- Visa is the global leader in credit cards, with over 2.5 billion Visa branded credit cards issued worldwide.
- Visa is an intermediary that enables banks to issue credit and debit cards to consumers and helps merchant acquirers facilitate payments between banks and merchants.
- Looking ahead, Visa is betting on contactless and digital payments as well as international growth.
Visa is the leader in global payments technology. The company connects businesses, consumers, and financial institutions across 200 countries. As the largest retail payment network owner, you might be wondering how Visa makes its money.
This behemoth of payment processing has benefitted from the move towards e-commerce, but now faces a challenge from fast-growing fintech companies like Afterpay and Sezzle who are chipping away at the credit card's share of wallet.
Read on to find out how Visa makes money and how they plan to grow the business.
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What does Visa do?
Visa is a digital payments platform and card issuing authority enabling fast and efficient transactions between consumers, merchants, retailers, banks, or financial institutions. Visa's data-processing operations are the company's largest revenue generator.
The Visa business model and strategy have the company aggressively expanding into e-commerce and contactless payment services, and several other digital vehicles.
Visa continues to innovate, focusing on strategic acquisitions in the payment sector and international expansion. Visa purchased the fintech company Yellow Pepper in 2018, expanding its presence in Latin America and the Caribbean.
How does Visa work?
Visa runs as a business intermediary between card issuers, its merchant partners, and its cardholders. Visas' primary customers are merchant acquirers and issuers. Visa offers companies a range of Visa branded payment products and cards to issuers, which they use to provide credit, prepaid, and debit services to the consumer market.
For issuers, Visa provides the issuing authorities with the transaction network they need to process consumer purchases of products and services. The primary customers of the issuing authorities are the actual cardholders. The issuing authority creates accounts and issues Visa card services to the cardholder. Each issuing authority sets its terms and conditions for the use of its facilities by the cardholder, and Visa doesn't interfere with these policies.
During the processing of payments, the issuers authorize the cardholder transaction and fund the settlement obligation for the cardholders' spending. Issuers will collect payments from cardholders, and the issuers also accept responsibility for late or non-payment by the cardholder.
Some of the processing services offered by Visa include authorization, sale clearing, debit issuer processing, and settlement. The company also offers value-add services like risk management, dispute management, loyalty services, and information services.
For acquirers, their main customers are merchants in their network. The acquirer provides the merchant with payment connectivity to the Visa network. Acquirers may establish an applicable merchant fee or discount rate.
During transactions, the acquirer receives its settlement funds from the issuer, crediting merchants for the transaction value. In exchange, the acquirer takes a percentage cut before crediting the merchants. Acquirers then assume the risk of merchant compliance and non-fulfillment.
Visa generates its revenue primarily from the fees collected from financial institutions using its network. The company bases its charges on the transaction volume funneled by the institution.
How Visa makes money
Visa makes money by collecting fees from financial institutions to issue Visa credit, debit, and prepaid cards. They also collect payments from merchants based on the transaction volumes of goods and services purchased with Visa cards.
Visa's profit comes from being the middleman in the transaction, facilitating the seamless processing of payments between the merchant and the bank or financial services provider. They do not make any money on the interest charged for Visa-branded credit card payments. Instead, these fees go to the issuing institution.
Visa reports earnings through a single segment, known as payment services. However, it divides its operations into four segments, with each of the components responsible for generating revenue for the organization.
The segments are as follows:
- Service revenue
- Data-processing revenue
- International transaction revenue
- Other revenues
Visa operating revenue consists of service fees, data processing fees, and international earnings. The client incentive arrangements the company has with its partners reduce its earnings with costs for facilitating business.
Visa collects service revenue from institutional clients like banks and other partners that want Visa-branded payment solutions. Fees are generated based on the payment volumes of Visa-branded debit and credit cards and payment products used in acquiring goods and services.
Data processing revenues
Revenues are based on the volume of transactions processed, and are earned via the authorization, clearing, and settlement of transactions, as well as network access and maintenance and support services used to enable information processing and transactions.
International transaction revenues
Visa also earns on processing cross-border transactions as well as currency conversion fees.
These consist of long-term contracts for programs built for institutional clients to increase payment volume. Other goals include increasing Visa acceptance and winning over merchant routing transactions. These incentives actually reduce Visa’s operating revenue as they are provided to improve partner loyalty.
Visa also collects earnings through licensing fees, value-added services, services for its account holders, and more.
It's important to note that Visa doesn't earn money through the interest of fees paid by merchants or cardholders on Visa-branded debit or credit cards, which are instead collected by the card-issuing authorities.
When processing purchase transactions, Visa acquirers pay Visa an interchange fee to reimburse the issuers. Visa is responsible for collecting these fees via the settlement process. However, Visa typically doesn't receive a portion of these interchange fees.
Future growth engine
Visa intends to expand into the digital payments space as society moves towards cashless transactions. They are focused on expanding their presence in the cashless payments space via tap to pay, click to pay, digital wallets, and cross-border transactions.
In the B2B sector, they will continue to focus on settlement, card solutions, and accounts receivable management.
Finally, Visa is tremendously focused on emerging markets where the company sees the best growth potential in the next decade. Visa believes it's a good fit with its "network of networks" strategy, as evidenced by its recent acquisition of the fintech Yellow Pepper in 2020. Yellow Pepper supports startups and leading financial institutions in the Caribbean and Latin America. The company also sees significant opportunities in Asia through IoT and digital wallets.
Visa is the world leader in card-based payment systems. The company doesn't have many large competitors except for Mastercard and perhaps American Express. However, Amex is a closed-loop system, whereas the open-loop system of Visa offers it better potential for growth across all payment networks.
Chinese payment processor Alipay also have eyes on international expansion, encroaching on markets that were previously left to the "Western" payment processors.