Visa Inc. (V)
Investor Day Conference Transcript
June 6, 2013 11:00 AM ET
Jack Carsky - Investor Relations
Charlie Scharf - Chief Executive Officer
Bill Sheedy - Group President, Americas
Elizabeth Buse - Group President, APCEMEA
Jim McCarthy - Innovation Panel Discussion
Sam Shrauger - Innovation Panel Discussion
Bill Gajda - Innovation Panel Discussion
Mike Walsh - Innovation Panel Discussion
Silvio Tavares - Innovation Panel Discussion
Byron Pollitt - Chief Financial Officer
Victoria Hyde-Dunn - Investor Relations
Patrick Laney - Investor Relations
Glenn Fodor - Autonomous Research
Sanjay Sakhrani - KBW
Jason Kupferberg - Jefferies
Gil Luria - Wedbush
Tien-Tsin Huang - J.P. Morgan
Christopher Brendler - Stiefel
David Togut - Evercore Partners
Moshe Katri - Cowen
Bob Napoli - William Blair
Wayne Johnson - Raymond James
Darrin Peller - Barclays
Julio Quinteros - Goldman Sachs
Greg Smith - Sterne, Agee
Bill Carache - Nomura
Dan Perlin - RBC
Bryan Keane - Deutsche Bank
James Faucette - Pacific Crest
Tom McCrohan - Janney Capital Markets
Matt O'Neill - CLSA
Okay. Good morning, everyone. And welcome to Visa’s Investor Day. For those of you in San Francisco hello, for those of you joining us on the webcast welcome as well. I’m Jack Carsky. I oversee Investor Relations here at Visa. On behalf of the entire management team and the entirety of Visa thank you for coming.
We think we have a pretty exciting day planned for you. It's a triennial event. We are hoping to make it more frequent than that and you all have an opportunity to weigh in on that in the post Investor Day survey will be sending out to you and I encourage you to please respond to it.
Okay. As you can see from the accompanying slide we have a pretty deep lineup today. We are going to commence the morning with Charlie Scharf, our CEO who will provide you with an overview of today's program, shares his thoughts on our current and future business opportunities and his strategic vision for Visa.
Next up Bill Sheedy and Elizabeth Buse, who I know many of you have met within the past both the conferences and on-site Visa. Rather than speak to the geographies they historically managed, Bill and Elizabeth will split the Visa world into emerging and developing markets and will focus their respective presentations on what it takes to be successful in those sometimes similar but just as often widely divergent geographies in terms of how we approach them.
After that we are going to have a brief Q&A session with just three of them and I’d ask that you pose questions of them hold-off on tech related questions and so forth until we have our second all in Q&A when those speakers will be up here on stage and can answer that type of thing.
After our initial Q&A we’ll have about a 30-minute breakout or bathroom session if you will, I encourage those of you who haven't been over to innovation showcase, take the time to go over there, there is some really interesting stuff we've got and I think it’s going to help you in a lot of respect separate some of the rhetoric from the reality that really is swirling around not just Visa but the tech space in general and certainly in terms of mobile and so forth.
When we’ll resume, Jim McCarthy will bring you up to date on some of these new initiatives and we’ll, I think help bring a lot of that innovation showcase to light for you. Jim will then bring up the people who actually are in the trenches dealing with these technologies every day that will be Sam Shrauger, Bill Gajda, Mike Walsh and Silvio Tavares, who many of you may know from his past life that first data both as head of big data there and also IR, so there is future for me, someone else in Visa apparently, if Silvio will have.
They will be followed by Byron Pollitt and I just want to pause there for a moment and mentioned most of you don’t realize but last night Byron was inducted into the local Seattle Hall of Fame given the Lifetime Achievement Award as one of the Bay Area's eminent CFO’s, huge honor.
And after that Charlie will come back with a brief wrap up and then we’ll have a general Q&A session, and that will be more of the focus for tech-related questions if you’ll please hold them for that.
At the luncheon which is in the same room as the technology showcase, management will be present in addition to all today's presenters will have other folks from Visa risks, finance, so forth, it will be open seating, so just pick your favorite Visaed and sit accordingly. And again spent some time in the showcases, it will really be worthwhile.
Before the ceremonial reading of the forward-looking statement which is what I personally look for of course. I’d like to acknowledge the other members of the Visa IR team, Victoria Hyde-Dunn, who is somewhere in the back and Patrick Laney without whom a good portion of today never would have occurred.
And then copies of today's slides were distributed before the meeting, for those of you listening via webcast they are on the IR section of the Visa website. And so with that the forward-looking statement, we always market in the IR industry but we take it seriously here at Visa so do give it a brief read.
And with that, it is my pleasure to introduce Visa’s Chief Executive Officer, Charlie Scharf.
Thank you, Jack. Good morning, everyone. I too just want to take a second and congratulate Byron on his achievement. We are -- is a real honor. Byron has done an unbelievable job for Visa and obviously before that at his prior companies, but the company would not have had the success that it has had without Byron position that he assume. So thank you everything, Byron.
So I’m going to just talk a little bit about some of my thoughts on where we’ve come from and where we’re going. And I guess, I just want to start by just telling you how I wake up everyday and I think about how lucky I am to be at Visa. And that's really what today is about as we’re going to hope to share why I feel that way, why the rest of the team feels that way. Part of it is our history, so we’ll talk a little bit about how we’ve done and how we’ve gotten there but we’re also going to talk more importantly about the future.
Very big part of what you’re going to hear from Bill, Elizabeth, Jim and the panel as well is how we see the world evolving, why that excitement exists and what we’re doing to capture our fair share or more than our fair share as time goes on. As Jack said funny time for Q&A, we do have the demos which we encourage you go to see. So you have to put and plug for that and we have a broader group of the management team here other -- in additions to people that you’re going to hear from, who are going to be around at lunch to talk to you.
I also want to introduce Ryan McInerney who is right over here on my right, on your left. Ryan joined us three days ago. So we’re going to give him a reprieve from being on stage, give him at least four days before we actually allow, ask him to do that but it’s -- I think it’s great for the company.
I have known Ryan for quite some time. We’ve worked together, known to many of our customers. He is a great addition to what we think is just the terrific team that's delivered these great results. With Ryan's arrival, it’s been an opportunity to consolidate all of the client-facing functions into one place as oppose to where they had been, take all of our regional heads that we have across the globe, have them report directly up to Ryan.
It’s allowed us to take Bill and take Bill’s skills and talents and knowledge and let him focus across the world as opposed to just part of the world and the same thing for Elizabeth, running what we call global solutions, which is really think about as the pieces which we are heavily reliant on for the future.
So arguably the most important sets of things that we have, which is mobile, data, processing, digital wallets among other things. So very excited to be able to do that and then it’s also enabled us to have Jim who most of you know, who is going to be up later today. He has been full time on innovations, partnerships, how the world is evolving and what our place is in it.
Hold on. I just want to look for the clicker. Here we go. So with that, I’m going to move on, we are going to start with the key themes which you can read up here. And again it’s, our company is evolving. And it’s clearly, these are dynamic times but we’re more excited than ever about what the changes in the payments world mean for us.
We think we do have the strong foundation. We’ll talk a little bit about the macro trends that most of you know but we think are certainly helpful to address, talk a little about the progress that we've made and the consistency of where we’re going with some acceleration of some things. And the message that you’re going to hear consistently is the company has invested materially for growth and we’re going to continue to do that.
Little bit about our business for a second. We have an enviable business for sure, $4 trillion in payment volume. I’m sure you know lot of these numbers we can process 24,000 transactions a second. We have 36 million acceptance locations across the world and that does not include mPOS, mobile point-of-sale, which we’re going to talk a great deal about which is extremely exciting to us. It’s a huge opportunity to expand the acceptance of our products across the globe.
Square alone, we think has over 4 million merchants today, most of which we believe are new to accepting our products. And they’re just one provider of these services across the globe. And again you can see here, strong performance in our revenue and our growth and our EPS both over the past five years and over the past year. So again I had nothing to do with that. It was the rest of the team that you’re going to hear from but certainly worth calling out.
Our business and our success, we feel very, very strongly when we look at where we've come from and where we’re going that our success really is built around partners of all sizes. It's not just about us doing something. It’s the leverage we get from working with these fabulous partners that we’re lucky enough to call partners across the globe. It's critical importantly for us when we think about what we’re doing, what our opportunities are that we think about it as it's a very diverse set of partners that means geographically as well as partners of all sizes.
Everyone likes to talk to us about the big deal, the big client, the big thing we announced with one of our partners. But the reality of our business is we have the leading share of seven of the top 10 issuers in this country. We have long-term contracts with more than 600 financial institutions here.
We have leading share with the Credit Union and Commercial Bank associations whose logos you see off on the right. In fact, just yesterday, we announced an initiative with ICBA which is the group that represents the community bankers association to offer real-time offers to people that are part of that association.
So it’s just an example of -- it's not just big people, it's small bank and there is a deep commitment from us. They're very important part of our business historically and going forward. And our business outside the U.S., we all know is growing faster than the business inside the U.S. Again hereto 3000 non-U.S. Visa clients, leading share at 17 of the top 25 and 60% were smaller bank. So again it's a very diverse group of partners that helped drive our success.
In addition to the financial institutions, our partners go beyond just issuers and acquirers. It’s co-brand partners and it’s merchants. We’ve talked a fair amount. We’re going to talk more about the importance of thinking about merchants as our clients, as our partners. It's a big part of our CyberSource business that we have. It is our CyberSource business and as we look forward, more and more opportunities to help us grow there.
We have some of the greatest co-brand partners in the world. Again, here too in the U.S., seven of the top 10 co-brands are the majority of Visa. And beyond co-brands and merchants, we think the governments as great partners for us. And we’re going to talk a lot about that in both Bill and Elizabeth’s presentations but as the world evolves and our opportunity to penetrate the world, the world’s under bank population becomes an increasing reality for us. It becomes a real strategic opportunity for us to think of governments as partners.
And then we get lots and lots of questions about new payment participants. I’m not going to do the specifics here but from our point of view we welcome them. People ask us all the time about our concerns and how we feel about it. We have a great asset here which we’re going to talk about in terms of what our network is and what our capabilities are, very hard to replicate.
But they’re huge opportunities for people to help figure out grow electronic commerce across the world. And we welcome the opportunity to talk with them, work closely, let them do what they are good at, let us do what we’re good at. And it's all of our goals to grow commerce and grow the electronification of payments. And again Jim will discuss much more of this.
We’re also as we know in addition to these partnerships figuring out where we should be building our own solutions. So even though we love to engage with people on the outside, we’re building our own things like V.me which is our digital wallet, which is very issuer and acquirer-centric to help us tackle the opportunity along side the partnerships.
So let me just move on, just talk a little bit about the Visa stories, I think about it. I think about the path we’re on is falling into three distinct periods. I’ll just do this very quickly but first almost 50 years of our life was life as a financial institution owned association. And there were multiple associations across the globe that operated fairly autonomously, connected through interoperability agreements and brand agreements and whatnot. But what that meant was very regional focus, very regional resourcing and focus on the owners in that case which was the banks.
Then 2007, 2008 comes along, merged these entities together, excluding Europe. So, huge task to do these concurrent mergers at one's, company goes public. And then just to get that work done to create one great global company, huge internal focus initially and the idea of taking a company from an association to a for-profit institution is just, it’s a see change within the company, with just a lot of focus on doing what's best for Visa.
And then after those initial couple years the work began to focus more externally and you saw the acquisitions of CyberSource, Fundamo and PlaySpan as part of that. And then I just kind of said 2011 and beyond really creates a whole new part of our story here.
The world is going through huge technological changes we know, mobile is a reality and the things that we can do with mobile both with smartphones and non-smartphones are very different than what existed in the world three, four years ago.
We all know about regulation in the merchant voice as being something which is changing the dynamic and changing the dialogue and tells us we need to change how we think about them as well.
And so all these things just tell us, it’s -- this idea of we are maturing organization. The opportunities that exist in the world because of what's happening with technology, things like the opportunities at point-to-sell, the opportunities to use data, suggest that we do need to continue to evolve and actually accelerate our adaptability in this new world.
Just talk for second about the macro trends and why we feel so good about our place in the technology-oriented payment space. Our business really grows several ways and number one is, we’re lucky enough to grow along with the global economic growth and that's what you see on the left-hand side.
This is PCE and you can see that in our countries going back to 2009. It’s up 6% with a 10% growth in emerging world and 3% in the developed world. And so, as people spend more, we’re the beneficiary of that.
And on the right-hand side you also see a combination of couple of things, this is our penetration of cash -- our penetration of PCE and so this is as the world continues to electronify and as we continue to either do a good job or bad job with our share gains relative to our competitors.
And here you can see, the progress that we've made 6% to 9% in the emerging world, 19% to 22% in the developed world and you’ll just notice here that its flat over the prior year on that bar chart on the right and just note, remember we have Durbin effect us offset by strong gains that we've had in our credit business.
And so, these things are obviously important drivers for us as we think about our future because we feel confident that these trends will continue. And many of you just take a part what is actually driven our growth historically, so this just takes our revenue growth from ’08 to ‘11 on the right-hand side in 2012 and decomposes where our growth came from.
And so in this case you can see that PCE growth is has been about a quarter of our revenue growth in both periods of time and then when you look at our penetration, it's about half. And then what’s on the bottom is pricing and some other things you can see the numbers half of what it was and the reality in 2012 is that pricing, the effect on pricing and our revenue growth is negligible.
And so we have lots of questions about how we feel about our opportunities to increase pricing and we look at our opportunity in this world to grow volume and believe that pricing is not the lever that we have to pull in order to get the revenue growth that we think is right for company like ours to attain.
And all of this points towards the repeated theme, which we’re going to continue to talk about which is that, cash is the single biggest opportunity borrowing none for us. Again, this is our markets, so we’re not in the European market. So these numbers might not tied to what you see across the entire globe. But remember there is $11 trillion of cash and checks there in the world for us to penetrate and that number is growing.
And of that $11 trillion people get surprised little bit when they see five of its in the developing world, I’m sorry, five is in the developed world and six is in the emerging or developing world, and obviously, that's because that the developed world is still a big number and there still a huge amount of penetration that can still take place in the developed world.
So, very focused on growing the business outside the U.S., especially in the emerging world, but we think we still have plenty of opportunity to grow in both developed and undeveloped worlds, and Bill and Elizabeth which takes it through all those pieces as well. And we’re also excited these days and we’re going to talk a lot about this potential for the acceleration of electronification.
I talk a little, second ago about mobile acceptance. We’re going to talk in detail about what we’re doing in mobile acceptance. How this actually works in reality. But for us mobile acceptance is, it’s a huge driver of increase acceptance. I referred to the 4 million square users and then -- and our belief that a huge portion of those are new to the Visa payments universe.
But you just look at the number below that, the number of mobile terminals grew from 4.5 million in ‘11 to 9.5 million in 2012, and Bill is going to talk about where that’s projected to go. And again, so that both in developed worlds and developing worlds creates a huge opportunity for us to have our products serve a much wider group people than we were able to serve in the past.
Financial inclusion is a big part of opportunity. Financial inclusion is trying to work with the 2.5 billion underbanked people across the globe, 1.7 billion of which have access to a mobile phone. This is the core of how we start the core of what we do. It’s socially good. It’s economically good. It aligns, what's good for us is good for governments and good for individuals across the globe.
And then, the other thing which we think a lot about is this idea of working with merchants and you think you can, it easy to think it about what’s going on here in the U.S. and think about the relationship that we and our competitors have had with the merchant community in United States and it's hard to believe that they've been working really hard to help drive our business, right. I mean, that's obviously not been the case.
And so we believe there is a great opportunity to work differently with them to engage them in a way where they actually like our products and they can actual be a partner of ours overtime to help drive not just their success because that's how we’re going to win, their trust, but ultimately we’ll be a beneficiary of that on the side. That's both because of the e-commerce opportunity and what we think our products can bring to them, as well as things that we could do at the physical point-of-sale, again which we’ll talk about as we go through the day.
And then I just want to touch for second on one of our core assets, when we think about our core assets, we have global acceptance with those 36 million or so merchants plus mobile point-of-sale. We’ve got the intellectual property that exist it’s been built up over long time within Visa. But at the core we’ve got a network is what we called VisaNet.
And then just to shows you just a little bit of how its evolving and as we think about the future value of the core network, we actually think is growing not being diminished anyway it perform, but it's obviously very critical that we continue to extend the edges of it, extend the uses and extend the capabilities, and again, we’re going to talk through that.
And so you think about how the network has evolved. We think about access. And you think about historically there was just basic point-of-sale an ATM acceptance. Today, new segments being opened up, small tickets on the Internet and things like that, and as we think about the future, that our network really becomes a platform for merchants and issuers to experience, to help customize their experience and grow their business.
Transaction processing, again, also great changes, we’ve done from reliable, [clear out and settlement] to be able to create real value added services, especially that are geographically centric as we’ve continued to grow our network. And now we are entering the world where we’ve got the ability to create highly customized processing solution.
And driving the processing solution as you heard about and you’ll hear more about from Bill and Elizabeth, key driver to our margins overtime. And then the opportunity to continue to grow out our business intelligence and platform tools, again here we’ve gone from years ago just basic reporting to people who participated in our system to what we think are some pretty advanced risk and fraud management tools, really hard to duplicate the way we’ve got them today so just true value added, but the opportunity is to go well beyond that to connect issuers and merchants let them use their data our system in a way that they can’t do on their own and the ability to do that is because we sit in the middle of those transactions with the network that we have.
Our investments that we have been making I just thought just have to give you a little bit of quantification that we talk a lot about these things. But again I just also think about this in the context of those great results you saw on the beginning pages, those were not done at the expense of not -- I think those were not done, I’m doing like a triple negative here. Those were done with the eye for grow in the future.
So there was no skimping going on relative to investing in things that we thought were important to help grow the company and what this shows you is, this just shows incremental expense added to the company between 2013 and 2011. It adds up to $700 million of annual expense addition to our total base of which you can see what the pieces are and that’s on top of the $2.3 billion that we spent on the acquisitions of the three companies I mentioned earlier.
You can see a $125 million of incremental expense going into non-U.S. market focus, this is people, it’s technology, it’s marketing, it’s helping build out acceptance, it’s all the things that you’re going to hear about in a little bit.
And then product innovation, we talk a lot about V.me, CyberSource, mobile and things like that, again additional $300 million in our expense base. And then just basic technology huge and important that’s what we are at the core of what it is our network is a technology business, and as we think about the future here, we can think that as a couple of different ways. This is a huge amount of money. We feel great that we spent it because that puts us in a position to capture that opportunity.
