its customers through one of the largest global ATM networks, while VisaNet delivers value-added processing, fraud, and risk management services to merchants around the world. Although its roots date back to 1958, Visa has a relatively short history as a publicly traded company, making its debut on The New York Stock Exchange with a successful IPO in March of 2008.
You’ve Got to Give Them Credit
Firmly entrenched today in the mind of Americans--and to a growing extent, global consumers--Visa started from relatively humble beginnings. The typical American consumer had long maintained several disparate, revolving lines of credit with local merchants to pay for day-to-day items, such as groceries, clothing, or a fill-up at the gas pump. But, in 1956, an internal think tank within Bank of America (BAC), headed by senior vice president Joseph P. Williams, adopted the idea of an all-purpose credit card that would essentially consolidate those bills into one unified payment.
The concept was not a new one, since charge cards of various stripes had been in use for many years. However, charge cards required payment in full at the end of each billing cycle, and were largely issued on a local scale. Too, earlier attempts to create an all-purpose card had failed, since the issuing institutions were small banks that lacked the resources to make the programs successful. Learning from those previous failures, Mr. Williams had an ingenious—though at the time, somewhat radical—idea; rather than requiring customers to settle all debts at the end of each billing cycle, he proposed that Bank of America allow its cardholders to carry a balance from month to month, all the while charging interest on the debt. After meeting some initial resistance, Mr. Williams convinced senior executives at Bank of America to pursue what would become the world’s first successful credit card program.
In September of 1958, BofA launched the BankAmericard initiative, the precursor to the Visa-branded cards of today. Fresno, California was selected as the program’s test market due to its "Goldilocks" size; a market large enough to provide a good measure of the all-purpose card’s feasibility, yet small enough to contain the public relations fallout should the enterprise go awry. Although the BankAmericard would eventually become a runaway success, the program got off to a rocky start. Indeed, the pilot program had a delinquency rate of 22%, far wider than the 4% expected, and quickly became a breeding ground for the nascent crime of credit card fraud. With his brainchild in turmoil, Mr. Williams resigned after BankAmericard racked up substantial losses following the initial launch, officially pegged at $8.8 million.
It’s Everywhere You Want to Be
Despite the program’s early missteps, top executives at BofA still felt that BankAmericard could be salvaged, though stricter monitoring and financial controls would be required to make the initiative a success. In the coming years, that faith would be handsomely rewarded as the program eventually turned a corner and became a profit center for Bank of America. Indeed, in 1965, BofA created a new stream of high-margined revenue by licensing the BankAmericard name to financial institutions outside its home state of California (like all U.S. banks at the time, BofA was prohibited by federal regulations from expanding outside its home market).
In 1970, Bank of America relinquished control of BankAmericard to the various issuer banks throughout the network. The program then morphed into National BankAmericard Inc. (NBI), an independent non-stock corporation in charge of managing and developing BankAmericard domestically, with licensed banks stretching from coast to coast. However, BofA retained control of licensing the BankAmericard name on the global stage, a vast and still relatively untapped market. In a few short years, licenses were granted to 15 countries around the world, a multinational body was formed to manage BankAmericard internationally, culminating with the program’s far-flung offshoots coming back together to fly one flag. In 1978, BankAmericard, in all its various flavors, was rechristened Visa.
Will That Be Cash or Charge?
By the turn of the last millennium, Visa had cemented its place in the wallet or pocketbook of most Americans, a phenomenon that was aided, to no small degree, by the rapid adoption of all things digital. Indeed, the decades-long transition from traditional forms of currency, such as cash and checks, to electronic transactions had been highly beneficial to Visa’s operating performance, and the company was among the first to identify and fully capitalize on that trend.
Visa is still poised for ample growth in the years ahead, building on its commanding lead in developed markets, while forming beachheads in emerging countries with fast-growing middle-income populations. However, it bears noting that the breakneck pace of the payment processor’s early years is almost certainly a thing of the past, due to the near saturation of Visa’s home (and still largest) market, the United States. Too, the company’s business is under assault on multiple fronts, most notably from competing networks managed by MasterCard (MA), American Express (AXP- Free AmEx Stock Report), and Discover (DFS), among others. At the same time, Visa, and its well-entrenched brethren, is facing a new threat from electronic payments services that operate outside the traditional banking system, namely Web-based networks run by Internet search giant Google (GOOG), eBay's (EBAY) mobile payments facilitator PayPal, and tech darlings such as Foursquare.
Despite these myriad challenges, we continue to recommend Visa’s good-quality shares as a core holding for nearly all investors. Indeed, Visa has built a very sound business model, as evidenced by its stellar operating performance in both good and bad economic times. In a nutshell, the company remains relatively insulated from the effects of a downturn, since it generates substantially all of its revenues from processing payments, while leaving the lion’s share of risk to the financial institutions that issue credit and debit cards. This, coupled with Visa’s well-regarded brand name, rock solid finances, and best-in-class management, provide a good foundation for long-term, sustainable growth.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.