Best business model in the world? (VISA)
Network effects at their finest
We’ve rarely analysed a company and thought “Wow, we have no idea how this company can be disrupted”. But with Visa, we did.
Think of the Visa network as you would any other network: a phone network transmits voice via radio waves, the internet transmits information, and Visa transmits – you guessed it – money
Visa functions as a toll road and railway for digital payments: for every debit and credit card transaction, a payment network like Visa sets a merchant discount rate (MDR). A merchant discount rate consists of three components:
The interchange fee: roughly 1.6% of a transaction is for the issuing bank.
The network fee: this ~0.2% fee is paid to the payment network like Visa for using its infrastructure and network.
The payment processing fee: a ~0.2% fee for the acquiring bank and/or processor.
The height of the MDR is variable, and is dependent on the risk of a transaction, if it’s a cross-boarder transaction and the payment method (credit card fees are higher than debit card fees).
The payment market is a very complex market, with several categories and a lot of players:
But, the payment market is mainly dominated by two giants: Visa and. In the U.S., Visa is by far the largest player, processing over $6 trillion in transaction volume. Mastercard is roughly half the size of Visa in this market, while American Express is about 5-6 times smaller.
In Europe, Visa is still larger than Mastercard, though Mastercard is growing more rapidly in the region. Together, they form a true duopoly in Europe, holding a combined market share of over 90%.
In other regions, Visa and Mastercard are also active but hold a less dominant position. They halted their operations in Russia due to the war with Ukraine, and in Asia, Chinese UnionPay is highly dominant. Unlike Visa and Mastercard, UnionPay not only operates as a payment network but also issues its own payment cards, giving it a stronger position in the region than its Western counterparts.
The secret of payment networks like Visa lies in the network effect. Visa is connected with over 10,000 banks worldwide. If you are a new entrant to the network market, in our opinion there are several requirements needed to become a serious competitor of Visa:
Advanced technology to ensure network uptime.
Extremely robust data security.
Extensive bank partnerships, ideally with hundreds of banks, including those from other countries.
Compliance with local regulations worldwide.
Lower costs than Visa and Mastercard.
In our opinion, the chance is very, very low that a new entrant can succeed in this market. Instead, nearly every financial institution in this world chooses to work with Visa and/or Mastercard. This is something we see in the payment volume and revenues
This volume is processed through VisaNet, a network comprising four dedicated data centers and an extensive underground fiber-optic network. This fiber network is so big, that it could circle the Earth 400 times 😮.
Visa's value proposition is truly compelling: work with us, and gain instant access to a network of 3 billion cardholders, 14.500 banks, and 44 million merchants across more than 200 countries. For businesses, a payment network like Visa or Mastercard is a must-have.
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We hope you understand Visa a little better now.
Have a wonderful day and happy investing.
The Dutch investors