Over time we do believe we can become more efficient and that then becomes a lever for us to think about what do we want to do going forward. That means we -- if we can continue to reinvest and move on to the next things that Jim and the team are going to be focusing on or it becomes a lever to do something different with that depending on what we see as the outlook. So, again, I feel great that we’ve actually spent the money. It’s embedded our numbers and it creates not just a great future for us but a whole lot of optionality.
I have spoken a great deal about being flexible and being adaptable over the past seven months since I have been here so I just wanted to touch on it again because I am not sure everyone in the audience has heard it.
As we mature as a company and as we go from what was again a financial institution owned business that wasn’t focused on its own result initially to all of a sudden you are public company and you’ve got to focus on your results. We are in a growth business big expectations, huge focus on what’s right for Visa.
Overtime, the only way we’re going to be successful as a business is to put our customers first and as I have talked about consistently, defining customers’ broadly not just issuers and acquirers but merchants and governments.
We’re very clear when we talk internally about what our future is that our future is supporting those partners that we have today. We are not interested in competing with them. We’re not interested in being divisive amongst them. Our job is to bring all of the tools that are available to us, given where we sit in the payments value chain and help every one of them grow big small, U.S., non-U.S., and financial institutions, all the way through to the merchants, absolutely critical for us. But we’re also very, very keen that we’ve got to do all of this while we stay very, very disciplined about what’s important to us, so that means being principled.
So we’re going to adapt our practices. We start to see some of that. Part of that’s our own mindset in terms of again who we view as customers and things that we should be doing in this evolving world. It’s also going to be things like rules which we’ve heard a lot about, our ability to be flexible.
And it’s something that we have to do. There’re so many new opportunities in the world that didn’t exist three, four, five years ago, whether it’s again, things at the point-of-sale or things that our data allow us to do. Those opportunities didn’t exist in the past. We have people all across the globe that are trying to figure out how to do that and we believe we’re in the best position to do it.
So, again, we’re going to do it. We’re going to be principled. We’re going to do things that support the Visa brands, safety, soundness and security; nothing will stand in the way of that. We have to control the intellectual property that’s the core of who we are. We won’t do something that advantages one client versus another. If they have differentiated capabilities that’s up to them to figure out how to compete with each other but we’re going to do something that we think allows everyone to compete and whatever we do with someone else is got to add value to our network.
So, again, lots of opportunities for us to do things of companies with all sizes. You’ve seen some of the big things that we’ve done, but as I mentioned earlier, the announcement we made the other day is in fact something and it’s an example of what we want to do with smaller companies.
So I just thought the last slide I would use at this part of the section is this page which is strategic aspirations for 2015. But everything to the left of the checks on this page, this is the exact same page that was put up at the last investor presentation. So I just thought we go back, take a look, say, what did we tell you all and we think we’ve accomplished what those things are. And I’m not going to go through each one of them individually but you look at all of them and we are on track to deliver all of them by 2015, if not sooner.
I just want to point out two small but significant modifications which are the notes on the right. When we talk about entering new businesses, we’re thinking about that just a little bit differently, right? We believe the value is in our network. That’s what we are. We love the business that we’re in not someone else’s business.
All the things that we’re focused on that you’re going to hear about are all about driving more transactions by creating more value for all the participants in our network to run through the VisaNet system.
Great opportunity to do that because of where we sit, because of the capabilities that we have, so it’s not about entering new businesses it’s about continuing to extend the network on the edges and doing the things that we think we can do to help drive more transaction to us that are proving, that will prove to be more valuable for all of our partners in the process.
And then the last thing you can see here is we’d talked about being a top 25 company by market cap and the way -- and the reality is inside the company -- this doesn’t change inside the company. There is really no talk inside the company about market cap.
The talk inside the company is about total shareholder return and we talk about the pieces and we talk about the importance of driving revenue growth and EPS growth because that’s what we control, just doing all the things that we can do to help drive that over a period of time that obviously will drive the stock price. But it’s also about using capital wisely and making sure that we return it in a way that makes sense for you and Byron is going to cover that, so I’m not going to talk anymore about that.
But as we look forward, all of these things that are on here are still absolutely critical for us. This opportunity to extent the mobile through -- to extent the network, through mobile, through ecommerce these data driven solutions thinking about working in partnership with a broader group of people, all these things we think accelerate our opportunity.
I’m just going to close with just a reminder we love the space that we’re in. We love the assets that we have. We actually get very excited not worried in the way share perform about technology’s role and what it’s doing to the payment system and believe very strongly that we’ll be the beneficiary of that.
And so with that, I’m going to turn it over to Bill who is going to start to taking us through the developed world and I’ll see you all a bit little later.
Thank you, Charlie. I can finally click. So building on many of the same themes that Charlie just walk you through, the next couple presentations will touch on, I’ll hit the developed markets, Elizabeth will come using the same exact framework that you see on the chart in front of you to walk you through the ways in which we’re thinking about growing and investing in our emerging markets.
I think many of the questions that we get as it relates to the developed markets is relates to, do we have a strong and long runway for growth given the size and the significance of our business in the developed markets, and the importance that it has to the business today, can we continue to drive growth as a growth company and I won’t surprise you since the answer to the question is, yes.
There are hopefully, if I answer no question over, if I only answer one question over the coming slides it will be, where do we view the primary sources of our growth in the developed markets. I’ll touch on to a certain degree the how, but Jim McCarthy and the panel will touch on to a much greater degree the ways in which we’re investing to deliver against that growth.
I’ll break it down by a product perspective. Certainly as we think about growth. It’s first and foremost driven by the fundamental economics, Charlie talked about PCE is going to be a common theme in my presentation, Elizabeth presentation. Break it down by product.
Certainly the acceptance of the product is fundamentals of the consumer value proposition not just the terminalization of the world, but the engagement with merchants, the ways in which we incorporate innovation of the product and the engagement with additional clients outside of our financial institution clients in particular with government.
So starting with personal consumption expenditures, you see here, I’m going to focus throughout my presentation, most of the slides on seven developed markets represented here. These seven markets represent two-thirds of Visa's business globally, roughly by measured by revenue, as well as volume.
And you can see here even across these seven markets you see very mixed of cash and check volume in these markets. The 5 trillion in volume, Charlie referenced this some of his slides. This more than doubles Visa’s penetration in these markets with electronic forms of payment.
And a couple of points, Charlie mentioned, the cash volume in these markets on an aggregate basis year-over-year continues to grow. So not only is the opportunity for us to penetrate over the long-term as we continued to execute against our business and ride sort of the secular shift as consumers and businesses go towards electronic forms of payment, but the pie continues to grow.
Second most important point, as a company the historically was in support of financial institutions who were issuing products to bank consumers, certainly our focus is on personal consumption expenditures. But there is enormous opportunity, there are two enormous opportunities, they aren’t even reflected in PCE.
Commercial consumption expenditures globally, another 5 trillion we believe is cardable and we are only roughly 1% penetrated even in the developed market as it relates B2B expenditures and none of these speaks to the even larger opportunity as governments transact with their population. So we look at all three of those as very significant and compelling sources of our growth.
Before I talk a little bit more specifically about sources of growth in the products and markets segments, I want to talk just for a few minutes about the ways in which we think about yield. It’s a question that we often get, particularly given our margins, how do we think about the changes in yields and the investments that we have as we invest in local markets.
And one thing that surprises many investors and analyst is that when we invest in local markets and we drive what we considered to be more and more healthy growth in a country, it has the effect of actually driving down our yields and let me explain why?
The highest yielding transaction we have globally is a cross-border transaction, roughly speaking we have 10 times the yield both in the -- multicurrency fees and other fees that we charge on those transactions, as well as the fact that all of our transactions globally when they happen cross-border run over our network.
So these yields are very attractive. We like that business very much. But a stronger source of we considered to be long-term fundamental growth is when we start driving domestic volume and domestic growth.
You can see in the left hand side of this chart that when that happens it certainly a sign of health and participating in the local economy. It’s a lower beta of volume because it tends to be more stable over time, but its lower yielding. So that tends to drive down our yields.
Likewise in many of the things that Jim and the panel are going to talk about is we invest in information products, processing services. Those require significant incremental investments. It differentiates us from the competition but have lower yields than what has been historically the case with our processing services and our branding services where we have very low incremental costs associated with moving those transactions on the network.
So just to illustrate the example in Chile, when you back to 2008, we had a business that we like very much in Chile. It’s fast growing markets. We have strong bank relationships in the market, 90% of the business was domestic in 2008, 10% international. The growth in the domestic business was a concerted push.
Falabella is a very large retailer in that market, increasing our share position with the financial institutions, lots of marketing with fast-growing middle-class or particularly over the last four years in that market.
And in doing so, we developed a stronger franchise in the market, sorry. I forgot to how to go back obviously, you bet. And in doing so we drop the yield in Chile by close to 10%, but over that four-year period we increased aggregate revenues in Chile by 80%. So, lower yields, higher net revenue or total revenue of the company and a stronger market.
Next few slides I’m going to walk through a product perspective in ways in which we think about sources of growth. When affluent credit is an increasing portion of the ways in which we think about the growth within the company.
Over the last five years, affluent credit has moved from just north of 20% of our total credit business to today in these developed markets it is 40% of our total credit volume. And you can see in this column across the seven markets, the affluent credit business is growing consistently faster than the rest of our credit volume.
And that's a combination of two things, one, the investments that you are seeing on the right-hand side with co-brand partners and a marketing programs and sponsorships, primarily historically designed towards the mass affluent consumer.
In the U.S. households that have over $100,000 in annual income mass affluent, it only represent 20% of the household, but they drive 70% of the spend and these mass affluent consumers put more than 50% of their total household expenditures on cards.
We like that very much. We will talk in a bit about the fact that we are still under penetrated as you move up in the higher network categories so we view that as an incremental opportunity going forward.
Debit in the U.S., largest portion of our business is a place where we are very enthusiastic. Why? There is many tourisms and payments, but one of the universal truths is that when you look at consumers around the world, almost irrespective of geography and demographics consumers want to transact with money that they have, not money that they borrow, or have preloaded, we like those businesses, there is other businesses very much.
But over the long-term we view debit as the most compelling way to penetrate cash and check, it’s just natural to consumers in all of the market research that we do drives that whole.
There is two sources of growth that we’d like you to think about is relates to our debit franchise, certainly the cash and checks that I just referred to. But also as you move around the world, and I’ll explain the data on the chart here in a moment.
As you move around the around world, many of the local debit markets are driven not by business that we currently enjoy but by local players, domestic debit schemes, sometimes they are national switchers, sometimes they are strong incumbent players. And as you can see in the U.S. given that 61% of Visa's business is debit, we’ve done a very nice job of growing that category.
Around the world as you move on the right-hand side of this chart, the -- you see here that there are very large developed markets, where we haven't really even started. And when you look at markets like Canada where Interac has 99% of the debit market and in Hong Kong and Japan as well, we view the services that you are going to hear from Jim and the penal, the ways in which consumers are going to increasingly look to be able to transact with their debit accounts, not just in a physical world PIN or Chip enabled environment but online in a multiple channels, the concerns that financial institutions, governments and consumers have around the risk and our networks ability to better manage and support those transactions as compared to local players.
We think that there's an opportunity to grow this category not just by changing consumer behavior around cash and check but by penetrating the share that’s currently enjoyed by local players. When you look at the Australian example where we have 20% of our business on debit we’ve been able to grow that very nicely at the expense of mPOS local player.
Now the debit business in United States has been rather challenging. It’s certainly been something that we’ve all talked about. It’s covering the press, certainly the analyst, lot of uncertainty within the industry and particularly given Visa share position lots of discussions, I’d like to spend a few minutes talking about U.S. debit.
As you know pre-regulation Visa enjoyed a very strong position in U.S. debit. We were roughly 60% of the category when you look at Signature and PIN-based debit and that volume, our share of that category is absolutely declined. It’s come down about 15% from 60% of the category to just about 50%. And that share position decline is going to be something that will be, that will stay with us.
The regulation, the ways in which Interlink competes with other products on those cards is just the reality. The good news is from an investor standpoint, the volume that went away that will likely stay away as we’ve talked about is lower yielding and frankly, a portion of the business that was more competitive.
So when you look at the aggregate revenue associated with the U.S. business which is our largest business globally when you look at it from a geography or product perspective, it’s still about 20% of our global revenue.
We like it very much as you can see and as Byron and Charlie talked about in recent earnings calls, we have now lapped the four or five quarters worth of a very significant decline in the (inaudible) and we will now reach a portion as you can see in the top hand part of the chart, we’ll start growing right along side the rest of the industry.
Now, if you go back around Dodd-Frank and the Durbin Amendment there was lots of concern about the health of U.S. debit and how the business would move going forward. What I can tell you and I think the data bear this out. The U.S. consumer frankly has continued to power through and use their debit accounts. They -- it continues to be the market research is that 50% of consumers in U.S. continue to look at their debit card as their preferred form of payment.
And when getting back to the point earlier, where consumers want to pay with money that they have, when you look at the range of options that consumers have to access their demand deposit account, check, cash, other forms of payment, it continues to be the most convenient for them to use their debit card and even though the economics have certainly been hurt by interchange regulation, the debit card continues to be the most profitable access device for financial institutions.
There is no question the banks have dialed back their investments. We’ve seen pullback and rewards. As I mentioned, our position has declined and we’ve had to explain that over the last four, five quarters. But we’ve now I think settled out in the position and we like this business very much is I think a sign that while regulation certainly a something about which we need to be concern.
In my new role, certainly, something that I’m going to help the company focus on, reality is that consumer values debit products whether it’s U.S. or in these markets and we continue to think that it’s a very business irrespective of any regulatory uncertainty or headwinds.
The other point I want to make on this chart and it will talk a bit about the merchants here in a moment, some of the lemons lemonade situations as it relates to the debit challenge. We came out various position of debit product. We also made a very active push with the merchant community with the acquirers and processors. When you look at our incentives historically they’ve been traditionally position on issuing side of the business which is driven most of the competition and most of the share.
We’ve now over the last couple of years established over 100 routing agreements with merchants, with acquirers, with processors and I think that that's been a healthy development of our business to bring about balance but it’s also enabled us I think to weather this transition and position as well to grow.
Let me talk now a bit about of prepaid, something we talk less about, we don’t break it that out in as a business for you. But when we look at the prepaid volume opportunity globally, in -- its 3.8 trillion and market opportunities in the United States alone we see this opportunity at 2.2 trillion.
Now this would encompass general purpose re-loadable which is a product category that their banks have now moved into in addition to some of the non-bank players Green Dot, NetSpend and others who have been strong partners of ours and help this category grow. It includes the opportunity with payroll.
We now have over 40 million consumers who are outside of the banking system being marketed by their employers and partnership with Visa in some of our processing and financial institution partners to take that pay-per-check. The expense, the risk associated with that and move that on to a card we see that as an enormous opportunity, as well as to partner with governments.
There are 95 million individuals households receiving government benefits around the country. We see that as a $400 billion cardable opportunity. There is 100 programs in 40 states and we continue to see interest across the market to continue to grow prepaid.
So we are very bullish about prepaid. It’s our fastest-growing consumer product globally. In the U.S. if you look back a handful of years we’ve been sustaining 20% to 30% growth rates in prepaid. So we’re very encouraged about the opportunity to penetrate prepaid. It’s impart because of the increased focus and increasing size of the unbanked population.
So those -- that's the product view. I want to talk for a few minutes, I mean, next few slides about the importance that we place on processing. And I think that when you look at the business in the developed markets, in particular in North America, we’ve talked for quite some time about the ways in which we linked very closely the brand, the relationships we have with financial institutions, the health of our franchise with VisaNet and the processing of transactions over our network.
It enables us to deliver consistent services, distribute product much more effectively, lower costs, lower risk and as you are going to hear from the panel in a moment, it's inextricably linked to our ability to innovate in the market with our clients and ultimately in fact consumers and merchants in the ways that we like. We’re well positioned in Canada and U.S. and have been for quite some time.
One of the benefits of the global merger, that Charlie referred to in 2007 and 2008 is this emphasis that we had always had in North America was something that we started to globalize. And when you look at the progress that Elizabeth’s team made in AP, CEMEA over the last few years, you can see that the rest of the company has absolutely gotten on board.
We have a market like Japan where we still have situations where merchants have deployed multiple terminals at the point-of-sale and were compelling more and more transactions coming directly over our network to switch through the network as opposed to directly from the point-of-sale. The situation in Australia where direct partnerships with merchants has compelled those merchants like host throughout transactions, through us as opposed to bilateral agreements through financial institutions.
And again as I said, the more transactions we see the more opportunity we have to lower costs and distribute more effectively the product innovation platforms that we’ll talk about over the course of the rest of the morning. This isn’t just a developed market play. Charlie showed you the hundreds of million dollars -- $700 million of investments that we layered into the company's annual expenses. A good portion of that is focused on building processing in these local markets.
So let me focus just for a moment, be it from development market view to an emerging market view, you see here, Brazil, Southeast Asia, South Africa, we’ve also been very successful in driving domestic processing. And very often, you can see in a moment making in bets, making investments in driving domestic processing, pays off and very often takes years to take a foothold.
In Brazil, we now have our second largest population transactions moved over the network. This upcoming year will hit north of 90% of the transactions in that market moving over the network. Very important that we just turn on debit in Brazil to transact online, which is roughly 30% of our business. So we are having opportunity to drive organic growth there.
In the local markets, very interested in our ability to support them there because we’re able to lower risk by real-time risk running of those transactions over the network. South Africa likewise, we’ve been able to dramatically increase our penetration in that market, not just by lowering costs and bringing our scale of our global network but by reinforcing to the clients in that market that our risk tools work better than their domestic processing options. As you can see, they’ve respondent accordingly.
I think about earlier stage developed markets, mostly in Russia but at the moment we’re not processing any transactions in Mexico or Columbia. And if you talk to the country managers in those two markets, they would tell you it's a top-tier priority initiative of theirs, to tell you, I was just in South America a month or so ago meeting with members of the central bank as well as the financial institution and local processors in order to establish our processing foothold in these markets.
It’s critically important to drive terminalization and the fraud rates in lot of the American markets are unfortunately high. And we think that we have an opportunity to grow the market there and tap into even greater growth that we’re seeing across the region that is already driving fantastic growth for us.
And the Russian market, huge business for us as a country, growing faster than any other country we have within the global franchise. And we've made some progress in domestic processing, the acceptance in Russia outside of the metropolitan areas is not where we want to be. We think we can be a partner in that only for the financial institutions but for the government as well.
Big partner processing is merchant. It’s being -- we like to say internally, probably the highest return on investment that we have within the company is deploying new terminals. And you can see that over the last 10 years, if you went back, there was lots of discussion even 10 years ago about the U.S. being immature in acceptance market.
