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Visa Aims For A 'Token' Of Customers' Appreciation

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A s cybercrime strikes with worrisome frequency,Visa ( V ) is deploying new technology and services to keep digital thieves at bay and secure its position as the world's largest money card processor.

The late-2013 data security breach atTarget ( TGT ) was a game changer for American merchants, exposing 40 million debit and credit card accounts, costing the big-box retailer tens of millions of dollars and the CEO his job. It accelerated the move to chip-embedded cards in the U.S., which had lagged behind foreign money-card innovation.

Target wasn't the only big victim.Home Depot ( HD ),JPMorgan Chase ( JPM ),Michaels ( MIK ),Berkshire Hathaway's (BRKB) Dairy Queen and others also have been badly compromised in the last two years.

Fighting cybercrime has become an endless war as hackers grow more sophisticated, but Wednesday is the last day of blame-sharing. Beginning Thursday, Oct. 1, more liability for money card fraud shifts to merchants and retailers if they don't use the tech to handle the new chip cards from Visa or its rivals.

"The U.S. was the last major global economy that hadn't moved to chip and PIN," said Andrew Jeffrey, an analyst at SunTrust Robinson Humphrey. "That made us the weak link in the chain from a security perspective."

Visa reportedly had issued more than 142 million new chip cards in the U.S. by Sept. 1, but still has a way to go. It had 2.2 billion money cards issued globally in 2013, including 702 million in the U.S.

Easing Out The 16 Digits

That's a major change for certain, but a bigger one may be afoot. The 16-digit account number, once as much of a staple of credit cards as landlines were for telephones, is being phased out for online and mobile payments by the big payment card companies.

Visa is among the companies that have begun using "tokens," which substitute the 16-digit number with a randomly generated sequence of alphanumeric characters for each transaction. They make it more difficult for cybercrooks to steal identities.

Moving American consumers from point-of-sale cash transactions to higher-tech digital sales, Visa is clearing the path. The Foster City, Calif.-based company has inked deals withApple (AAPL), Samsung andGoogle (GOOGL) to deploy the tokenization tech.

It's the wave of the present. Its rivalMasterCard (MA) recently unveiled its own tokenization system for use in so-called digital wallets. Smaller competitorsAmerican Express (AXP) andDiscover Financial Services (DFS) also have joined the tokenization transition.

Pushing Visa further into the digital world is CEO Charles Scharf, a former JPMorgan executive who took over Visa in 2012.

Chip-and-PIN cards, tokenization and opening up Visa's network beyond bread-and-butter partnerships with banks are shaping up as hallmarks of Scharf's tenure.

One recent product push to digital is Checkout, an online payment service that integrates Visa plastic cards on the Internet via merchants' websites and mobile shopping apps.Yum Brands (YUM) restaurants andUnder Armour (UA) are among the 250,000 merchants offering this service. Visa also is extending the service to China, Australia, the United Arab Emirates, Canada and Colombia. It says Checkout has 6 million registered users with average monthly enrollment growing more than 30% in June and July.

Benefits In The Middle

The company is so ubiquitous, Visa seems to be at the center of almost every transaction short of real estate.

"The beauty of Visa's business is they get a very small part of every transaction done on a Visa card," said Gil Luria, an analyst at Wedbush Securities. "All Visa has to do is be in the middle and coordinate with everybody."

Visa consistently ranks among top corporate performers, with at least 19 consecutive quarters of double-digit earnings growth. Its shares have risen about 518% since going public at 44 in 2008, splitting 4-for-1 this year and now trading at about 68. Visa has a stellar IBD Composite Rating of 96 out of 99.

"We look at it like we've had this amazing past," Scharf told IBD. "We sit here today and think our future is more exciting than the past we've had."

What's perhaps even more remarkable is that despite Visa's dominant position, cash still rules much of the world. Cash is used in about half of U.S. transactions. Outside the U.S., 85% of consumers are estimated to pay with cash.

"There is a lot of growth potential in the United States and it is more pronounced internationally," said Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods. "There is still a long runway for growth."

In terms of growing shareholder value, a possible $20 billion merger with Visa Europe, spun off from the main company just before Visa's IPO, may steepen Visa's growth trajectory. Merger talks reportedly have been ongoing since the spring, but Scharf declined to discuss the subject. Visa Europe, which deployed chip card tech long before Visa, claims about 52% of the European market. MasterCard claims about 26% in Europe.

Defying The Larger Market

In a volatile, down year for the market, Visa has been a leader in boosting value. Visa shares are up 3.7% so far this year, while the S&P 500 is down about 8.3% in 2015.

Visa's net revenue in fiscal '14 rose 8% to $12.7 billion, and analysts expect 2015 to settle up at $13.87 billion. Adjusted net income in 2014 rose 15% to $5.7 billion, yielding earnings per share up 19% to $2.27 adjusted for the split. Analysts expect a 15% rise to $2.62 EPS in 2015, ending Sept. 30.

Visa has its challenges beyond hackers. Merchants have sued Visa, accusing it of unfairly charging excessive fees. Currently, Target,Amazon (AMZN) and other retailers are suing in federal court, asking for a $5.7 billion antitrust settlement to be vacated.

They argue the settlement forces them to give up rights to sue over some of Visa's practices and policies. The merchants also claim that Visa and MasterCard fixed the fees they were charged each time customers used their cards. About 8,000 merchants opted out of the settlement, approved in 2013, and more than 30 lawsuits against Visa and MasterCard are still pending in that case.

A federal appeals court in New York is currently weighing whether to approve the settlement.

Scharf downplayed the litigation, stressing the value that the Visa network provides for all of its customers -- big and small.

"Merchants are as important to us as the banks are, as are the acquirers," he said.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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