The payments processor has found its way into wallets worldwide, becoming the world’s most valuable financial services firm with a $291 billion market cap.

Visa hit the most-valuable mark in March, despite its share price being dragged down along with that of just about every other listed company amidst the COVID-19 crisis. Analysts have cut forecasted revenues from transaction fees; yet Visa has not taken the kind of hit endured by big banks like JPMorgan Chase. How did it best the traditional winners? Visa executives might point to their firm’s technology and marketing capabilities, but basically it is by virtue of being the top player in the near-duopoly of the payments segment.

Visa’s role in global commerce is to coordinate the long chain of intermediaries between buyers and sellers, taking a small cut of each transaction. The California-based firm connects more than 61 million merchants to 3.4 billion Visa-branded cards, most issued by banks. This is very much a volume business. Visa claims to be present in over 200 countries and territories, and all told, it racked up some $9 trillion in commissions last year. Prior to COVID-19, Visa’s revenues grew by around 10% a year, reaching $23 billion in 2019, according to The Economist.

Up until 2008, when Visa was spun out, it was collectively owned by more than 10,000 banks. And up until then, the banks pocketed the fees. In the past 12 years, Visa’s already enviable operating margins have grown unimaginably, from 43% to 65%. Its costs have grown over the years, but more slowly than its revenues, since it can add capacity to its payments network for very little. And it can still use growing costs to justify charging more for its services.

Sitting at the top of the financial services world, Visa has very little competition – apart from Mastercard, at the global level. People still pay with cheques and cash. In some individual markets, there are local players vying for their share, but they are small. The difficulty of such would-be competitors catching on lies in a causality dilemma: Consumers won’t use a payments system if merchants have not adopted it, and merchants will only do so if enough consumers are using it.

There are some challenges for Visa, such as governments that oppose the quasi-duopoly of Visa and Mastercard. Some have established national equivalents, notably China’s UnionPay. Others, in Russia, Australia, the EU and other places, have called for payment rails that they can control. Both firms have been targeted by competition watchdogs, resulting in large settlements. Europe and the U.S. have put limits on the fees that payment processors can charge.

Others are looking to fintech alternatives and trying to broaden the payments segment with apps that enable direct payments. But typically a payments processor such as Apple Pay and Google Pay is essentially providing a way to use Visa and Mastercard without a physical card. Another alternative would be to incorporate payments into a larger commercial ecosystem, as exemplified by China’s Tencent and Alibaba. Amazon has this potential. But for the foreseeable future, advancements in fintech aside, Visa will be hard to displace globally.

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