When you go over the last 10 years, even in the United States, we’ve increased terminals and merchants accepting by over 70%. And when you look at the other developed markets on this chart, if we just bring them up over the next 10 years to where U.S. and Australia are now, we have an opportunity to layer on an additional 5 million merchant locations.
And Japan, Singapore and Hong Kong are not as terminalized today as U.S. was 10 years ago. So we think that's a real opportunity. As is and Charlie mentioned, you saw on Charlie's charts, the mobile terminalization has more than doubled from 2011 to 2012 to over 9 million. Our projections are by 2017 that that numbers is going to exceed 38 million that's additive to this numbers.
So if we do nothing else, same cards, same financial institutions, same products in market, just like giving consumers new places to use their cards in these developed markets, we should see fantastic organic growth. Marketing partnerships -- merchant partnerships, excuse me, Charlie made reference to this.
I’m not sure that there is much that I can do to build on that other than that I would tell you that outside of North America, we had many very, very strong merchant partnerships. And when you look at the investment that we have in the CyberSource organization, what Mike Walsh and his company do is lower risk and add value to merchants everyday. That’s a big part of how we’re thinking about the engagement opportunity globally with merchants, not just to terminalize, to gauge them and to increase and improve the health of the payment system.
On innovation, Jim and their panel will hit this in more details. I just want to stick to additional theme, the same theme, same number of cards, same number of financial institutions. If we accelerate the growth of the e-commerce channel by marketing the consumers, the safety and security of using their cards online, facilitating banks and processors and merchants to move online, our share position, our growth will happen naturally because as you can see our share position in the physical world relative to all forms of payment is 20%.
As it moves online, it approaches 50%. So that movement, that migration in it of itself will grow our business because of our stronger position which is only going to be strengthened further based on the V.me and other initiatives that you’ll hear from the panel a bit later.
Processing services, very important not only for the reasons that I talked about earlier but in the U.S. as an example, we are the world's largest debit processor with our DPS platform. We’re not only the brand on the product but when we’re touching that transaction from a processing standpoint, it's a stickier relationship because very often these processing relationships with the financial institutions are customized and the yields per transaction are 30% to 40% higher.
Likewise, I think that there's been much that's talked about the use of data leveraging of information, very few organizations probably have as much information as do we. We will tell you that the focus internally is to be very careful in that, our focuses in organization is to drive value to our financial institution and merchant partners. We are not going to do anything with information that they don't support.
We’re going to hear more about that from Silvio in a moment. Our ability to risk or transactions in fact with advanced authorization is unparallel. So using information to lower risk as well as to deploy value-added services to financial institutions of all sizes.
Charlie made reference to the ICBA Bancard announcement giving even local financial institutions, Community Bank and ideally Credit Unions, if we can deploy their service more broadly. The ability to deliver targeted value offers to consumers in their portfolios and over time giving the ability to redeem us in the point of sale, we see that as a point of differentiation and a significant growth opportunity as well.
The last slide that I want to talk about before I wrap up is on government. Shifting the dialogue with government is key. Again, it’s we’re going to view the relationship with governments more and more as a client. And an example in Brazil, where it was very clear to us, the local financial institutions, Banco do Brasil, Bradesco as well as the government, it is very important for them to position the local brand, ELO, we’re a partner for that.
We’re not going to compete with these local brands. We view that as an opportunity to grow the category and create an opportunity for these local brands to evolve into our business. And we are supporting these transactions over our network.
Likewise, driving efficiencies, I already talked about the size of government programs. We have in the United States an enormous focus with 40 states, over hundred programs global in the government to electronify benefits that will continue to be viewed as a partner, not just domestically. We will continue to view government as a partner in these initiatives, not just in U.S. but globally as we drive financial inclusion and efficiencies of government.
In driving economic growth, lots of examples as a $22 billion cross border flow into the Thailand economy. We had initiative last year that Elizabeth’s team led to increase the efficiency of that targeted marketing for tourism by over $750 million. We demonstrated that to the local government. And we've also been much more active in quantifying the benefits of electronic payments to governments around the world.
We did a study with Moody’s that over the last five years in these seven developed markets, electronification of payments, in which we believe Visa was a big part has had an accelerating effect of GDP annually by 0.8%. Recently, we told that story, I think it’s reinforcing the government the benefits of electronic payments in the imperative department.
So to wrap up, the growth opportunity in even these developed markets we believe is key. The top of this we do nothing else, the fundamental economic growth is going to be a driver. When we look across the opportunity to partner with merchants to expand electronification at the point of sale, to improve the engagement of the range of products and processing services here, hopefully, you’re convinced as are we that we will continue to drive growth in the developed markets.
So with that, I’d like to introduce Elizabeth to come up and talk to you about even more compelling growth opportunity in our emerging markets. Elizabeth?
Good morning. So as Bill said at the beginning, the themes are the same, developed and emerging, the themes for growth but they manifest themselves quite differently in emerging markets. And I’m going to go through each of those five themes in turn and show you what they look like and what we’re doing in emerging markets to accelerate our growth there and our penetration of PCE.
So starting with the cash and check opportunity, Charlie already showed you this number $6 trillion in cash and check, primarily cash payments in emerging markets. I mean, you look at the markets on this chart, they have one thing in common with one exception and that is that more than half of PCE in most cases substantially more than half is still on cash and check. That’s all opportunity.
The one exception of course is China which has a unique situation with union pays domestic monopoly. The other one that stands out on this chart is Rwanda with its very small number. It’s there for a reason and I will get to that toward the end of my presentation when I talk about innovation but the opportunity is substantial.
And Bill talked about the evolution from high yield low-frequency transactions to low yield high-frequency transactions. He used Chile as an example that happens to be an emerging market and so typically what we see is that every market starts out as an affluent credit market for inbound or outbound tourism. Even if there is a domestic issuance market, typically you will have inbound tourist that’s an affluent credit product, high yield, high ticket lower frequency.
As the market mature, you will see them move into more typically debit categories. Every day spend, more local markets in the tier 2 and tier 3 cities and then into the most frequent transactions which are ticketing and bill pay and on to prepaid. Given you three examples at the bottom and what you’ll notice is that debit is growing faster than credit, prepaid is growing faster than debit as these markets are maturing.
But if you go back to the left and look at the growth in credit, there is still robust growth in that product even as you continue to see growth in the products that build a more robust and sustainable domestic payments markets. So while this trend is largely the same, for us to capitalize on it, requires us to focus on the local market needs and the particular clients portfolios in those markets.
And I’m going to give you a few examples. We’ll start with the UAE. You may remember 71% are cash in that market, very big market for affluent credit, lots of travel and the banks there tend to have pretty specific needs for their clients.
So we partner with them to evaluate their portfolio to identify the behaviors of their consumers to put together marketing and benefits platforms that allow them to accelerate their growth. And you'll see at the top, the success that we've had in winning new portfolios and the growth that we've had in cross-border volume with those affluent credit portfolios, where we worked with the specific issuer to customize our offerings.
In South Africa, Bill talked about the success that we've had penetrating domestic processing that is strictly because our banks wanted access to Visa Advanced Authorization and Visa Risk Manager that can only get that if we saw the transactions over VisaNet. The reason for that is that there is tremendous concern about risk and fraud as it relates to enabling debit at the point-of-sale.
By having VisaNet by deploying Visa Advanced Auth. and Visa Risk Manager, we gave our clients the confidence to authorize those debit transactions at the point-of-sale and accelerate that growth. What you see here are the numbers of transactions going through Visa Advanced Auth. and Visa Risk Manager.
And then finally in the Philippines where we have a lot of growth in prepaid, you see the 49% there because infrastructure challenges are particularly acute. In order to get funds on the card, we had to use a different approach here enabled by mobile. People can add funds to their prepaid cards using their mobile phones. That has enabled us to grow this product and get cards into the hands of people who typically were unbanked.
The other thing that we did specific to the Philippines was activate a distribution channel with Western Union agents because they were easier to get to them with financial situation branches. So these products are distributed through Western Union agents who also act as cash-in cash-out locations. So three examples of how the specific market instance or specific client needs required us to change our business model in order to effect that progression credit, debit, prepaid and accelerate growth.
Merchant acceptance, Bill talked about huge opportunity in emerging markets because almost always issuance precedes acceptance and acceptance tends to come first in the tier 1 cities in the T&E categories and then it takes work after that to get to the kinds of numbers that Bill showed. So I’m going to talk to about starting on the left one historic example, very successful and two new things that we're doing to accelerate acceptance. Many of you will know the story of VisaNet do Brazil.
Brazil used to be a greenfield market for acceptance. We in partnership with the financial institutions set up a company that had exclusive right to acquire Visa transactions in Brazil. It was owned by the financial institutions who issued the Visa products as well as the network hugely successful model. If you look at the merchants per 1,000 households in Brazil, it’s higher than Singapore and it's coming up on Hong Kong's level, so really successful.
But we also recognized that when it got to a particular point of maturity, it was time for us to change the model. As you know, that company has gone public, it's now called Cielo and competition has given it an additional bump in growth and acceptance, very successful. So we looked to that, we looked at the needs of some other markets and we’re doing some other things that are quite different from the way that we approach acceptance in developed markets and allow us to do one thing it gets lots of acceptance locations.
In Indonesia, we just started and acceptance program working with our issuers to fund broad acceptance in two categories that are critical for debit and prepaid tier 2 cities, its small merchants and food and fuel. We hope to get that, take the 25 million cards, activate those, get more acceptance locations which then encourages more issuance particularly outside the tier 1 cities.
In Mexico, where today we have 500,000 merchant acceptance locations, we partnered with the Grupo Bimbo, the largest bakery in the world that distributes to small convenience stores around the country to take their drivers as a value-added service cell terminals to those convenience stores and we’re expecting to get 160,000 POS terminals, a 30% increase in the total acceptance that we have in that country just through this one partnership.
And we believe as Bill mentioned, as Jim and the panel are going to address that the biggest change that we will see in acceptance in emerging markets is the proliferation of mobile POS providers. This is not a model where they're coming in as an acquirer, this is simply a low-cost device that allows us to reach merchants that we couldn't reach before. And what's interesting about it is that in the emerging markets these devices are going to enterprise merchants.
In India, for example, the largest life insurance carrier is using them with agents to collect premiums via a mobile POS device. And you'll see across the bottom the markets where we've already rolled those out and we expect those markets to climb.
Another significant opportunity is the e-commerce channel. In emerging markets as a whole, it's growing twice as fast as the face-to-face channel but it's not because people are buying books on Amazon. It’s overcoming the infrastructure challenge of having physically to go and buy something. Very often ticketing and bill pay are our highest types of -- the largest number of transactions, India being a great example.
India Railways is one of the largest merchants in India. And until we enabled e-commerce purchasing of tickets, the average Indian would have to go stand in line sometime for hours and hope that by the time here she got to the window, there were still a seat on the train that they wanted to ride.
Now, they can buy that ticket online. It dramatically reduces their time. It dramatically reduces the cost for the railway. And it's been a great business for us because you can see here we have more than 2 million transactions per month. And because the government in India mandated verified by Visa for online transactions, we also can access debit transaction. So it's been a big accelerant of our growth.
Another huge concern in the e-commerce channel as it is for debit at the physical point-of-sale is risk and fraud. Our ability to work with our issuers and optimize their authorizations in the e-commerce channel significantly accelerates growth particularly in cross-border transactions. And as you know, most of the time you don’t know, if you doing a cross-border transaction in the e-commerce channel.
In Russia, where infrastructure advantages are particularly acute because the country is so large and so sparsely populated, this is a place where we spend time with our issuers. You’ll see one example here where we worked with an issuer to increase cross-border authorizations from two and three to three and four and climbing.
So those are examples of innovations that you might see is extensions of the business that’s vaguely familiar, right. It looks like the developed market but what we do is different. This is not something you're likely to see in a financial services related presentation in a developed market.
In fact, many of my colleagues didn't know what this is. This is a bank account in Africa. It’s a payment account. It’s a savings account. These are cow horns that have been hollowed out and person has worked during the day gets paid, comes home, rolls up his or her, usually her bills, sticks it on the cow horn, buries the cow horn, puts it under the bed and hopes that the money is still there the next day when they have to buy groceries or go reopen their shop.
Certainly not convenient, certainly not secure and not usually reliable. So this is banking in a lot of places in Africa. This is what they should have, right. They have a right to have convenient and secure and reliable and financial institution backed payments. But how do you get from that to that, you off course know the answer. The answer is those people of cow horns, most of them have mobile phones as well.
Getting from the place where they load their mobile phones, they buy their minutes to VisaNet through financial institutions is the opportunity and very importantly to VisaNet. So there are a lot of mobile operators who are investing in and establishing mobile payment systems. But they are not interoperable across operators. They are certainly not interoperable across borders and a lot of this labor goes across borders. So how do we think we are going to penetrate uniquely this opportunity through the assets that we have acquired and built.
Fundamo is the leading mobile wallet provider that allows us to get a payment account out of the cow horn on to the mobile. Visa Mobile Prepaid is a Visa account optimized for the mobile channel. And the Visa Mobile Managed Service is the processing infrastructure that allows us to connect the mobile operator at the mobile wallet with the mobile prepaid product and the mobile managed service. And the best example of where we bring all of this together is Rwanda, hence its present on my first slide.
In 2011, we entered into a charter of collaboration with the government. 88% of the population unbanked about 11 million people in Rwanda. And the government said we want to work with you to electronify our economy, to bring more transparency, to bring more people into the financial mainstream. The first thing that we did was establish VisaNet in the country.
So settlement could be done in Rwandan Francs, critical to the establishment of a domestic payment system. Then we connected ATMs to Visa so that when all of us go to Rwanda to see the extraordinary guerrillas, we can put our Visa card into an ATM get cash. It means we will spend more money in the country growing their economy.
We brought acquirers into a acquire merchants and enabled them to accept payments. You see the numbers below. We brought major businesses online. There was no e-commerce even the domestic carrier, RwandAir, didn't sell its tickets online. And perhaps most importantly that chart that I just showed you, well that’s easy to do in PowerPoint but hard to do in the real world, we just introduced in January the world's first truly interoperable mobile branchless banking service.
So this is the ideal approach to greenfield markets like Rwanda and the government is absolutely critical. But markets don't evolve neatly either along that path that I showed at the beginning or the way that Rwanda did. Most markets that are emerging have some of both that we call hybrid market. We've got great growth in our historic business that’s what you see from the yellow bars. And we have even better growth in the mobile business. So what you’re looking at here is growth in cards-in-force in the yellow bars, growth in Fundamo registered wallets in the blue bars.
That two exceptions here, so you see Nigeria, Pakistan, Uganda, Bangladesh and Ghana. Ghana, the blue number is small, we just rolled out -- we just introduced Fundamo in Ghana. So you’re going to see that that number rise pretty dramatically. And particularly for those back in the room, you look at Bangladesh, the only reason that that yellow bar looks smaller, it’s in fact the largest number on the page at 28% is that we're seeing such extraordinary growth in mobile because of the population there and because of the extreme infrastructure challenges.
So those are the ways that the same themes Bill talked about manifest themselves in emerging markets. And we think there's tremendous potential there now obviously as evidenced by the $6 trillion. And that is only going to grow. The economic growth in these markets is extraordinary. $1 trillion in growth in annual PCE, that's just the tide rising.
Merchant acceptance as I mentioned particularly with mPOS continues to be a huge opportunity. Mobile is going to be the story in the frontier of the emerging markets. And government is also going to be critical to accelerating our growth. They are central to financial inclusion to bringing the more than 2 billion people who today don't have access to traditional financial services into the electronic mainstream and to enabling a sensible domestic processing infrastructure.
So that’s everything that I wanted to cover specific to emerging markets. At this point, I will invite Bill and Charlie back on stage and we’d be happy to take your questions. Thank you.
In terms of the Q&A, there are obviously people walking on microphones. If you would wait till they passed you one and then identify yourself and your company affiliation for the benefit of those listening via webcast we’d appreciate that. Glenn.
Glenn Fodor - Autonomous Research
Hi. It’s Glenn Fodor from Autonomous Research. Excuse me, question for Bill, appreciate your overview. Our view is that core U.S. consumer credit not affluent or commercial which is doing very well, the core U.S. consumer could be a pretty exciting opportunity for next year given the growth prospects. Just wondered if you share some views for us on the gives and takes of what you expect for that vertical market next year?
So the question is core not affluent in U.S.?
Glenn Fodor - Autonomous Research
Part of the problem you see when you look at our numbers is that you're still seeing a lot of fundamental conversion of our core business into our affluent products. So I think it does mask. Glenn, I agree with you. Economics over the credit business in U.S., when you look at funding cost, credit cycle, I think there's been -- our economist is very enthusiastic about the pent-up demand.
When you look at just household expenditures that have been deferred over the challenging economic cycle, we would tend to agree with you and in our forecast show pretty strong cross growth or cross credit faster than debit. As I said when we report numbers, it may not show that way only because you continue to see some conversion of accounts from core credit into some of the masked affluent products.
I just want to talk about this, just one thing real quick which is -- again because Byron is going to talk later about guidance. He is going to talk about what we put in our 8-K today. When we think about next year, I just want to be clear, we’re not -- we don't see some huge recovery happening. I mean is something possible, absolute it’s possible but as we planned for the year, it’s a continued slow -- relatively slow recovery that we’re planning for when we talk about next year. Over there?
Sanjay Sakhrani - KBW
Okay. Sanjay Sakhrani from KBW. Thank you. I was just wondering -- thank you for all the information but I was just wondering if you could just hit on the top one or two products or strategies that are important for Visa over the next five to 10 years. I think V.me kind of probably at the top of the list but maybe you could just talk about it’s importance? And then second, I was just wondering if you could talk about any changes to your approach in educating or talking to legislators in DC post Durbin. Thank you.
I’ll take a shot at the first. And I guess we just spend and now we’re going through it. So but if I had to narrow it down to couple of things, I think the opportunity as we’ve talked about in mobile is significant. Again very different type of opportunity in developed world versus the emerging world. But you can’t sit here and see the huge acceptance growth that has already occurred, think about what Elizabeth just went through in terms of how you can transform the way money is used in the developing world and not feel great about our position in that.
So again we’re going to talk a little bit more about, lot more about that when Jim comes up and he is going to talk about it. Mobile is obviously extremely meaningful for us. And then I guess the second thing I would talk about is this idea of adaptable customized solutions across the world and especially here at the developed world in the United States is doing everything that we can but position that we play sitting ultimately between issuers, their customers, acquirers and the merchants and getting them to work together in a way that really hasn’t occurred predominantly this country. Hold on. There was a second question about DC
So, DC is challenging. I think we can all agree that company and the industry got caught flat for it and when Dodd-Frank in the Durbin when it happened. The engagement wasn’t there at the level of that we would like. I would say that we approached it looking back in a way that was more confrontational than what was productive. And I think that when we look at the model of engagement with governments around the world where more often than not, it’s a productive relationship and were viewed as of course for good.
