V – Cuts 2014 Revenue Guidance and Reorganizes for Merchant “Outreach”

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SEE LAST PAGE OF THIS REPORT Howard Mason

FOR IMPORTANT DISCLOSURES 203.901.1635

hmason@ssrllc.com

April 25, 2014

Quick Thoughts:

V – Cuts 2014 Revenue Guidance and Reorganizes for Merchant “Outreach”

  • V traded down over 4% in extended hours after delivering in-line results but lowering growth guidance for 2014 to single-digits (10-11% in constant currency with a 2% currency headwind); the firm cited weakness in cross-border volumes and a downshift in US debit. Prior guidance had been for revenue growth of 10-13%.
  • As set out in our January 5th note, “Implications for Visa and FIS of Structural Change in US Debit”, we expect a 5-year revenue CAGR in the single-digits although conversion of the Chase commercial portfolio from MA will provide a lift in 2015.
  • The structural challenge is that as payments integrates with marketing, digital wallets (whether from Starbucks, ChaseNet, PayPal, Google or likely Apple) are interposing their brands between point-of-sale and Visa. Even if Visa processes the transactions, this “wrapping” of the Visa acceptance brand weakens pricing power and can bring alternative “rails” into play. PayPal, for example, routes over ACH; the merchant payments consortium, MCX, will route over FIS; and ChaseNet can “on-us” settle transactions where Chase is both issuer and acquirer.
  • Visa has responded with its own digital wallet, V.me, and reported signing up merchants representing $60bn in addressable volume; in comparison, MCX members control $1tn of spending. Presumably to help close the gap, Visa recently reorganized to strengthen merchant outreach including the hiring a payments executive, Ramon Martin, with previous affiliation to the National Retail Federation, to lead the effort.
  • However, just last month, Visa illustrated its tin-ear to merchants: “the more we can do to partner with the merchant community, the better it is for issuers …. Having said that, there’s a lot of value that can be brought to the merchant community by taking the information they have and the information issuers have to help drive more sales .. we want to do that in a way that preserves the existing four-party system” CEO Charlie Scharf, 3/24/2014
  • Large merchants are not interested in preserving the existing issuer-centric payments system or sharing their data; indeed, this is what is motivating MCX. WMT’s view is crisp and clear: “We think the card payment system is quite broken. We think there needs to be balance [between issuers and merchants]”. Sabrina Chin, Senior Payments Director, 4/23/2014. Lowe’s speaks to merchant concerns around the information generated from their customers’ payments activity: “What would those wallets be doing with that data? Would they use it to steer customers to competing stores. The control and ownership of data is really important to us retailers”. John Manna, VP, Lowe’s.

Our note of January 26th, “
Structural Advantage of MCX
”, provides further detail.

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