Visa (V) And MasterCard (MA) Raising Prices On Issuing Banks: Read What The Director At SunTrust Thinks
March 9, 2010 - The Wall Street Transcript has just published Business & Application Software Report offering a timely review of the Multimedia Software sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Andrew W. Jeffrey, CFA, is a Director at SunTrust Robinson Humphrey. He has 19 years of experience as a sell-side Research Analyst, covering a variety of business services industries. Mr. Jeffrey has followed transaction processing and payments companies exclusively since 1998, and his research has been recognized in Reuters and StarMine surveys.
Prior to joining the firm, Mr. Jeffrey spent roughly two and a half years at Needham & Co LLC. Prior to that, he was at Robertson Stephens for six and a half years. Mr. Jeffrey has also worked at Rodman & Renshaw, Mabon Securities and Volpe, Welty & Co. He has held the CFA designation since 1994 and is a member of the San Francisco Society of Financial Analysts. Mr. Jeffrey graduated from the University of Pennsylvania in 1991 with a B.A. in economics.
TWST: Let's look at the end markets. What's going on there? Are we still seeing good growth opportunities here?
Mr. Jeffrey: Yes, I would say certainly more so in emerging markets than in the U.S., I think that's true for a lot of economic categories. But when you consider credit cards, for example, you are seeing a couple of things. You are seeing the U.S. lag credit card growth of more emerging markets, whether that's Latin America or Eastern Europe or Asia-Pacific, but you are also seeing a very pronounced trend toward increased debit card volume. Consumers are certainly demanding or preferring to use debit cards over credit cards, which has benefited a company like Visa disproportionately. But you are also seeing continued global remittances, albeit at a lower rate for migrant workers, and you are seeing automation trends in certain industries that are driving growth for well-positioned companies - a company like Solera (SLH), for example, that's able to automate the auto claims and insurance workflow process.
The move toward more sophisticated, automated markets for auto insurance has been a key driver for them. I would say the one area in the U.S. that is the real secular driver or growth area - the ultimate winners from an investment standpoint are still ill defined - I think is data security. And you have got a race to secure consumer data at the point of sale; we have had a lot of very high-profile data breaches. A company like VeriFone (PAY) I think is a very interesting play on that, with some of their new point-of-sale technology and security, which will probably allow them to transform that business from more of a hardware business into a truly recurring software business over time. So that's an area that really bares watching, too. Generally, I would say we are looking for sustainable, outsized, secular growth in electronic payments in international markets.
TWST: You mentioned pricing. Have these companies been able to get some higher pricing in this tough economy?
Mr. Jeffrey: Visa and MasterCard certainly have. Visa and MasterCard have been able to raise prices generally for a higher level of service on their - they have been able to raise prices on their issuing banks and to a lesser degree - or more recently, I should say - on merchant acquirers globally. And they have been able to raise prices in various categories, and in various markets around the world. They are probably the exception rather than a rule in terms of the ability to price because for the most part, pricing in these industries is adversely affected by the fact that they are fairly commoditized. But certainly, those are two companies that have really benefited from pricing power. And Global Payments (GPN), there are certain niche markets of Global Payments. The UK has benefited from pricing, benefited from pricing in Canada. Overall, Visa and MasterCard are kind of special companies in terms of their ability to price.
TWST: As we look at the longer term, are any new players coming on the scene?
Mr. Jeffrey: Barriers are high, markets are relatively mature. When you look at the market for merchant acquiring, core processing for financial institutions - certainly payment networks, private label and loyalty programs - for the most part, these are, as I said, mature markets that lend themselves more to scale. There is some disruptive technology - a company like DealerTrack (TRAK) that provides dealer management systems that we think are competitively advantaged. They have been able to take some market share from the legacy providers. You are seeing some shifts around the point of sale, as I said, where I think next-generation point-of-sale technologies give VeriFone an advantage. But more or less, the established players are the ones that are probably going to dominate the markets for the next several years.
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