I think that there has been quite a bit of an education even through challenging time about what we do and why we do it. And I think that the relationships have been built. We just need to deliver on the promise of supporting government initiatives. First and foremost, I think on the support of the underserved in the electronicfication of government benefits.
But it’s going to take a while in DC, I think to repair some of the challenges but we’re committed to doing it. And I think if you look at the resources that we put in the higher that we’ve made, we brought a new head of government relations in the Americas focused on U.S. I think we’re making strides.
And let me just add to that if I could which is everything that we’ve seen in DC over the past four or five years that’s not -- DC is not the cause, right. That’s the effect of what the entire industry and all of our partners have done to each other. And so absolutely, we -- I think this is a broad comment not a Visa comment as much from my prior job and my own role on that is I think we all could have done a much better job engaging early on, educating, make sure that the decisions are headed down the right path. But again that’s ultimately you got to solve the underlying problem.
The underlying problem is we have merchants across this country that are talking to politicians and talking about their unhappiness. So a lot of what we’re talking about in terms of this adaptability and flexibility and getting issuers to work with merchants and point of sale discounts and things you’re going to hear about later that’s all targeted at getting at the underlying issue, not trying to deal with it after the fact because if that’s the case, we will always lose.
Jason Kupferberg - Jefferies
Jason Kupferberg from Jefferies. I wanted to pick up on the discussion around processing because obviously that’s a big push for you guys to increase the percentage of transactions going over VisaNet and seems like that will be an important driver of growth and yield over time. So can you just give us some general idea quantitatively in terms of maybe where you were five years ago, where you are today and where you might be five years from now in terms of on a global basis percent of transactions that you are actually able to process?
Yeah. The challenge if you look at it quantitatively because we’ve seen enough enrolling transactions in U.S. move off the network. That sort of mass effect that we have seen good steady progress in around the world in driving more transactions on the network. So at the moment globally we’re about 78%, we’re 78% of the Visa transactions on the network which I think is an impressive number.
We do see that number steadily increasing. I mentioned in every one of the developed markets outside of North America we see progress there. The fact that North America is such a large portion in the denominator, you probably wouldn’t see that move up globally as impressively but I think you’re going to see steady increase where the 78% certainly gets into the mid-80s.
Jason Kupferberg - Jefferies
And just a quick follow up on China so maybe for Elizabeth. We’ve seen UnionPay introduced a prepaid card here in the U.S. and obviously there is a sense sooner rather than later that there will be some new rules put in place to allow yourselves and others to get into the domestic China market. So this is just bode for an increasing overlap from a competitive standpoint globally between yourselves and MasterCard with UnionPay. Is that how you see it playing out?
I think UnionPay has been tremendously successful. Internationally, they have been very sensible. I mean if you go to their website and look at their aspirations, they clearly want to be a global scheme like MasterCard and Visa. And they are looking to participate globally and we are equally enthusiastic about the opportunity to be able to participate in the domestic market in China.
We are eagerly awaiting the terms of what that is going to require. And we’re excited because we have fantastic partnerships with all of the blue-chip Chinese banks. And we’re looking at being able to -- looking forward to being able to compete on a level playing field with UnionPay as we do with our other global competitors.
I’d like to add just a little color on that from my perspective which is again as UnionPay clearly has global ambitions, there is no question that that’s the case. As we’ve said, there is lots of opportunity in this world and to have good smart competition is not a bad thing. And ultimately it’s one thing when you have monopoly inside the country, it’s another thing when you then go and you try and build an acceptance network based upon the monopoly that you’ve had, that’s very different than showing up in Bank of America’s offices and saying there is a compelling reason for you to issue our cards.
And this is not just true for UnionPay. It could be anyone who wants to build the network. And so that’s why for us it’s not price. Price has a component of a decision. It’s all the things that we’ve talked about, not the least of which exists today, which is hugely important, which is the size of the scale, the reliability of our system, the way we’re willing and not willing to use data which other people aren’t willing to make those commitments, the safety and security that you get by using our rationale network and all these value-added services that quite frankly the people that have came before me to spend 60 some odd years build it.
You don’t build that in a couple of years. So for anyone who wants to become a network even if you are able to build it off of a strong domestic base, it’s a long road to build what we’ve here, not something that we look at and say isn’t doable when you got the resources that the Chinese have. But it just, I think it’s a comment about how we feel about what we have here.
Gil Luria - Wedbush
Thank you. Gil Luria, Wedbush. I want to follow up on -- first of all thank you for the presentation. It’s been extremely helpful in terms of setting your path. I wanted to follow up on one of the items you’ve talked about during the presentation as well as to one of the answers which is that you are now reaching out to U.S. retailers and trying to help them understand the value of what you are doing as opposed to have them going in a confrontational path.
So couple of -- and you also made similar comments about the technology innovators that are working right now to fence the cause of digital payment. So two parts of the question, the first part is the U.S. retailers haven’t seem to reach back to you. Yeah, they have escaladed on the litigation front at least some of the really big ones and they have a very broad initiative to compete with you in U.S. domestic debit.
Do you think we passed the point of no return in terms of engaging with the retailers or do you think you can still convince them not to go down the path of direct competition and to try to go into the framework of settlement that’s the first part. And then on the technology front and the so-called aggregators your competitor from Purchase, New York has chosen to go down the path of considering them as competitors and penalizing their business model as it stands today, especially Google and PayPal, the ones that have kind of broken to the front.
You hinted in the last few weeks and months that you’re going to come up with a new framework of how to engage with them. Is that framework going to go in the same direction of considering them as competitors thereby meeting to find a way to stop their progress or is it going to be more down the path of trying to expand the shared path?
I want to take a shot and then Bill feel free to chime in. On your first question, is it too late? Absolutely, it’s not too late. Is it easy? No, it’s extremely hard to change the dialogue that we have and we’re not naïve about this, it’s going to take a long time to change -- it took us 10 years -- so when was the first lawsuit in 2002…
… 2003 and it took us 10 years to get where we are where we’ve been facing each other across the courthouse steps. It’s going to take a long time to change the dialogue. It’s also particularly complicated right now by because of where we are with this existing MDL litigation that exists.
But it’s ultimately retailers are in a -- they’re in a business to sell whatever if they choose to sell and if we can show up along with issuers or groups of issuers and we can convince them that we can help them do a better job and sell more and make a reasonable amount of money and that we are charging a fair amount for our services and all of our partner services that will change the nature of the dialogue, okay?
Yes, we’ve got to resolve the litigation and you’re going to hear lots of noise about that between now and the time it all gets resolved but that’s a meaningful conversation that we didn’t have in this country in a meaningful way.
By the way, it’s a hard thing to do when you’re in the middle of trying to resolve legal disputes but it’s something we’re committed to going forward because again we’re thinking you are going to hear more about it after the break. We think we’ve got lots of asset that can actually help them do a better job and it’s up to us and the participants in our network rest of our clients to prove it to them.
So, again, it’s -- that’s an onus to prove but it logically make sense and if we can actually get some proof points in the marketplace as some of our clients have referred to that they’re close to doing then that’s what will make a difference or not. Anything you want to add on that?
The one thing I do want to add on that and I agree with Charlie there is lots of noise around litigation in Washington posturing and its difficult to understand what’s the true nature of the challenge with merchants particularly in U.S.
The difficulty at a fundamental level with the merchants is that when they view your product and your service is cost of goods sold, there is going to be natural attention and you become just a cross-line item and the posturing about managing that number down.
I would argue that when the business involved very simple form factors in the card and very simple terminals at the point-of-sale then it was -- there was a natural way of over time becoming dial tone and being commoditized and creating that price attention.
What you’re going to see and I think we can all see it is that in the form factors in the sophistication of the point-of-sale we have an opportunity we invest in the right platforms to be not just the movement of money and the movement of electrons in support of that transaction, but deliver of value-added services, delivering the merchants more information so they can better understand their customers because we have a lot of them that are carrying Visa products and helping merchants not only reduce their costs but market themselves better.
If we do that well, I think that’s the best path for improving the dialogue with the merchants but it doesn’t change the fact that you’re dealing with billions and billions of dollars and interchange merchant discount and I just think that there’s naturally going to be a buyer seller tension.
And on the second question about the aggregators and PayPal and some of our competitors, so directly answer your question we’re not currently contemplating a fee like that. When we think of the role that these people play and the issues that they’ve raised, we don’t see that solution is actually solving the problem. It might be a way for us to make a little bit more money but our focus is to figure out just what’s changed and how should we deal with it.
What’s changed is a lot of these people started out which we’ve lot of respect for their great businesses. They started out small ticket, internet focused, transactions but it wasn’t easy to use other general-purpose cards.
Fast forward 10 years later and all of a sudden they’re very Amazon like they’re representing very big merchants they’re going to physical point-of-sale and the rules that we had in place and the pricing structures were not designed for someone like that and what were the position that we are in is they’re sitting there in a position where whether they are doing it or not we can argue about but they’re certainly encouraged to steer away from our cards, even though 50% of the activity in PayPal’s case is on general-purpose cards. And the way the data flows our issuers are being disadvantaged and then it creates other complication in terms of whose transaction is it, whose customer service, whose rules apply.
So when you go through all that that just tells you we need to rethink what we’ve allowed to happen over these past 10 years because this has all dramatically changed over the last couple of years.
So what we are thinking through is how we do that and what it means to pricing, what it means to the rules, what it means to the flow of data, and what we’d love to wind up with is a situation where we and our issuers because what our issuers think is absolutely critical.
They’re being hugely disadvantaged today in this is that we believe that those transactions really are incremental and they don’t lose anything in that relationship as time goes on. So we’re working on it. We’ve got nothing to report now but that just gives you a sense of how we’re thinking about it.
Tien-Tsin Huang - J.P. Morgan
Yeah. Kind of building on that last question, yes, Tien-Tsin Huang from J.P. Morgan, how should we measure sort of the success of the risk of some of the thing changes that are happening, the relaxation of the rules; for example, pushing value on to the edge of the network. Should we see greater incentives as a result or is it greater merchant acceptance, for example, we should measure that before we get to greater volumes and thinking about mPOS that was mentioned a few times by all three of you, is that creating more risk to the network. I am curious as you’re opening it up and putting it to the hands of the consumer.
Why don’t we just can we differ the second question and have make sure the panel addresses that…
So, Jack, make and then if not, we make sure we cover it in the Q&A that follows because it’s a big part of it and the first part of the question was how we’re going to…
Tien-Tsin Huang - J.P. Morgan
Relaxing of the rules and…
How we’re going to measure it?
Tien-Tsin Huang - J.P. Morgan
Listen you’re going to see, I mean you’re really going to see it in our volume numbers and ultimately our net revenue numbers and that’s where it’ll be.
Tien-Tsin Huang - J.P. Morgan
Right, but in the interim I guess where I was going with this is there is an investment to get there, right? Is it we’re going to see a higher level of incentives, for example, to get there or some change in the face of the P&L to get there?
Again people can answer it themselves and so if you think differently unless Bryon comes up later as we thought we’re not thinking about this is a big driver of additional incentives. I mean we’re thinking about the investment to get this done are those operating expenses that we put into the system to build the products out that didn’t exist three or four years ago.
And again Jim can actually you what’s been rolled out over a period of time and it’s a huge amount of expense that’s embedded in the place so that we can actually show up on the merchants doorstep and have a conversation that we quite frankly weren’t able to have three or four years ago.
Tien-Tsin Huang - J.P. Morgan
That makes sense. Just quick follow up. I don’t know if it’s quick or appropriate to ask now or later, but MDL 1720 any change in your confidence level Charlie in getting that settled as it is?
No. No change. I’ll tell you it’s look like they are around 25% as best we can tell the number will be reported to the court in a little but I am not sure exactly when and we don’t think it changes the outcome of our position or the courts.
Christopher Brendler - Stiefel
Okay. Thanks. Christopher Brendler from Stiefel. I’m just very curious about the processing a follow up there. I wasn’t clear exactly how, I am sure it varies market by market but how you’re driving increase perhaps in share, what are the strategies that you’re employing?
And then if you could potentially give us a little more insight on the countries that could be highlighted in three years from now your next Annual Investor Day? Are there going to be certain countries where you have significant opportunity in processing share, are there certain countries that you’re probably not going to have some opportunity and then some of the times local regulations and governments can play a role there? Just help us frame the opportunity there?
And then a more broader question all this discussion so far has been about the opportunity for Visa in the tremendous potential for growth. What do you see is sort of biggest risk right now in the comparative front? Thanks.
Okay. So processing is a big opportunity in most of the developing markets and I’ll take your sort of turn your question around. The places where we're not going to see, we are not likely to see significant increases in domestic processing.
First, where the government has said, it something that has to be done domestically by a domestic owned and operating competitor, there are smattering of those markets around the world. Second is where there is a government interest in preserving some domestic payment infrastructure, Korea would be a great example where the varsity of the domestic processing.
But outside of that markets that have a strong issuing base you should expect to see that absent government intervention we will be able to increase processing and you said, how does that work? It works in two ways.
The first is absolutely leading with the reliability of the network and the risk and fraud products. We've had a couple of market where they've dabbled with a domestic processor, usually starting with ATM then you start seeing outages, you start seeing fraud spikes and that becomes a compelling discussion, I gave South Africa is one example.
You also, where we partner with governments, which is something Bill touched on and I touched on, we are going to do more comprehensively, governments can be a massive accelerant to domestic processing, usually in concert with their desire to accelerate financial inclusion and electronification of payments, governments increasingly are interested in doing that because it leads to economic growth as Bill said. It reduces corruption and it increases transparency, so it’s a trend that you are going to see broadly.
Okay. At that point we are going to stop here or you want to.
Second question was biggest risk. I guess the two that come to my mind that we think about all the time are, number one, regulation and legislation which we’ve talked about and so, building relationships with the government, engage differently, becoming more of a partners as well as solving the underlying issue with the merchants is the way we’re going about that.
And the second has to be that, that you don’t miss something when it comes to technology. And so we get, the whole next sessions is dedicated that’s you can make your judgment to whether or not you think that we are not. We talk about it all the time. We talk about all the things that are going on in the world, all the capabilities to make sure that we are not. But you always have ask that question.
Okay. With that, I am sorry, so we are going to break now. Please be back here at precisely at 10:15 avail yourselves to the showcase and enjoy.
Okay. We are ready to commence once again. I’d like to introduce Jim McCarthy who is Global Head of Innovation and Strategic Partnerships. Jim?
Thanks Jack, and okay, great. Thank you. So, I have the great job of following up after the, everyone’s stealing our thunder, just going on the innovation space. So it makes me feel good about the work we've been doing.
Thanks everybody for joining us this morning. I’m Jim McCarthy as Jack said. I manage and I had the privilege of managing really what has been the innovation agenda at least for the last three years and what I’d like to talk about today is, how we are very excited about the position we occupy with respect to future of this business. Primarily because of the way in which the network asset that is VisaNet is transforming and I believe in ways that will only fundamentally accelerate our business model.
So to that end, as Charlie, Bill and Elizabeth, all talked about, the way I tend to think about Visa is really two different networks. The first network, which you heard a lot about today and one that we can't emphasize enough is the network of our financial institution partners globally that we have a commercial relationship with and we share our brand with that we license the Visa brand to.
And over the last 50 years that partnership has exceeded to the extent that through them we’ve been able to distribute over 2.1 billion cards around the globe and have created relationships through the acquirers with over 36 million merchant locations.
And that commercial relationship that relationships that bound by the brands that’s on the card and on that merchant storefront is a very, very powerful and important one to us, and we’ll continue and you’ll hear that throughout the day when we talk about distribution even in this new inherently digital world.
But the equal and I would argue really differentiating network that we share is when those 2 billion cards interact with those 30 million merchants and a transaction occurs and flows across the VisaNet physical network is one that we’re really focusing on today.
And how that physical network is evolving to embrace and expand the edge of the network as Charlie talked about to move beyond what is traditionally been a kind of point-to-point issued or acquirer network to embrace the changes that are occurring around the globe primarily driven by the Internet of things.
So when I think about VisaNet and the traditional edge of the network, when I got here to Visa over 14 years ago, we were still running on an IBM system network architecture 3270 network, more or less point-to-point that ended somewhere in the back office of an acquirer or merchant location.
Play forward 14 years and look at the numbers when you think about scale and scaling of our network. Over 2 billion -- 2.4 billion internet connections global. We in 1999, 2000 rearchitected VisaNet to take advantage of the coming change that was driven by the Internet. We move from that SNA network architecture to a TCP/IP Internet protocol to actually extend the edge of our network and see beyond the back office of our retailer.
You forward over the last five years, not only are we talking about Internet connections but we are talking about social connections, consumers talking to merchants, merchants talking to consumers, consumers talking to others, creating again a large network effect that’s predominantly connected by again this wired Internet environment.
And as you heard earlier today mobile, when you think about the numbers are just staggering, 7 billion -- over 7 billion subscribers connected to mobile devices around the globe in every one of the markets we serve and others that we are not in yet.
And everyone of those consumers is connected and making payments or making transactions and we have the opportunity to extend the edge of the VisaNet network today well beyond the borders that we currently exists still within in the confines of those commercial relationships that are very important to us, but extend the edge and address the needs of a growing population of connect to consumers and merchants and new transactions that we’ve never service in the past.
So when we think about that, we have to put all of our strategy in the context of what's really happening at the furthest edge of our network, because while we will continue to serve and our customers will be financial institutions, governments, merchants. In order to win in this space you have to think about the end users of our products and services, who are prominently consumers and merchants.
So when we think about this environment and why we get really excited about the opportunity is? These consumers that have traditionally been bound by or form factor which was a plastic form factor that only works when they could find a terminal that was connected to a wired telephone line and electricity that was a working. We now found substitute environment where consumers with these new devices be it on iPhone or flip phone and an Android phone, they are always connected and they are always on, which means they are always ready and able to transact.
More importantly, versus the card form factor where in the past, this was always ready, if you could find the terminal that was up and running that not only these connected and on, but they are highly personalized. I imagine the vast majority in the room have an iPhone or an Android device and while the hardware maybe very similar that the actual desktop, the deck that you have is very different.
The operating systems and the software that are running on these devices allow us to have a very different discussion and dialogue with the consumer, one that's highly personalized and therefore highly relevant.
