Unpacking the firm’s investment in both companies during a presentation in Johannesburg, research analyst Victor Mupunga, said with the exception of cheques, every form of non-cash transaction had increased over the past decade. The biggest beneficiaries had been debit and credit cards. Yet, only about 40% of global consumer spending was via electronic means, suggesting that there was still significant opportunity for growth.
Visa
Although Visa is broadly considered a financial institution, it is not a bank that takes deposits or lends money. Rather it provides a network that facilitates the movement of funds between consumers, retailers and their banks. For the use of its network, Visa earns a small percentage fee of the transaction from the merchant.
The key drivers of Visa’s revenue and earnings were increases in the number and size of transactions and both were strongly supported by the megatrend to non-cash transactions, Mupunga said.
“Despite the proliferation of all these new digital payment technologies it is the incumbents like Visa that are best positioned to gain from this move to a cashless society.”
Visa had built a deep “moat” around it in the form of its network effect, relationship with stakeholders within its network and brand equity, which made it difficult for new entrants to disrupt the business, he said.
Banks from around the world wanted to be part of the Visa network because it allowed their consumers to travel internationally and use the network without any difficulty.
Mupunga said Visa paid a percentage of their revenue to banks as an incentive. In turn, banks used the money to fund their loyalty programmes to attract customers.
“It is this symbiotic relationship between customers, Visa and the banks that we believe makes it very difficult for new entrants to come into the market.”
New entrants often found it a lot easier to leverage off the established networks than to circumvent them. Visa also spent a considerable amount of its revenue on marketing and building the brand to ensure the consumer felt secure.
A key attraction was its business fundamentals. The revenue tailwind of increases in the number and size of transactions was expected to continue driving Visa’s earnings. The group also had stable margins, which were significantly better than its peers and its debt ratios were attractive. Since listing, the firm had been able to convert 100% of its net income into cash. In two of the last four years, it had paid out all of its net income to shareholders in the form of share buybacks and dividends, Mupunga said.
“We believe that by investing in companies such as Visa that are domiciled in developed markets, but are capturing some of the growth in emerging markets we are able to generate superior returns.
“We believe that incumbents like Visa are best positioned because of the high barriers to entry that they’ve created in their business operating model, which will support strong earnings growth going forward.”
Starbucks
A company that understood the value of building and maintaining a brand was Starbucks, Mupunga said.
Store openings in Japan and China earlier this year were accompanied by long queues similar to those seen in Johannesburg when the first Starbucks store opened its doors locally in 2016.
Why do customers keep coming back to Starbucks?
