V and MA: Quantifying Concentration and Disintermediation Risk
Conversion of the Chase consumer credit portfolio to V, which apparently had not begun in 2013, will represent a 2%+ headwind to global growth for MA in 2014 (and 6-7% headwind to US growth) assuming 80% of the portfolio migrates during the year. In 2013, Chase’s ~$90bn of credit volumes represented 8% of MA’s branded purchase volume of $1.05tn in the US and 3% of the global figure of ~$3tn (see Exhibit below).
The Chase conversion means 2014 purchase volume growth for MA will likely be low-single digits in the US and ~10% globally; this can leverage to 11% net revenue growth (as guided) assuming a modest lift from pricing and less-than-10% growth in rebates/incentives. With a 32% tax rate and 3% reduction in stock count, EPS growth of 20% will require expense growth of 3% or less.
Network economics are sensitive to large issuers. MA’s other large issuers are C and COF accounting respectively (across credit and debit) for 20% and 11% of US purchase volume; large issuers for V, other than Chase, are BAC and WFC accounting for 18% and 11% of US purchase volume.
- We separate Chase because its private-processing arrangement with Visa means that some (and, in due course, possibly substantially all) of its volume will not count towards branded purchase totals; this is important because V and MA generate 10-12% more revenues from service fees (based on branded volume) than transaction processing (based on processed volume).
We see risk that other issuers (particularly those with large acquiring businesses such as BAC, WFC, and USB) follow Chase’s move towards private-processing; V and MA can be disintermediated even by issuers who do not have large acquiring businesses through BIN routing (where an issuer partners with a merchant-processor, merchant, or merchant consortium such as MCX so that transactions are routed directly based on a Bank Identification Number).
- BIN-routed transactions cannot benefit from network-level services, such as the detection and prevention of fraud. However, large issuers have fraud risk management to rival the networks; furthermore, if fraud risk is reduced through chip-and-PIN and (for online activity) tokenization, network-level risk management becomes less compelling even for smaller issuers.