So when we think about the opportunity not only around payment but commerce the ability to actually get out of this business or pushing information but allowing the consumer to create the preferences, exposes those preferences and allow commerce to occur seamlessly and easily on 24x7 basis gets us really excited, because what we are seeing is for the first time is really the mesh-up if you will of commerce and payments coming together.
Again when I started 14 years ago not only that VisaNet stop in the back office of the retailer, but as you heard a lot of the friction you hear about when you talk about in developed markets around merchant interface are or interactions with merchants was created by the fact that payment is less mile thing, as Bill described, there is a cost of good sold.
But in this new environment payments is absolutely core and critical to commerce, they are blending together. And again, this is last point about taking friction out of the commerce experience. If you got a great retailing experience online or on a mobile device, but the payments experience requires you to key under 16 digits billing information, shipping information to complete the transaction, it's a bad experience.
And what we are finding for the first time is this concept of search to purchase that the whole thing is wrapped up that we have exceeded that table and an ability to fundamentally shift the way consumers are interacting and transacting on these devices.
And as I said, it’s not just a consumer, it’s a merchant. These devices as you heard from Elizabeth, and Bill and Charlie are fundamentally changing the way merchants interacting. So a retail storefront that use to be open from 8 to 5 Monday to Friday is now can be open 24x7, always on, always connected.
And again, you’ve heard a lot about the mobile point-of-sale devices that are coming out around the globe. Certainly, putting us on this device turns it into a point-of-sale and as Elizabeth talked about, I mean, there is a lot of growth in her markets with respect to mobile POS.
But again back to the Internet of things its not just small merchants and micro merchants in the long-tail, but we are fundamentally seeing a shift even in developed markets as merchants have the ability to take this technology along with payment move from behind the sales desk, move to the front of the store, interact with consumers in ways they never had before, again highly targeted, highly relevant, you can check in, they know who you are, they can share information with you, they can bring you into a commerce experience that again this fundamentally tied to payment, because the payment piece can be integrated, so making that a better shopping experience.
And further when we talk to segments like quick service restaurants. They have the ability, I guess it was 2003, 2004, one of the greatest things we did within my lifetime at Visa from an innovation perspective was do something called no signature required.
With a stroke of pen back to power of rules we change the way in which Visa transaction could occur at McDonald’s location. You no longer need to get a signature, print receipt, hold that receipt. We allowed commerce to take off in the QSR environment and fundamentally changed the -- our share position in a category that up until that point was really under penetrated.
What happened as a result, if you play forward 10 years, payments not the pain point in quick service restaurants anymore. It’s the queue at the end of the line. So I went to Starbucks this morning, bought my coffee that line moves quickly, so I can make payments very quickly, but now really queues up around the [briston], the espresso bar.
While those retailers are now looking at another pain point which is how can I get people to not only pay in advance but order in advance. Again, these devices hold the key to that, and so we have the ability for the first time to really change the way commerce and payment are interacting because of these devices, because of the mobile POS application both in emerging and developed markets.
The key to this so and what’s often times loss in the discussion and I'm sure lot of, lot of questions around this is, lots of competitors, lots of new business models, lots of interesting things happening in this space, a lot of really smart people are innovating in this space. But we always have to focus back on the consumer and the merchant on ease-of-use, ubiquity and taking friction out of the process.
Often times the discussion we have around the management tables, there is a lot of interesting things we look at that we think we could do. But really the question is, that should we do it, are we helping the retailer to close the sale, are we helping the consumer get out of the check out with the goods they want, reliably, securebly -- with security, all the things we've done in the past that made Visa the brand that it is today.
So, again, the opportunity is really huge for us. So when we think about innovation in this space, it’s really straightforward and something that Charlie referred to you earlier. It's all about VisaNet. So, taking the needs of that consumer, the needs of that merchant, which are inherently living in connected environment and always on environment looking to take friction out of the system?
How do we take the edge of the VisaNet network and expand it further to embrace these new technologies, the Internet, social networks, personal payments, remittances and commerce in these new form factors.
And our belief is that we’re starting in the best position than anybody because we have VisaNet which is already built for this and really the challenge in front of us, the opportunity in front of us is to effectively scale our network to embrace these new environments and move into this new electronic age.
So as Charlie referred to and I’ll spend some time on this, the last three years, since this last Investor Meeting has really been all about starting this journey, I had the benefit of having a lot of great work in front of me, and the fact that VisaNet was already IP -- TCP/IP enabled.
But when you started to think about, how can we really penetrate this market. How can we move forward with an accelerated approach? We really started to think about the capabilities that will be required in developed and emerging markets and what will you need to do to build that out.
So when we think about the developed market, it’s all about click, touch and tab. The fact that the matter is consumers are transacting in large number still over wireline internet connection. But with mobile devices we’re just at the early stages of mobile remote payments, the ability for consumers to use the browser on the phone to make purchases. Again we need to make that easy.
We are also seeing the convergence of these devices as I mentioned at the physical point-of-sale and that game is still being played out. The big challenge that we all have is that the card, that no signature required experience creates a really high barrier entry not only for consumers because they know what to do, but merchants as well.
So the capabilities we’ve been investing is really to think about how we take our network, how do we take our capabilities and solve for those pain points for the consumer and for the merchant, and since the last time we had this meeting, we were making significant investments in this space.
So four of them that I’ll refer to you this morning. The first one is the developer center, and again as I said, on the software on the phone, the software on e-commerce devices. One of the major macro shifts in this space is the fact that software developers are having a much greater impact on the convergence of the commerce environment and the payment environment.
And so one of the things we realize we have to and back to what Visa has done historically very well is published standards and APIs and make it easy for those that are license to use the Visa brand to connect to our network. It just happens to be generally speaking an authorized clearing or settlement message. Those are our words or our APIs.
But going forward we realize we have to create a way to expose these other capabilities of third-parties to software developers, so they can use the power of their mobile phone, the computing power of the tablets and notebooks, and other form factors to expose the edge of our network.
And so stood up the developer center and you are going to see greater emphasis on this going forward, so that we can actually integrate more closely with those that are innovating on the edge of our network.
The next thing we did, we had a payWave application or payWave specification that most of you know on a contactless card. As you heard throughout the day, mobile is taking off and mobile is an important form factor us in developed markets. So one of the first things we did was we took the payWave application and made it available on mobile phones.
But more importantly we took the next step and have created a reference application that we’ve actually published along with APIs and software developer kits for third-parties to begin to integrate the payWave application natively into their devices.
For those who saw the announcement at Barcelona this year, the Mobile World Congress you saw the first announcement with the major handset manufacturer Samsung where they are now embedding the payWave application natively on to the deck, on their phones, on their Galaxy S4 and the Note 3 tablet. That’s one piece of the equation in the payWave ecosystem to solve and again, we are beginning to make progress there.
But the second and equally fundamental piece is often lot focus is, how do I get that card information on to the phone. Issuers for years have gotten really good at producing plastics and they have, there is a whole ecosystem of companies that support the personalization of cards that ecosystem does not exist today in the phone space.
So Visa has stood up a service called the Visa Mobile Provisioning Service which is our trusted services manager that allows for us to help the banks on behalf of them to provision that card information on to these devices.
So like we’ve done in the past we are creating an ecosystem approach not only make it easy to get the applications on to the devices but help our clients put their card information on to those devices and close that loop.
And then the last piece of the equation and something that you guys are all aware of is our investment in V.me. And again, I think, we tend to really kind of ground as consumers first on V.me as a consumer wallet. But I want to stop and make the point really clearly, it’s really about the merchant experience and helping the merchants drive sales conversion in these new digital form factors.
If you look at our growth in e-commerce over last 10 years on a traditional wireline Internet environment, you didn’t see us make the move into the wallet space or an -- a new acceptance mark, primarily because our cards actually work very well today in those environments.
But as Charlie noted, looking forward, mobile is not loss on us, we have to evolve like we’ve done the last 50 years to make it easy for our products to work not only for consumers but more importantly for merchants. For wireless to takeoff, wireless web and wireless commerce, we need to have an easier way for consumers to use that Visa credential for our merchant.
But again if you want a proof point for how we are thinking differently about the business and about merchants in particular, you’ll notice that V.me is the first thing we did, we didn’t make it Visa only, while I’d love to say, it’s a Visa world that we are all leaving in, it’s not the case.
And if you ground in the merchant value proposition, what merchants’ want, which is the Charlie’s point earlier retailers is to sell their goods and services. They want to take all tender types. They want to drive sales conversion. So V.me supports all the major general purpose card brands out of the gate. We want to make it an easy one click experience for that merchant to check you out regardless of the digital channel you come through.
So we made significant advancements in that space. We’re making progress on the issuer side and the merchant side, again to create a network effect, much like we did with the Visa brand 50 years ago. You will hear more about that.
When we start to think about the emerging markets, again it was at the top of lot of the kind of the traditional approach. How we go in or live with affluent credit. We follow with often times debit and move to prepaid. And again, predominantly urban centers are leveraging travel quarters to build the traditional approach.
She also showed you the rise of the mobile wallet in a lot of these markets. There are, today, I think, over 150 close loop mobile money schemes appearing across the globe, addressing the needs of the often times unbanked and underserved consumer who has money. They want to transact. They have bills to pay. They wanted to buy a train ticket as Elizabeth described. They want to remit either from a rural center, sorry -- from an urban center to rural center or often times remit across countries because they have left to go to Dubai as an example from India and they got to send money back home.
They way they are doing that today is not with cards. They are doing it today over mobile devices. And again those 150 closed loop mobile money schemes have propped -- have popped up to serve those needs. So instead of like playing pass that and looking strictly at the traditional Visa model of purchase only in the urban categories, we’ve embrace this and we’re focused on opening this close loops.
So if I take you back historically again to where we started as a company, Bank of America had a close loop business that they ran a product called BankAmericard on and then they realized that the way to grow this thing is to go open. To license that brand to a new company that could go -- partner with other banks to create an open network connecting these closed loops, if you will, these pockets of consumers and merchants that were acquired and issued by different banks to create the business that today is Visa.
Well, we find ourselves in a very similar position in these emerging markets. These 150 close loop networks that Elizabeth referred to that do service our consumers very well have a problem and is fundamentally scale because you can only transact within that closed loop, within that mobile network operators, mobile schemes. So you can't send money to your relative who's in the same country on a different mobile network.
You can send money across the globe to your relatives in a different country. You can't top up their phone remotely. You can't do e-commerce transactions. So what we've done, we’ve focused on the opening these close loops millions. And again it’s a playbook that we know well.
So what we’ve done is create a focus effort on open loop prepaid. So in essence taking a 16 digit Visa account number and overlaying it onto this 10 digit phone number so the consumer can send money using that flip phone to any person on the Visa network around the globe. So that’s a fundamental strategy for us is to figure our ways to open these close loops.
The second piece as I mentioned is these transactions aren’t traditionally what you think of as a Visa transaction. So you heard often times this morning that PCE, personal consumption expenditure, which is more or less a purchase metric. Well, a lot of these transactions what we think of this purchases some are but a lot are just remittances. And so what we’ve done with Visa personal payments which is our product, which is based on a unique transaction within the Visa system called the original credit transaction. We’ve enabled any tender type, any channel to send money to anyone around the globe to any Visa card credit, debit or prepaid.
So when you think about the combination of these open mobile prepaid devices, we’ll now have a Visa card associated with my mobile phone and now the ability to send money, any tender type over the Visa network to that device is extremely powerful. It’s a new transaction type and a new combination of the form factor along with this transaction type, really opens up the edge of our network.
And then the last piece, mobile point-of-sale. Again lot of time and energy on this because again when we think about 7 billion devices that I can put a dongle or a device on my phone and turn it into a point-of-sale device, again compared to 38 million, sorry -- 36 million merchant locations we have today. You can see just -- as we have just the numbers, just making those into mobile point-of-sale devices, changes the entire trajectory of our business.
And so we focus there as well to not like work on models of aggravation, work with partners from our business model perspective but work to certify our new devices. So again over the last three years, what have we been doing. So the first thing is we acquired Fundamo. And again Fundamo is really important to us for two reasons, I will come to the next one on the next slide.
But fundamentally, Fundamo gives us access to the largest number of closed loop mobile wallets in the world. So it's a great starting point. I remember Visa traditionally has dealt only with financial networks and we realize at the mobile networks, it’s a different language, it’s a different game. We need to really start to understand how the telco is thinking.
So Fundamo really helps us not from a positioning perspective but truly understanding how to work with telcos effectively. The second thing we did was Visa Mobile Prepaid. So we announced the Visa Mobile Prepaid product which is again fundamentally different than the prepaid product because we don't require you to actually issue a companion piece of plastic.
For number of these people that never see a terminal, so we ant to give flexibility to the issuers in this case to issue the 16 digit Visa card number only on the mobile phone. And again turn those closed loop mobile wallet into open loop Visa Prepaid Cards.
The third thing we did was the personal payments application. So we had Visa personal payments for a number of years. But in the last two years, we've made significant inroads because we introduced a new fast funds requirement that allows the sender to send money and get it to the receiver with guaranteed delivery within 30 minutes.
So often times, these are funds that -- the emergency funds, folks need to get it back to the home to top up the prepaid to pay a bill and again with 30 minute guaranteed payment, guaranteed settlement, it’s really changed its trajectory of that transaction type across the globe.
And the last most importantly, I think this goes to Jim’s point earlier on security on mobile point of sale devices. One of the things we announced at the mobile congress was a new Visa certification process. And I think this goes to something we don't talk enough about is Visa is in the business of the standards.
When the business are making it easy for folks to transact on the network, also about reliability and with security. And so what we announced was a new program that we would actually certify mobile point-of-sale devices. And so yesterday, we announced three new participants in that program, iZettle, SumUp and Swiff.
We’re trying to create an ecosystem of standards based ecosystem. So not only our acquirers but consumers and merchants will know that these devices have been certified for security PCI standards across the Visa network. And so the Visa ready program is really intended to help drive an ecosystem approach around standards and reliability in the space.
So capabilities are great but again this is a fast-changing space. Our issuers, our customers, our acquirers are confused often times about to get started. So we’ve taken our capabilities and we’ve rolled them up into set of platforms, predominantly focused on making it easy from a turnkey perspective for our customers to get involved in this new and changing space.
So when we think about, again platforms, again as I said, the first recognition and there is a big change for us from the past, just to say, it’s not just a Visa environment. So when we think about platforms, we have to think about real open and flexible approach. It has to go beyond Visa.
And so when we think about what we've done to support other brands in the space both on the issuer processing as well as the acquire processing side is really the way we’ve been developing our platforms. Second is core to the payments business, trust is absolutely at the core of who we are.
The payments is all about trust. And so one of the things we've done and every one of the processing platforms that we stand up on behalf of our clients is build risk management into that. As you heard from Elizabeth, it's a key driver for our ability to open up not only new segments, new channels but to really drive the authorization and approval rates that we need to really grow this business.
So we continue to bake risk management and risk tools into our platforms. And then last but not least is payment analytics, especially when you think about the platform businessman from a merchant perspective, it’s all about conversions. They need to understand what payments we’re converting. They need to understand what times of day they should be open. The information that's embedded in the payment stream is absolutely critical to the analysis of their business and driving the business forward.
So we bake payment analytics into all of these platforms. And again so over the last three years, we’ve been busy rolling out platforms to make it easy and a turnkey way for our customers to engage here. So the first is as Bill talked about Visa DPS. It’s been around for a while, the world largest debit processor but we continue to innovate on that platform.
So what we've been doing. So prepaid processing as you heard, big growth industry for us, from a branded perspective, prepaid is absolutely critical to the DPS platform. We continue to not only innovate on the core enhancements for prepaid processing but the reliability of the Visa debit and prepaid processing service.
More importantly, we’ve now also invested in our relationship with monetize to create a mobile banking and mobile payment platform on that service. So we are taking DPS and bringing it forward into this mobile environment. Charlie referred to the CyberSource and Auth.Net acquisition.
And again, Mike will be appearing in a second but it's absolutely critical to the growth of our network, the reach of our network. And so what we did was to stopping the channel conflict. We got requiring business and are focused on the value-added services that we can provide to acquirers to take the CyberSource platform and extend and provide services, sticky services to merchants. So a lot of the capabilities I described, we won’t be able to make it easy for that last mild emerging connectivity to take advantage of both domestically and globally.
And then last in the processing space with Fundamo, which have been traditionally in enterprise software sales organization, we’ve taken that business and actually turned it into a processing service called the Visa Mobile Managed Service which is like DPS for mobile phones.
So helping the telcos in large parts so we no longer have to invest in fixed cost infrastructure but ride our variable cost processing rails, get the extension that they are looking for and get into the marketplace in an easy-to-use turnkey way. And at the end of the day, all of these things, getting back to the 82 billion transactions we saw last year, it’s all about the information we’ve seen, how we can play that back to help our customers grow their business and take risk out of their business.
So again, when we think about issuers and how they can do a better job of servicing the portfolio, getting activation, getting penetration, getting usage, we’re investing a lot of energy in world-class payment analytics, business intelligence tools to help our issuers visualize their business and figure out better ways to serve the customers.
Equally, we’re doing the same on the merchant side of the business. When you look at our share position on a global basis, we have a unique set of insights to help merchants understand how their businesses is working, where they should put their stores, how they should interact with their customers, again payments is at the core of that information. We’re beginning to create visualization tools to help them understand more effectively how to run their business.
Traditionally, our information business however has been focused on risk. Again, we’ve done, effectively seen those 82 billion transactions. We’ve been able to run all sorts of data models and as both Bill and Elizabeth spoke to, take those data models and in real-time make a risk decision and risk score, hand it to issuers as the transactions moving from the physical point-of-sale back to that issuer.
And as a result, we’ve been able to drive not only fraud out of the system but approval rates higher and both are not only good for Visa but they are great for consumers, it’s great for merchants and it’s great for our clients. And that model will continue. We’ll continue to make big investments in the fraud space.
But when you think about it, if you flip the fraud model on its head and in fraud models, we’re looking to find the bad transaction, it’s sort to think about those 82 billion transactions used to new propensity modeling, meaning if a consumer is shopping at a certain time of day, we know how that card usually behaves. Cards like this in certain zip, at a certain merchant are more than likely to make another transaction that looks like something.
We can start to expose that intelligence to our clients, our issuers and our merchant clients to better understand how to effectively not only deepen the relationship of those customers that already have but effectively acquire new customers for the first time. Now, lot of people say they can do that because they’ve got data and certainly data is one piece of that equation.
But back to the message, we want to leave you today is more importantly what we have is a network called VisaNet. That is a real-time network that we see these transactions coming across our network. And so we can actually effectively act on them on behalf of issuers and acquirers to more effectively deepen the relationship with consumers and merchants.
