The major card networks, Visa (NYSE: V) and Mastercard (NYSE: MA), reported this past week, Visa with fiscal Q2, and Mastercard with fiscal Q1. Both companies printed revenue and EPS beats for their respective quarters, which in hindsight, looks to have surprised investors given the subsequent price movement, especially in light of the challenging macro headwinds of the day. But quarterly beats aside, the more relevant, and surely more interesting news, was conveyed in the earnings calls, and in Visa’s case, some really good insight into its perception of future growth areas within the framework of its three business segments – consumer payments (credit and debit), “new flows” (Visa Direct and Visa B2B Connect), and value-added services (Ex. its new Crypto Advisory Service). Visa’s commentary around its new flows segment was particularly interesting as its performance is largely defined by the growth of one of its real-time-payments (RTP) products Visa Direct, whose core functionality enables RTP debit pushes between credentialed accounts, whether those accounts run P2P, B2B, or in the use case for payroll, where there’s been a lot of innovative complementarity in past the few years, B2C and B2P (think merchants paying employees and 1099s).
Though the mainstream financial press ran with a positive headline from Visa CEO, Al Kelly Jr’s prepared remarks, that regarding the past quarter’s payment’s volumes (overall), Visa saw “no noticeable impact due to inflation, supply chain issues, or the war in Ukraine”, there was a fairly conspicuous exception disclosed just a few paragraphs later. It was addressed head-on by Kelly when his comments turned to Visa’s new flows business segment, driven primarily by Visa Direct. It was here that Kelly qualified Visa’s 20% YOY growth in Visa Direct transactions by explaining that this is the one area of Visa’s business that will be directly impacted by the war in Ukraine. Visa, having pulled-out of the Russian market pursuant to U.S. sanctions, stands to lose roughly 17% of its fiscal 2021 Visa Direct transaction count, due to Russia being the 2nd largest Visa Direct market, lagging only behind the United States.
But even with the just-the-beginning-to-be realized weakness in the segment, Visa Direct transactions still grew 20% YOY, and that’s with lapping a very strong fiscal 2021 performance.
Because Visa believes its new flows segment addresses a $185 Trillion (yes, with a ‘T’) opportunity, supplying demand for new applications and use cases for real-time-payments, and Visa’s numbers suggest that it’s correct.
Per Visa’s Chairman and CFO, Vasant Prabhu, the underlying drivers of growth for Visa Direct are cross-border remittances, new payroll products for Gig economy workers and employees, and sundry B2B payments applications. Pertaining to employee payroll specifically, the growth is being driven by the proliferation of a new species of provider that allows workers to gain access to money owed to them off-cycle, known as earned wage access, or EWA. So, although Visa anticipates weakness in the overall new flows segment because of its withdrawal from Russia, the segment is being looked at as an “accelerated growth opportunity” internally due its ability to capture new flows from these entities that cater to, what, in essence is, on-demand payroll.
For Econ 101 geeks these new payroll providers represent the classic notion of a complement. In this particular case, a technology complement born out of the advances in, and spread of RTPs. That W-2 employees have historically been restricted to the rigid periodicities of 1-week and 2-week payroll cycles represents a major inefficiency. As such, Visa’s leveraging of RTP rails, creation of its own proprietary access point to the same, and monetization of that access through its multitude of strategic partners, provides management with a compelling case to make to investors.
Investment banking take…
Visa, “the network of networks”, always provides valuable, real-time insights into the world of payments. Of special interest to a fintech and SaaS focused investment bank is the payments activity – activity between merchants, consumers, and merchants and consumers – and the technologies employed within and around Visa’s payments ecosystem.
IMO, what’s worthy of note here is the power of real-time-payments to create an economic space where new fintech and payments innovators can flourish. Sadly, in the United States, we’ve been very slow (historically) adopters of payments and fintech innovation. This is especially true of real-time-payments where at this writing, the U.S, excluding private intra-bank RTPs and a handful of private and public blockchain protocols, operates only one RTP network – The Clearing House Payments Company – which is operated by a consortium of the nation’s largest banks. The only other RTP network in the offing is that of the Federal Reserve – FedNow – which isn’t scheduled to go live until 2023.
And yet currently, Visa, through Visa Direct, has access to 7 RTP schemes, in addition to 16 card-based networks, 65 ACH schemes, and 5 gateways. With this deep and expansive global RTP connectivity it should come as no surprise that upstart RTP-based fintech players are leveraging Visa’s technology to carve-out new territory in the payment’s ecosystem, especially innovative payroll providers and on-demand funders for Gig workers.
In a world where consumers expect their commerce, payments, and remittances to transact in real-time, these new breeds of payroll and on-demand funding fintechs warrant some attention. As do a slew of other fintechs who avail themselves of RTPs. Consumer demand for real-time-payments is high. As such, whether the use case is advanced payroll, travel related re-funds, P2P payments, or cross-border remittances, investors ought to take note of this burgeoning RTP ecosystem and the fintechs that are enabling it.