So what we have been doing again in this space for the last three years. So we continue to, again as I said to make investments in Visa’s Advanced Authorization System to not only make the data models better but also effectively create new tools like Visa Risk Manager and Visa Strategy Manager to effectively allow issuers of all sizes to automate the risk decisioning process.
So that’s great new authorization message but as we all know this inherently new world of card not present, the customer present, is it a physical world transaction, is it a internet transaction? I mean, if go to the Apple Store and use my Apple Store app, the easy pay app to make a purchase, I’m standing in the store but I’m making a card-not present transaction.
The issue is the form factor itself doesn’t really present itself to have been able to send all that mag-stripe information we usually got to see. So when we think about this, we need to start thinking about how we effectively authenticate the customer. I mean, the customer is standing in that store to the transaction and buying the two. But also do that in a way that doesn’t put friction in the system that drives down the transactions.
So we've taken the data models that we built for Visa Advanced Authorization and we’re applying them to a new tool you see on the page, you call VCAS, which stands for Visa Customer Authentication Service which in essence effectively on transactions where we used the risk, one that we used to use in advanced authorization, flags the transactions as being higher risk based on the behaviors of that card in the past.
We can now step up the level of authentication and ask the customer to authenticate themselves back to the issuer over the real-time into the network. So as -- the question was asked earlier about how do we think about some of these aggregator models and these tokenization models.
We have the ability to actually codifying when a customer is present but the card actually is not presented to us. So a lot of what you see here on this page related to information is going to be the key to the way we think about this new converged world of customers being in an environment but the traditional data not being passed.
So that’s the risk side. To the data side, as it relates to offers and deepening customer relationships, Charlie and Bill mentioned the relationship we announced yesterday with the ICBA to take Offers platform and provide an Offers capability to a number of the small banks and Credit Unions in the U.S.
But I think you have to go down a layer because when we talk about Offers, we often talk about it again as a platform but as a set of capabilities that are unique to Visa here that I think really make the story compelling. So the first is again we have 80 billion transactions, we have 2.1 billion card holders that we can start to look at how they behave.
So we can help issuers again through payment analytics and business intelligence to effectively tailor solutions where they can provide offers to their customers. Once those offers are provided, we have the ability to link those offers to the card or to the mobile device or the mobile wallet such that when that card is used regardless of channel, we see the transaction in real-time and we’re in the past, using that transaction to trigger fraud alert, we can use it to trigger an offer, an offer redemption.
And when that occurs, you see the last piece of the slide, POS Redemption for the first time instead of having a promo code where you have to tell the merchant what the code is to key into the register or have a statement credit delivered via the settlement message back to your card issuing statement.
We have the ability to actually do an inline adjustment as the transactions coming through VisaNet and take the discount before it gets back to the merchant point-of-sale and you see it on your receipt. And against the combination of the data position that we occupy, it's a combination of the distribution that we have through issuers and acquirers but more importantly the network and the real-time nature of it that allows us to differentiate our capabilities here and package it to something called Visa Offers.
So when we think about all of this and by the way, when I talk about capabilities, I want to be clear. These aren’t just made of things we’re thinking about. The things you see here in yellow, again I encourage you as Jack did earlier to go down the hall and see these things. Every one of these things in yellow is live. It’s a product and you can see in the showcase.
So again three years of investment here and we’re just beginning to hatch these out the door. But we believe again that if you think about these capabilities, they can fundamentally change the way we engage with our clients and through them with customers and merchants.
So as I think about the story you’ve heard a lot of today. It is a growth story and it is a story about evolution. The last 50 years has been wonderful. And the commercial relationships that we have with financial institutions around the world and through them with consumers and merchants is a great story. But I believe in the next five to 10 years, really we’ll fundamentally accelerate the story you’ve heard about the last 50.
Because when you look at the numbers we’re talking about and the connectivity and the edge of our network, if we are able to fundamentally punch through and actually on behalf of our clients, we’re effectively engaged. In this case, this connected consumer, connected merchant do what we've done with the physical form factors, it’s been a card and things like swipe and go and dip and go or tap and go and take it to these new digital environments, take friction out, make it convenient, make it easy and do it in a way that secure and reliable. It’s a tremendous upside to us. It’s our story on steroids.
Further we can do with relevance in a way that's customized like never before. I remember. It was only less than 10 years ago, if you got your card from issuer, that was a gold card or a platinum card, there is very little difference from any card that an issuer gave to you. Well, now we’re talking about the ability to actually customize the experience for both the consumer and the issuer. So it’s really exciting.
So that’s the consumer merchant piece, access. You’ve heard a lot about mobile POS but I’m here to tell you because a lot of the discussion today and in the room I’m sure is about, what about EMV and what about QR codes and about NFC. The fact is Visa at its best is always agnostic.
The edge of our network doesn’t care whether it’s a QR code that’s presented, whether it’s an NFC tap or it’s an NFC contacter’s card. And we’re going to continue to drive more access, more openness on the edge of that network because as we talked about mPOS just scratching the surface, we want to make it easy to get the transaction onto our network. So we're going to be agnostic and we’re going to create standards what we've done in the past to make it easy for those that are licensed to get access to our network to get on our network.
Then we think about the platforms better distribution. I think again about our position with respect to 50,000 FIs globally, there is no better distribution. And we’re going to continue to invest in those relationships. But as Charlie and Bill and Elizabeth also said we’re going to come with our local and those platforms and those services and capabilities I talked about, when we expose them either through their developer center or through our processing platforms allow us to engage more effectively at a local level with more flexibility.
But we will never lose sight of the reliability and security that we owe you, we owe consumers, we owe merchants and that will always be a piece of who we are. And so when we do this, we’ll always do that with that as a first order priority. And then last but not least so what why Visa?
Well, again why Visa because we have -- we're starting with 2 billion consumers. We’re starting with 36 million plus merchant locations. We’re starting with 82 billion transactions and all that data information not only can we expose to help our clients run their business better but we’re using it to differentiate who we are, to do a better job of interfacing with our customers, to solve for a lot of that merchant friction because we could help them grow their business.
And in the past, we haven't packaged that for easy consumption while we’re doing that now. More importantly we can then customize it. So we can actually not only have a very different discussion but we can actually have a very relevant discussion with both issuers and acquirers, with consumers and merchants. And most importantly, when we do that, we differentiate.
So again, we’re going to stick to standards. We’re going to realize it, again grounding consumer and merchants, who inherently limited open environment. They make all sort of choices everyday. That’s how we’re going to build but at the end of the day, if we do it the way we’ve discussed with our network, allowing easy access to merchants and issuers in this new converged -- sorry merchant and consumers, in this new converged world, we will differentiate when in the marketplace.
And from the financial perspective what’s it all about and Charlie said it before its more transactions. If we open the edge of our network, if we start to drive consumers and merchants to prefer these processing platforms, these new capabilities we will win and we will drive more transactions over the world's most scalable payment network.
So with that, what I’d like to do is go a little bit deeper on each of these areas and I’d like to invite up some of my colleagues from Visa to spend a little time talking about some of these areas in more detail.
So first off, let me introduce the folks on the panel that have joined up here. So first is Sam Shrauger. Sam is the Global Head of Commercialization for Visa. Next one is Bill Gajda, who is our Global Head of Mobile Product for Visa. Mike Walsh, the CEO of CyberSource and Silvio Tavares, our Global Head of Information Products.
So let me first start with Sam. So Sam you are relatively new to Visa having recently joined as a past Head of Product to PayPal. And I think Sam can offer us and ask you your point of view, if you will, on what we’re doing with V.me, the relative strength of that product in terms of what merchants and consumers are looking for. And most importantly, how Visa’s core assets hopefully can differentiate us in this space.
So I think first, I think I’ll start with the assets because we talked a lot about them today. But I think that you really can't underestimate how critical these are to us both in the success that we've had but also the success that we will have going forward. Since I have come into the company, I've been really struck by two things as our core assets of this business. Number one is the network.
We talked about it today. The numbers are staggering. This is a global network that is out scale and most importantly, its architected to see us into the future of electronic payments just as it has seen us through the past of the electronic payments. Secondly is the brand. I think from -- if you look at the Visa brand. And you look around the globe, there are millions and millions and millions of people who are interacting with this brand, every single day. They recognize it, they know it, they trust it.
And if you look forward to the future of electronic payments that we’re talking about e-commerce, m-commerce and some of these other things that trust and that awareness and that knowledge of our brand are going to be critical to us as we move forward.
So looking forward, I think specifically around V.me, you talked a little bit Jim about why we’re doing V.me. And I think the bottom-line is there are lot of transactions. We used to consider the point-of-sale to be a physical place. Well, now the point of sale is moved into our homes. It’s moved onto our mobile devices. It’s moved into our offices. Anywhere that we have connectivity is now point of sale. But I think we inherently recognize that there's a still friction in that process as you talked about. E-commerce is a $1 trillion market globally and it’s growing 21% a year.
Mobile commerce which honestly was virtually non-existent about three or four years ago is tens of billions of dollars now and it’s growing in an absolutely furious pace. So these are big opportunities for us, in particular, because by their nature those are electronic transactions. Cash and check don’t work in the mobile and e-commerce environments.
And so they are right on our sweet spot. They are electronic transactions. That's what we do best. But there are also places where there is still friction and just as we've done in the physical world, taking friction out of payments by making Visa products easier-to-use than cash or check, we want to do exactly the same thing in the online, in the mobile commerce world with V.me and that's really what that product is about.
So what is V.me first of all. And by the way, I would encourage you all to check out the demos which were down the hall and experience it for yourself because I think that will really bring it to life. But for consumer V.me is a digital wallet. So it's a place where they can safely, securely store the information that makes checkout in payment on the web and on the mobile device easer and faster than it is now.
So personal information, all major card type information as well as preferences, consumers can store that in their V.me wallet and then any time that they are at a merchant who is V.me accepting, they can access that information to be able to make a transaction in just a few clicks or few taps or few swipes. And that's really, really important in these environments because as Jim said, particularly as we’ve move to mobile, if you think form filling is fun on an Internet browser, just try it on a mobile device sometime, it really doesn't work.
And so for consumers, we need to solve that problem. But that also solves a problem for the merchant, which is really converging the sale. And that again is what we’re all about on the merchant side, making payment simpler and easer, taking friction out, so that for a merchant a consumer is more likely to complete the payment process and complete the checkout process, and that’s really the value proposition on the merchant side for V.me.
I think the most important thing there for V.me is to recognize. This is fundamentally an issuer and acquirer centric solution. So for acquirer this is a payment solution that they can offer to their merchants to help them solve the payment problems that are inherent in a mobile commerce and an e-commerce environment. So it’s an additional service they can offer to their merchant portfolio.
On the issuer side, this is an issuer centric product. This product is intended to help issuers have their products work better for their consumers in an online environment. Issuers can easily add their cards to the V.me wallet. They can maintain their branding within the wallet environment and most importantly, they maintain that customer relationship.
So V.me is not a direct-to-consumer play on behalf of -- on Visa's part. V.me is a way for issuers to allow their customers to use their products better in an e-commerce and mobile environment and it's enabled by Visa.
Now if you take this problem of kind of taking friction out of the e-commerce and mobile commerce space, including by the way remote payments when you are standing in store or in island of store. Are there other people that are out there trying to solve that problem, of course, they are, there are lot of smart people out there trying to solve that problem and some of them over the years PayPal and others have created relatively good products to go after parts of that.
But from my experience in the e-commerce and mobile commerce space, I know there are really four things that are going to make any digital wallet successful and I think there are things that if you look at them and you evaluate V.me you will agree that we’re incredibly well-positioned on each of these damnations.
The first is the quality of the user experience, just back to Jim's point, got to be simple, got to be easy, got to be fast, got to be safe. And if you use V.me at the demos, I think you'll agree that it is really unlike any other payment experience out there in terms of its ease-of-use and simplicity. It’s equally easy for the merchant in terms of adoption and usage in their online and mobile commerce properties.
Second thing is the network, again there is the scale demand, the performance demands in the online and mobile environments are just the same as they are in the physical world. And the Visa network, it brings all that same capabilities to those environments, and is -- and this what's really sitting behind V.me. And so, again, the network strength is there, I think with the product as well.
The third thing is distribution, so it's great to have a great digital wallet experience, but if you can’t get it into the hands of consumers and merchants, it's not going to be successful. And because this is an issuer and acquirer centric solution, by definition distribution scale is built into our model and I think that's a really critical point about V.me.
And the last thing I’ll say is about the brand, the brand is, I think particular in an online environment and in mobile commerce environment, trust and knowledge of a brand are absolutely critical for any digital wallet that’s going to be successful. I think if you look at Visa brand you would agree that it’s incomparable to anything else out there from branding standpoint.
So let me talk for a second about how we’re going to go to market with V.me and I want to be very clear about the fact that V.me has been built as a global platform. So we built this on top of the PlaySpan technology asset we acquired in 2011. We’re distributing and in part through the CyberSource platform which has great reach here in the U.S. and extending reach globally as well.
But this is a global platform and we’re going to be making this product available globally. That being said, we’re starting very focused here in the U.S. It is the largest e-commerce market in the world. It is one where we have to win, we have to get it right and that’s exactly what we’re focused on doing.
We’re going to be extending next into Australia and Canada and then over the coming year you are going to see us extend in waves into additional countries in Asia and Latin America. So that’s kind of global the rollout plan.
As we do that, how we are going to measure our success? I think it's really pretty simple. Its two things, number one is, what is our merchant acceptance footprint look like in any market that we are in? And number two is, what kind of adoption are we getting on the consumer side, adoption in usage of V.me wallets?
So if you look at V.me and where we stand now, we've been in market since November 2012. We have 240 enterprise and mid-market merchants signed for V.me. They represent $25 billion in addressable e-commerce volume and we have 35 of them live and are working to bring more, more merchants into the pipeline and get them live as quickly as we can every single day, so that’s our real focus here.
On the consumer side, we have 86 issuers in the U.S. who committed to the program. It’s 15 in the top 25, 35 in the top 100, includes names we all know Bank of America, U.S. Bank, PNC and in total they represents a 49% of our U.S. card accounts.
And so we have great traction on the merchant side, we have great traction on the consumer side and I think most importantly, when you look at this that is what we’re doing. We are building a merchant and consumer side network again and I think what's most critical to realize is it’s again.
So is it hard to do? Absolutely it’s hard to do. But this is something that we do as a business. This is what our business is. And so we have to build that network with V.me but it’s something that we’ve done before. We know how to do it and that's exactly what we’re going to do again with V.me.
Great. Thanks. So, Bill, as a [crucial better and among] to put there. You’ve started here three years ago actually had Inventor Day. And at the time, I think Elizabeth was talking about our mobile aspiration and I think it was 23 pilots in 19 countries. So was that doing a public appraisal how have you done?
Yeah. It’s difficult to say because as I’ve said, there is somebody in this room before you can't swing a dead cat without hitting a mobile wallet everyday. And so, and as Charlie said, you wonder what you’ve missed because mobile is changing so quickly.
I think that being said, I think we put together the right set of assets for developed markets and emerging markets for the landscape that we see today, as well as what we see at least in the next few years and so let me talk about that in that order.
First of all with respect to developed markets and there has been lot of discussion already this morning around proliferation of smartphones, the emergence of mobile wallets and mobile commerce applications. And we’re already benefiting from that as a network today and driving incremental revenue.
As an example, the point has been made square 4 million or maybe 4.2 million merchants in a relatively short time. These are merchants that only accepted cash and check before, and so we’re seeing, volumes driven as very inexpensive mobile point-of-sale devices are being driven out to the long tail of merchants.
On the other hand think about the Starbucks app, over a millions of consumers are loading their Visa card into that Starbucks app and using that app to pay for coffee instead of cash. We’re going to see the proliferation of those apps in a number of verticals, not just coffee. And again, this really drives the viable network get incremental transactions in these develop markets.
In addition and there have been too much talk about NFC this morning, but after some false start when I was in the mobile industry, I was partially responsible for some of those false starts. We are seeing now the rollout of NFC at some commercial scale. Nine of the 10 top manufacturers are producing their smartphones with NFC in them.
Virtually every smartphone you walk out with AT&T and Verizon and T-Mobile today will have NFC capabilities as an example. All of the major merchant point-of-sale devices are embedding NFC into their terminals and Genica will sale 5 million NFC terminals, 100% of their portfolio.
And so we’re starting to see that whole chicken of the egg problem being addressed and we will see rollouts in markets like Canada, Australia, New Zealand, Singapore, Hong Kong and surprisingly Brazil, South Africa and of course, the U.S. with ISUS and others leading the way.
And so again I think that we are seeing this transformation in the developed markets with smartphones, people taking what’s in their physical wallet and putting it into their mobile phone and driving incremental transactions on our network.
We will continue as a part of the mobile team to support what’s Sam doing in mobile optimizing V.me, as well as e-commerce and the large screen move to the small screen. And we will think about as well, how do we takeaway what we’ve done with the payWave app that you’d described and extend that to QR code, that’s a vertical that’s going to be meaningful. You talked about the Samsung example where they are introducing an alternative secure element to the SIM card. And we made that agreement.
Well, how do we continue using our assets, our mobile provisioning service, what we’re doing with the payWave application and its continued development to continue to encourage our issuers and merchants and acquirers to drive people from the physical point of sale to electronic or mobile devices where we get two-and-a-half times the market share and take a lot of the friction out of what can be some complex technology.
So I’d say that the shape of what’s going on in developed markets is very strong. I think we’ve got the assets, the development for Visa. But quite frankly I think where the game is really going to be played and this has been alluded to a couple times what Elizabeth spoke is what’s happening in the emerging markets. Because in these markets, it’s not about that incremental convenience of tapping my phone or swiping my card.
It’s transformative for these economies and for consumes in those economies. There’s been a lot of discussion around the 150-plus mobile money schemes that have been launch in partnership with banks and mobile operators to provide these very basic financial services to consumers. Fundamo which we acquired two days ago or two years ago this week actually was the software platform that powered a majority of those early instances and in fact is still the largest provider of mobile wallet software in emerging markets.
And as Jim and Elizabeth alluded to, over the past three years we’ve taken what was already a great piece of software and a keen understanding of those emerging markets and strong relationships with mobile network operators and did a couple of key things. The first thing we did, as Jim described, was take that software and put it in our largest data center in Virginia and another data center in India to provide a turnkey managed service for banks and mobile operators. Because before they would buy the software they’d buy their own hardware, they’d buy their own data center, they’d set up their own service centers and customer support before they got transaction number one.
Well, now they can plug into the Fundamo software in our data centers with a variable cost model and really just focus on building out their agent network, building out their customer base, getting the pricing and distribution right and have this variable cost models. So, again we’re taking the friction out of launching these mobile money services which will drive further adoption.
I think most importantly though we developed Visa Mobile Prepaid based on the principles of the Fundamo platform. And as Jim said, the challenges that exist with these mobile money schemes is they don’t talk to each other and they don’t really talk to the global payment ecosystem. So with Visa Mobile Prepaid an overlaying of Visa account on top of a phone number and letting people use that phone number to now make open-loop transactions.
So, again we didn’t talk about it yet this morning but we’ve developed Visa Mobile Prepaid in a way that really respects what’s happened in these emerging markets in the way that people are transacting on their mobile phones. So in order to make a transaction on a close-loop scheme, all you need to know is your phone number and all transactions are phone number to phone number.
Well, the same is true with Visa Mobile Prepaid. We’ll do the translation from that phone number to the account number, expiry date CVV in our network, using our network capabilities and allow consumers to have a very easy transaction phone number to phone number, whether it’s an international peer-to-peer payment and ecommerce payment and overtime payments at merchant points of sale.
And so again I think the combination of the managed service, the inherent robustness of the Fundamo platform, what we’ve done with Visa Mobile Prepaid are also the right capabilities for those emerging markets and it will be transformative. We’ve already seen some early successes with companies like Vodafone, MTN, and Orange where we really worked with the largest mobile network operators in the world to drive scale.
More recently, we’ve got our banks into the game. We’ve launched our person-to-person payment program in Kenya with Equity Bank based on mobile-to-mobile, person-to-person transfers and we’re going to see those implementation of those programs continue to grow.
I think the thing that’s common between an emerging market and our developed markets is all the discussion we’ve heard today about mobile point of sale. We’re all familiar with Square. Hopefully, we’ve all used Square, very convenient. The people, the merchants that use Square love it and in the U.S., it’s not just Square anymore, it’s Intuit, it’s PayPal and several other smaller companies.
Around the world, there are more than a 100 companies that are putting together this very basic piece of hardware with a relatively basic piece of software in any phone to transform that phone into a PCI compliant terminal.
And while we’ve seen innovation both in terms of the hardware and the software, moving from Square which was really kind of mag-stripe base to yesterday in the announcement, we actually certified three pin-chip and pin-based solutions. We’ve also seen innovation on the business model.
So Square represents not just technology innovation but innovation in terms of unique way of aggregating all of these micro-merchants and bringing all electronic payments to whole classes of merchants that really were required traditionally before. And that’s great and we’ll see that continue to proliferate to these 100-plus companies in developed markets.
In emerging markets, it’s not about the long tail. It’s about core acceptance. It is moving from 9 million this year of mobile acceptance points to 38 million over the next five years which could literally double our acceptance points. So when I think about emerging markets or developed markets what’s happening in mobile, I go back to the point that Jim and Elizabeth and Bill and Charlie and everyone has made today which is it’s ultimately about driving our core business. So we’re going to talk a lot about startup companies and edges of the network and APIs and SDKs but they’re all geared towards what we do at Visa and have done for 50 years.
Mobile is going to drive more people who have accounts because our mobile phones and people have accounts today. We’re probably going to near double the number of nodes where you can use those accounts, either at the point of sale or virtually. And that’s only going to expand the size of our network and the number of transactions across it. So as Charlie said, I wake up every day worrying about what’s next and what I missed but I think that we’ve got a decent set of solutions.
Great. Thanks. So Mike I think everybody today has mentioned your piece of the business which is the acceptance side of the house. And in particularly, we acquired CyberSource recognizing that we needed to get closer to the merchants in order to deliver value-added services. Can you give the group an update on how we’re progressing and where you see CyberSource going in support of everything we talk about?
Yeah, sure. So what I’ll do is spend a few minutes talking about the evolution of the CyberSource business since the acquisition. And then I’ll talk a little bit about the role that CyberSource is playing in bringing a lot of the capabilities and the innovation that you’ve heard about today to market.
So I see a lot of familiar faces and here I know some of the people in the room who are very familiar with CyberSource. But I am sure some aren’t as familiar. So just as a reminder, CyberSource was acquired by Visa in the summer of 2010. So it’s been almost three years since the acquisition. In its simplest form, you can think of CyberSource as sort of the internet version of that terminal that sits on the checkout counter in the merchant location.
We enable merchants and partners to accept electronic payments of all kinds. And over the years, we went public in 1999 and we built the business around that fundamental opportunity in the e-commerce space. But what we’ve done over time is built a lot of value around that core function of an e-commerce gateway, things like fraud capabilities, managing risk as it relates to transaction fraud.
But also managing risk as it relates to payment data security. So a whole host of services and solutions for merchants and financial institutions and technology partners to help them mitigate the risk of a payment data. And then a third sort of broad category of business intelligence or you can think about it more specifically as analytics, payment analytics.
So helping our customers understand their business, you’re going to hear more about that from Silvio in a few minutes in the broader Visa context but this is something that the CyberSource business has been focused on for a number of years. And so to give again for those that aren’t as familiar to give you a sense for the scale of the business.
CyberSource has a little over 400,000 merchant customers around the globe. We partner with hundreds of financial institutions around the world and thousands of developers and technology partners as a part of our community. Jim mentioned the importance of the developer community to all of us, not just in the payment space but in the technology business as a whole.
And that continues to be a very, very important constituent for us as we extend the capabilities for the merchant community they are more and more dependent on their developers, whether they’re internal or external, because of the rapidly changing technology landscape out there.
So if you think about CyberSource, its heritage, its origin as an ecommerce enabler and then you think about a lot of the things that you’ve heard about today, we’re in a great position to not only participate and benefit from the electronification of all of that cash that Elizabeth and Bill talked about earlier but also drive a lot of that innovation. And it’s one of the exciting things that the CyberSource team has been focused on, has been part of Visa as we’re able to innovate at scale. We’re able to innovate at a much higher level of scale than we were as a standalone company.
So I’m going to kind of just sort of double click on a couple of the areas that we’ve always focused on as a company and that we’re two key tenants of the acquisition thesis. One is as I mentioned the area of risk management. And for us that’s really two things, it’s transaction fraud management and then it’s also payment data security management.
And so this has been a big area of focus with the CyberSource business as a discrete business but also partnering with all of the Visa functions and capabilities that focus on risk and fraud. One of the ways that it’s manifested the evolution and the new capabilities that we built in conjunction with Visa has manifested itself as it’s already been touched on by Elizabeth in particular earlier, if you think about ecommerce in some of the developing markets around the world, one of the challenges for a year is now going back from more than 10 years has been the concern around risk, the concern around fraud because you can’t -- it’s a non-face-to-face environment.
And it’s been a big inhibitor for the acquiring community to enable their merchants to do more ecommerce as well as the merchants themselves in expanding their sales channels and expanding the way that they can reach their customers. And what we’ve been able to do very successfully over the last year in particular as a combined Visa CyberSource capability is to open some of those channels up to provide tools, fraud and risk management tools to the acquiring community in these developing markets to the merchants themselves so that they can open up broader ecommerce channels.
Some of them were doing ecommerce at all. Some were doing a small amount of ecommerce but again because of the lack of risk tools, the lack of ability to manage this, they weren’t able to expand that. A good real-world example was just recently in Brazil in the Middle East some of the acquirers have opened up the acceptance of debit online. And Bill touched on this earlier so previously they had not, they didn’t feel comfortable but they have the tools and the capabilities to accept debit online and they attended risks that come along with that.
But by partnering with Visa and CyberSource, they have been able to open up those new channels. And so that’s been an opportunity, an area of a lot of excitement for us. And it’s a good segue because sort of next topic I wanted to talk about that was a big part of the acquisition thesis was the notion of global expansion. So not just growing the CyberSource business globally but as I just said using the CyberSource business to help expand the acceptance in the Visa context and to help accelerate Visa’s global expansion.
And so another example of where we’re seeing this manifest itself would be China. And I know China has been talked about throughout the presentations today, lots of challenges in China. There was a conversation earlier about China UnionPay and one of the things that CyberSource brings to the Visa family is the platform that we provide is agnostic and it’s agnostic in multiple ways. It’s agnostic in terms of payment types.
So we support not just Visa branded payments but all of the relevant forms of payment that the merchant community needs to accept around the world. But we also are agnostic in terms of device or form factor. So a lot of the talk about mobile, lot of the comments that Bill just made. The platform doesn’t really care about the device or the form factor and because of the internet is by definition global the platform doesn’t really care about borders either. So we’ve been able to take the platform capabilities into places like China that are very challenging markets for a lot of different reasons and open up new opportunities for Visa.
One partnership in particular I am sure it’s a name that many of you are familiar with is the Alibaba Group, one of the largest ecommerce entities on a worldwide basis, now a multi-business conglomerate. We’ve done a bilateral relationship with them where they use our fraud screening capabilities to manage a lot of their marketplace activity on alibaba.com and some of their other properties.
And then we enable their payment method. So many of you may know that they have their own digital wallet that’s called Alipay. And in fact, if you measure it by registered consumer accounts it’s the largest digital wallet in the world. And so we enable that on our platform. And so it’s a very symbiotic relationship. And it’s a good example of how the CyberSource businesses help to extend Visa into some of these emerging markets.
Let me shift gears into some of the ways that CyberSource is enabling some of the core Visa capabilities have been touched on. I think the most obvious example would be V.me. Sam talked about it. So I don’t need to go into much detail. But I think the way to think about the role CyberSource plays for V.me is that it’s a built-in distribution channel.
As I said, we’ve got that last mile that Jim talked about. We’ve got that last mile into over 400,000 merchants around the world. And so when we at Visa develop new capabilities like V.me, CyberSource is an easier way to distribute those capabilities into the merchant and acquiring communities. It reduces the amount of technical work that the users have to do, whether they are merchant or a service provider. So good example of where CyberSource helps to extend Visa innovation.
Another sort of fits back in that global expansion category is something we call CyberSource through VisaNet and again this has been a big initiative to help enable a lot of the acquirers in emerging markets open up e-commerce as a channel. So essentially what it does is it a new model, a new connection model that allows them to take advantage of their existing VisaNet connection but leverage all the functionality that we bring to the table to open up those ecommerce channels, those new mobile channels and that’s something that we’ve had a lot of success with.
We’ve got over 40 acquirers in developing markets around the world that are either live or in some process going live. And lastly, it’s a good segue to Silvio. We’re enabling a lot of the information products, the big data capabilities that have been talked about today through the CyberSource platform.
So I’d just leave you with that. As you think about CyberSource in the Visa family, think about it as a platform of technology and connectivity into the merchant and acquirer community, think about it as a platform of subject matter expertise in electronic commerce, and think about it as a platform of relationships that Visa can leverage. So very exciting times.
Great. Thanks Mike. And so be last, obviously new here to Visa haven’t built the data business for first data get that off the ground here and some more position here, would you mind spend sometime taking the group through, how you view the opportunity in respect to the amount of data you have, that we get to process on behalf of our clients and more importantly, how we views it historically and how see a path forward to help our clients keeping their relationships with their customers?
Absolutely, Jim, and I’ll start with how we use data here at Visa. And it’s not widely understood that Visa has just a great track record of using data for the benefit of its customers, issuers, merchants and acquirers. The reason we’ve been able to do that effectible is because we’ve been focus on how we can use data to benefit our customers.
Visa data helps our customers reduce fraud, Visa data helps our customers manage their business more effectively and Visa data helps our customers increase sales, those are all three critical things that we do with our data.
And just to make that real, I want to give you a few examples, starting first with our risk and fraud area. We have over 7500 global banks that use our real-time in-flight risk score to reduce fraud. Last year we delivered 55 billion risk scores and identified an incremental $2 billion in fraud. And so our data in real-time through the product you heard mentioned before Advanced Authorization really helps our customers reduce fraud.
Second key area is around increasing sales. We've been able to effectively leverage our offers platform and API capabilities to help companies actually market themselves more effectively.
Really good example of this is Sears Holdings Corporation which has loyalty program with tens of millions of consumers in it. We signed an agreement with them to enable them every time Sears customer roles their Visa card, get additional benefits like discounts to their Visa card and support because that’s Sears Holdings is a top 20 merchant and top 20 retailer in United States.
Third key area example, by way of example is in the area of managing their businesses more effectively. We have a great product called Visa View OnLine and that enables our issuers to visualize what's happening in their portfolio of Visa cards in real-time from their desktop.
So when you look at those three examples, it comes down to something very simple and very fundamental, with 82 billion transactions, 2 billion cards, every time there is a Visa transaction that's an opportunity for us to produce incremental revenue for that Visa transaction. It also produce differentiation for our most valuable core asset which is that that Visa network.
Now, none of that would be possible if we didn't really focus on the fundamental cotenant, that fundamental cotenant you heard from Charlie earlier on in his comments, that tenant is simply this. We use data for the benefit of our issuers, our merchants and our acquirers in a way that is consistent with their business objectives.
And it’s important point, so I’ll just repeat that, we are really focus again how we can use Visa data to benefit our issuers, our merchants and merchant acquirers in a way that is consistent with their business objectives.
Now changing gears a little bit and looking towards the future which I know all of you are focused on as well. The biggest future trend that impacts Visa information products business and industry overall is mobile phones.
You heard just the amazing statistic there are 7.2 billion mobile phones on planet earth, but only about 6.8 billion people. It's an amazing technology. It’s the first truly ubiquitous technology.
And what that means, is that there are many different ways now that Visa can both collect payment and commerce data, as well as deliver payment and commerce data, and when we think about that opportunity in terms of mobility, there is really three key areas we focus on. First one is personalization, the second one is authentication and the third one is visualization, and let just spend a few moments on each one of those.
Starting with personalization, increasingly we are focusing our products to enable our issuers and merchants to get to the consumer before transaction ever happens with a personalized message.
We have launched our offers platform and you heard about it a moment ago. We signed an agreement with ICBA to enable that technology for small community banks and financial institutions.
What it really does is it enables us to deliver a message in real-time personalized to the consumer based on their location, it’s based on their historical spend, incredibly powerful capability and an age where consumers are connected and wired all the time.
Second key area is authentication, particularly in the card-not-present space. In the authentication space just about seven months ago we launched the new product which is called Visa Consumer Authentication Service you heard it mentioned a moment ago.
And what that product does is it enables us every time there is an e-commerce transaction on a Visa card to look at the Visa card and then also pull information from that consumers device like a cell phone or PC and just see whether that card number and that device ID have been presented before in an e-commerce transaction.
And when they have it’s very unlikely that that transaction is fraudulent as a result we can let that transaction go through. It’s been a very successful product for us because as you know e-commerce transactions are the fastest growing segment of our transactions but there are also the areas you heard earlier which has higher relative level of fraud.
So we have now issuers, large issuers in three different countries using that service. We have top five issuers in the U.S. using that service and we expect by the end of this to have over 100 million cards enrolled on that product.
And importantly as you look outside of the United States, our ability to more effectively authenticate a transaction and reduce fraud is a key driver for domestic issuers outside the United States actually take a transaction which before hadn’t been following on Visa and put it on to Visa in that. So that’s a really key area for us going forward is that area of authentication.
The last area I want to touch on is visualization, increasingly issuers, merchants want to understand the overall trends in their business. One of our fastest growing and most successful capabilities is our API capability called close the loop, that enables our merchants and issuers to understand what proportion of their digital marketing spend is actually converted into a physical point-of-sale transaction on a Visa card.
Again, that's important because most companies increasingly they are spending more of their marketing budgets on digital marketing and they want to understand how that translates into increased sales at the physical point-of-sale.
But really the most important that I can leave you with is this one and you heard it from both Charlie and Elizabeth a moment ago. And that point is that the Visa network is perhaps one of the best position data delivery networks in the industry, because we are ubiquitously connected to the merchant point-of-sale. We’re also connected to the issuers and the acquirers. We sit right at the critical linchpin of digital commerce.
And there is perhaps no other better example of a digital delivery network that create huge value in real-time at the point when it matters the most, which is when a consumer wants to make a transaction. We’re connected to billions of consumers, millions of merchants and thousands of global banks.
Now as we look to the future, we feel very confident, we’ve had a really successful track record of developing information products. We continue to invest in this space and we fully expect to maintain our leadership position in this space.
Great. Thanks Silvio and let me thank the panel. And again, as I said earlier, you can see almost, everything they talked about at the showcase and again encourage you guys actually see first hand how those works, because it’s real and it will be a game changer for us.
So, with that, let me introduce Byron Pollitt to come up and discuss how this roles ups to the important things, the financials.
Okay. Home stretch. So, four topics as we enter the math part of the morning. Client incentives, capital allocation, little color on main metrics, which I know you have already seen and then some early thoughts on fiscal year 2014. I thought I would begin with a bit of a refresher on client incentives.
So client incentives are really customized price discounts and because they are discounts they have to be treated as a contra revenue expense. We use the discounts to help secure multiyear contracts which are at the heart of how we want to memorialize our relationships with our important clients.
This allows us a period of time over which we can invest and really establish a deeply embedded value-added relationship with our clients and price discounts or incentives are what we used to induce the multiyear contract and then restructure them in a way to promote payment volume growth, and so far that's been pretty successful.
Couple of points to consider, when we guide each year to the incentive levels, the metric we use is the percent incentives as a percent of gross revenue. We keep two things in mind, one of which is a very good understanding of what contracts will come up for renewal that year.
And the second, we have to make some judgments about how the incentives are going to be structured that we actually put into play for the year, because there are different accounting treatments for incentives.
In some contracts there is a heavy upfront that will be put in its entirety through the income statement and then there will be some contracts that are completely amortized. So on a $10 million contract if $5 million were upfront you put $5 million through typical contract five years, amortized $1 million a year over the balance that is a very different look to one that is completely amortizable at $10 million, $2 million a year over five years.
And so when we guide, we are guiding not only to what contracts will be renewed, what new contracts will we enter into and be affected that year, but we are also guiding to how they will be structured, which is why we use a range and why we give it over the course of the year, because as you can imagine trying to get the incentives right which contracts will be executed in which quarter makes it even more difficult.
I’ll also add that, as I mentioned at the last earnings call, the relationship we have with Chase, it’s one of our largest contracts. Historically is had a high level of incentive component to it. In the new contract more of the pricing will be direct and the way to think about that is gross equals net it will be pricing that is per transaction and therefore it will not much of a contract won’t involve incentives, there still will be incentives, but not to the degree that we had historically.
And then really importantly we expect incentives to grow overtime, not only in dollars but in the -- in its percent of gross revenue. And you should look at that as a healthy sign that the business is growing because the level of incentive that we pay is directly tied to the growth in portfolios and as clients deliver increasingly larger portfolios overtime, the incentive levels go up. It’s the way the business is always been run and if we have a healthy growing payment volume than an indicator of that is a rising level of incentives and I’m going to give you more color quantitatively on what that looks like in a moment.
But first let’s talk about what gives rise to incentives which are multiyear contracts, when we went public, multiyear contracts were relatively well-embedded in the developed countries, but we are just getting underway in the emerging markets.
But it has been a fundamental part of our strategy from the word go and so we have worked hard over the past five years in putting much of the rest of the world under multiyear contract.
What you have in a table before you is a snapshot of the payment volume for the second fiscal quarter. So this is the March ending quarter. And what you can see is that basically the rest of world has caught up with the U.S. We literally have 88% of our volume under multiyear contract across the globe and that's a good thing. It means well-established multiyear relationships with our clients and it brings a level of stability in our payment volume flow and in our revenue.
The question that normally follows from this group is that sounds great, what are you renewing next year? And so we've included a snapshot of that that's the final column to the right. So if you take the contracts across the globe that are schedule to renew in fiscal year 2014, it’s roughly 3% of payment volume in the U.S., 12% rest of world, 7% overall and we would consider that a modest year of renewal.
All right. Let’s take a look at incentives overtime which is another area, I know that is of significant interest to the group. And I said before that as portfolios grow as our payment volume grows overtime, we would expect incentives to rise.
So here we have a time series fiscal year ‘09 through ’12, all of us I think are painfully familiar of as to the economic -- global economics in ’09, didn’t do much for our portfolios that year and the percentage incentive actually fell back. It had been in the 16 zip code and actually fell back to 15 because incentives also act as a stabilizer, a portion of our contracts are structured to pay incentives on year-over-year growth. And so if there isn’t growth or if the growth diminishes significantly than incentives dial back and that's what happened in ’09.
But more importantly, as you look forward to ’10, ‘11 and ’12, the growth in the average portfolio was significant and you can see that overtime as a portfolios grew so did incentives. And we looked at that relationship and say that that's a pretty healthy an expected relationship in the way our business has evolved over the years.
So if we look at fiscal year ’12, it says clients as a -- client incentives as a percent of gross revenue is 17%. That's an average across the globe. You might be interested in seeing what kind of incentive level do you get to when the portfolios are the largest. In other words, among our largest clients. And so on the next slide what we've done is taken a snapshot of our top 20 global clients.
In fiscal year ‘08, the average size of the portfolio of those top 20 was 82 billion. And we’ve fast-forward to 2012, it had grown 36% to 112 billion. Client incentives for that group was 20.3% in ‘08 and the percentage changed, six percentage points of increase but it's about 29% increase in the level of incentives.
So when we look at 36% growth in the average portfolio, 29% growth in the level of incentives that feels like a good healthy correlation between the two. And what happens here as you accelerate, as you increase the level of incentives as portfolios grow in size, we increase the level of discounts.
Bill mentioned earlier several drivers of why yields come down. This is another one and an important one that as the portfolios grow in size, we offer more price discounts and the incentive and the yield levels moderate. But when you do the all-in math, the size of the pie has been so successfully driven larger that even with a higher level of incentive, there is net-net, there is plenty of revenue left to drive very attractive revenue growth which has been the story of Visa over the last 50 years.
So all in, we find -- we believe that the incentives that we are currently reporting are very natural and healthy outcome of the significant payment volume growth that both Bill and Elizabeth demonstrated that we have already delivered and expect to deliver. So on balance, on the fourth quarter call we’ll give you more perspective. We’ll give you a range of where we think guidance will be on incentives for the upcoming fiscal year but we took a snapshot today. We feel very, very comfortable that this is a very healthy level. And over time, we still expect it to rise.
All right. Enough on incentives. Capital allocation, I want to begin with just reviewing our guiding principles as it relates to uses of cash. This should look very familiar because it has not changed since we went public. The first call on our cash is always to reinvest in attractive organic investment opportunities which Jim and the panel talked extensively about just a few moments ago, significant reinvestment in our offices and our people in country which Charlie mentioned in JVs and any acquisitions we do.
This is always the first call on the money. We have historically and intend to continue to preserve a very strong balance sheet with sufficient liquidity to backstop settlement risk which I’ll talk more about in just a moment but also Visa Europe. Remember they have a put and when that put comes, not a clue when but when it comes we have -- we have to within -- in less than one year, we have to complete the transaction and fund it.
And so today we have no debt given a chance with the good use of proceeds, we put that on the balance sheet and that might be a good time to do it but in the absence of a strong use of proceeds, we have no debt and we will continue to reserve that debt capacity for good use such as the put.
We have been as I’ll talk about in a minute, very consistent and decisive in returning excess cash to shareholders through dividends and share repurchase. And then as the appropriate time, we would introduce debt into the capital structure. So our returning excess cash to shareholders, how do we determine what is excess.
So I’d like to walk you through this snapshot which is really a form of sources and uses. If you were to go to the end of Q2, our fiscal Q2, the end of the -- on March 31, 2013 and just start there, we had beginning cash of about $5.3 billion after set asides for the small amount, it still remains in our litigation escrow and any domestic working capital.
So beginning $5.3 billion then we would subtract from that $3.9 billion which is cash held in foreign subsidiaries. And you should think of the vast -- the majority of this $3.9 billion had -- none of it has been repatriated. Were we to repatriate, we would pay U.S. tax.
So that's $3.9 billion. We’ll add back as a source, our credit line of $3 billion. If you add all of those up, you come up with net sources of $4.4 billion. I mentioned earlier settlement risk. So when transactions occur, we ensure Visa stands behind, those transactions will get funded.
And so we operate to a Basel standard that says you should have at least enough liquidity set aside so that if the single largest settlement exposure from your largest client occurs, then you can backstop it and fund it in the event that they didn't fund any on that day. That event is always at the end of a heavy three-day shopping weekend.
Historically, it’s either been around Thanksgiving or it’s been around the December holiday period. The proliferation of Internet sales has begun to level out those holiday period. So I can tell you the single largest day that is driving our weekend that was driving this calculation was actually Presidents' Day weekend in the United States this past February.
And so what we do is we set aside the single largest exposure that Monday morning. If that client with the largest exposure failed to settle than we need to be able to step in that’s how we size it. And then we plus it 20% as an extra cushion to be above and beyond the minimum standard, that's 3.7. That leaves excess cash at the end of Q2 of roughly $700 million.
And so I'll talk more about how we’ve used our excess cash at the moment, just to comment on our debt capacity. Often the question comes up, if Europe were to put, how would you finance it, I have already indicated we’d undoubtedly use some debt and at an A rating, we estimate our debt capacity to be about $10.5 billion.
So this is how we derive our excess cash. How well have we walked the talk in delivering that excess cash since we've been public. So that's what this table summarizes. So let’s walk through it. Let’s take the first column fiscal year ‘08 to ‘10.
Let me go down that column and then we’ll go over to the cumulative. So during fiscal years ‘08, ‘09, and ‘10, using the definition of excess cash, I just described we generated about $5.8 billion of excess cash. We bought back directly in the open market or we placed deposits in the litigation escrow which has the effect of a share repurchase, the combined total of which was $3.3 billion. We paid $800 million in dividends that left $1.7 billion of excess cash unutilized in those three fiscal years.
And then if we stay with the remainder row, you will see that as we move into fiscal years ‘11 and ‘12, we work that balance down by $300 million and then another $1.1 billion in just the first two quarters of this past -- of this current fiscal year such that cumulatively since the IPO -- since our original fiscal year ‘08 as Visa Inc., we have returned all our excess cash except for $300 million. And we have an authorization that is that is open to buy so to speak that would more than cover that.
That means, we’ve returned $12 billion in the form of share repurchases and we’ve spent $2.2 billion on dividends. So I’d say we have walked the talk. Speaking of dividends, at the time of the IPO, we actually started with -- I think we had all described as a relatively modest dividend. It represented about an 11% payout on the ‘08 earnings.
And we had a covenant during the period of that we were going public that within five years we would strive to reach dividend payout ratio of 20% as measured on the previous fiscal years net income, adjusted net income. And with the October 2012 dividend increase, we basically -- not basically -- we hit that target of 20% and we did it in four years, not five.
Going forward, we will be looking more towards setting our dividend based on positioning it attractively relative to companies in the S&P 500 that are growing their EPS at 15% or better. We obviously had to go through some pretty significant year-over-year dividend increases to get up to the 20% payout.
Going forward, having reached that benchmark, we will be targeting against this type of peer group and making sure that we always position ourselves attractively. And we will be planning on dividend increases on an annual basis. So going forward, think of it that way as opposed to solving for a specific payout ratio.
So that’s a word on dividends. Just a couple of highlights on the main metrics, first of all how to read these tables. The Q2 is as reported, these are not normalized for the leap year that would have occurred in the prior year. If you want to do it just simple and quick, add a percentage point of growth to Q2 and that would roughly give you the normalizing effect.
The last word on April, the last time you saw April, it was April 28 days. This is the four month so the numbers are actually moved up the tad and May is a four month. So when you look at this particular metric which is U.S. payment volume, your eyes are immediately drawn to debit and April and you will remember it was the month of April last year that the routing rule was effective with regards to U.S. debit and having two networks, minimum of two networks on the card.
And so with this April, we’re now laughing last year and you can see the difference in the growth. Otherwise U.S. payment growth has held very steady April to May. Cross-border, we always talk to you with cross-border in constant dollar terms. All I can say here is four months of May 12, excuse me -- April 12, four month of May at 11 both are tad stronger than what we look -- what we saw in Q2, steady as she goes with all the unrest on the planet today, we look at these numbers and we like them.
Finally, processed transactions, again this is what you're seeing here is the lapping of the routing rules of last April -- April and May very strong mid-teen growth, move over to the U.S.. You can see in the U.S. at 12% growth in both April and May. This is the effect of lapping the routing rules.
Otherwise rest of world, very, very strong growth rates year-over-year. This reflect what Bill and Elizabeth talked about this morning in terms of the significant progress that we've been able to make in penetrating with greater processing in country. All of these metrics are completely consistent with our guidance. And so we're firm all the guidance that we have historically given, no changes.
A few thoughts, early thoughts on 2014. So revenue growth as Charlie mentioned this morning we assume a slow sustained global economic recovery, low double-digit revenue is the first call. And I would just say to the group, just remember we don't typically give next year’s guidance to the fourth quarter earnings call or five months out, early days on this on the fourth quarter.
We still expect to be a range but the level of confidence and there will be a lot more specificity around the guidance come the fourth quarter earnings call. But given the momentum and opportunity in the business, we feel very comfortable saying low digit -- low double-digit revenue growth for next year.
As we move down, the income statement, marketing expenses, recall that this coming year in 2014, we will not only have a winter Olympics in February but we will also have a summer World Cup. So expect like some modest increases in marketing.
Going further down, tax rate is always a work in progress but we will give you very specific tax rate guidance on the fourth quarter call, bringing us to earnings per share growth. So we’ve said mid-to-high teens and supported by share repurchases and we've also set free cash flow of $5 billion. And you will remember that our guidance for this year is $6 billion of free cash flow.
So for those of you who are wondering, what is it, given our growth that is causing free cash flow to drop by $1 billion. Let me remind you that on the fourth quarter call last October, our initial guidance for the year was $5 billion of free cash flow. And then later in that quarter, Judge Gleeson in New York gave preliminary approval to the litigation settlement here in the United States. And once he gave preliminary approval that triggered a $4 billion payment from our escrow account to the plaintiff’s escrow account.
And although we had already reserved that $4 billion in our earnings, in our reported earnings, you can’t actually take the tax deduction until you make the payment. And so when we transferred the $4 billion that constituted the payment and for tax purposes, we were then able to deduct it. And if you think about it was a little over $4 billion roughly on the margin 35%, 36%, 37% tax in the U.S. that created another billion plus of cash flow non-recurring that we were able to book in fiscal year ‘13 that won't repeat in ’14.
In the view that life is never quite that simple, let me give you a little more color of what to expect and then we’ll give you plenty of guidance when this thing ultimately sorts out. Charlie mentioned earlier that our current estimate of uptowns is 25%. So what will happen when they judge, when the judge marks of final approval on the litigation, than based on the uptown percentage let say 25%. Whatever the uptown percentage translates into there will be a return of the escrow because that money won't apply to them directly.
So, let say 25% on $4 billion is $1 billion, $1 billion will come back to us. We’ll put it back into the escrow. We will then have to take that out of our tax return. Could happen in September of this year, which would make it a fiscal year ‘13 event much more likely to occur in ‘14. And so not only will we not have the repeat of that billion-dollar tax boost to our free cash flow but we might actually have a few $100 million going back the other way as a headwind in 2014.
As soon as we have a clear picture of that, we’ll let you know -- we’ll still even if it happens in September, we’re still going to deliver about $6 billion of free cash flow. But the free cash flow number for ‘14 as best as we can see it today is about $5 billion. And on that note, I’ll call it a wrap and time for Q&A.
That’s right. Sorry.
So listen guys, while the work come, the only thing I was going to say is I hope you a get sense for the way we see the opportunity at Visa. We have a great history almost everything that we’re doing is building off of the history and building off of what we’ve done. But at the same time, adept change evolve. It’s a very different kind of opportunity that we have then the opportunity we had five years ago or 10 years ago. The position of the company is very, very different.
And both internally and the way we engage externally is in fact evolving. It’s something that when you hear everyone talk, hopefully you get a sense of consistency in terms of what we’re focused on, on the opportunity. So, we’re running a little bit late which is why I’m doing this very quickly. So I thought we go right to Q&A. So we get into this much of that as we possibly can.
Again just to let you know people have specific questions of any of the panelist, they are now here and they’ll be able to answer them directly as well. That’s the fastest hand, I’ve ever seen go up in my life. So to you Dave.
David Togut - Evercore Partners
Thank you, Jack. David Togut with Evercore Partners. Question for Elizabeth on the global prepaid and P2P business, Elizabeth you highlighted your use of Western Union's cash and cash out network in the Philippines for your prepaid business. So really a two part question, number one, outside of the Philippines, how do you build out a cash and cash out network? And number two, over time you see Western Union more as a friend or foe since obviously, you're in some respects you’re competing directly with them, impede their pay certainly?
Yeah. That’s terrific. I’ll start with the second half of that question. And certainly the opportunity to partner with Western Union globally is greater than is the competitive threat from them and much of that, I mean, all just comes back to the absolute size of the opportunity. Charlie started with that, Bill talked about it, I talked about it, the panel talked about it. There is enough room for everyone and there is going to be a lot of this. We’re both partners and competitors.
Prepaid in almost every market around the world including the United States relies on a different distribution channel. So in some markets, we use post offices. In many markets including the United States, we use retailers. In India, we use very small local retailers in the town. It just happens that in Western Union their agents which also in many cases happen to be retailers are particularly well positioned to distribute that.
So we look for where are the places that the people who would be the target either for the benefits program or to use prepaid as essentially their mobile current account where is it that they are shopping and they have a trusted relationship and then let’s sign that up as the distribution point.
Moshe Katri - Cowen
Hey, thanks. Moshe Katri with Cowen. Since we’re talking more about maybe collaborating more with merchants, opening in more direct dialogue with them. Can you talk about your views on the so far in the MCX kind of venture where this is going? Should we worry -- are you worried about that? And then looking at that second part question, looking at private-label cards and obviously there have been aggressively push the consumers by merchants, what's your view about that? Obviously they are also partially our competitors? Thanks.
You’ll do second first. And I’ll do MCX.
We have markets throughout Latin America. Mexico, Chile, I mentioned followed by the fastest-growing categories of our growths on issuance have actually been the conversion, a private-label programs. For those of you, who think that we don’t have good relationship with Walmart, one of our fastest-growing programs in Mexico has been the conversion of their private label program to Visa program. So we view private label in much the same way that I made reference to the ELO program in Brazil.
Getting consumers to electronify their transactions, get used to transacting with an account, we view is a wonderful bridge to a higher value, higher functioning account that they can get with their financial institution with the Visa brand. So, yeah, it's competitive but ultimately if you can create that path towards the movement away from cash and check than we think it’s all good.
On MCX, I guess, what I would say is first of all, I’m not sure we know what it really is and what its end game is. So I think it’s -- I don’t think we have a lot of ability to talk specifically about it. What I will say is that it’s -- I think we think about this very similar to the way, we think about the closed loop versus open loop discussion you heard earlier on mobile phones, which is again we believe in the open solution that we have is the best platform.
We haven’t had the kind of dialogue with merchants and engaged issuers talking directly to merchants in a way that can add that kind of value. So if you're them, you start thinking about closed loop solutions because that’s all you can do. Over time, if we change the nature of that dialogue, it changes what they would want to do in something like in MCX, but time will tell.
Bob Napoli - William Blair
Thank you. Bob Napoli from William Blair. Two questions, one, you guided $700 million of incremental expense over the last two years. Did you see adding that level of expense over the next couple of years and what is generally high fixed cost business and generally the same areas and than just on the Chase deal, really how does that and what situations does Visa lose control of its brand or get less exposure for it’s brand albeit the Chase deal. How does the change Visa will and what has been the feedback from your other issuer customers visit put at risk or given opportunity to MasterCard at some point?
I’ll take the second one first.
It’s important if I can bring clarity. The transactions that are launched by the Chase merchant services relationship that we’ve helped facilitate with Chase. These are Visa branded accounts, Visa account numbers, cards, use of the point of sale. So in our view it doesn't do anything to diminish the brand.
Arguably, it actually does the reverse because what Chase is trying to do what we think frankly as a trend, even the ICBA announcement that the number of us made reference to is reflection of fact that, there are increasing opportunities that we can facilitate, hopefully within the brand, within the banks brand to drive more value to consumers and merchants to the point of sale. That should be additive to the brand.
So it’s confusing because it's confusing because it’s new, hasn’t even hit the market yet. The client reaction, I think., we can all appreciate initially was mixed as is usually the case with things that are confusing. I would tell you that over time when we’ve sort of broke it down and appreciated the dynamics of what was motivating Chase, the sophistication of form factors, the opportunity to partner with merchants, things like offers, paying with points, things that we think will play to our strengths and bring more strength in value to the payment system and bring the merchants more into the fold.
We’re getting a better and better reception in the part of other clients who are less concerned frankly about what it might mean for them competitively and more interested in seeing how we might be able to partner with them to deliver similar value with the card holders and with their merchants which we think is positive.
I like to add on that is on the brand, what we want is we want solutions in the marketplace that grow our brand and grow our issuers brands. It’s the way V.me has been designed. So it's not in our minds a question of our brand versus our issuer. We want them to go jointly. When I put the slide that talked about some of principles were to do transactions like this, preservation of our brand and the ability to continue to grow the brand because it’s important part of who we are is extremely important.
And then the one thing I would just add to the Chase transaction, comments that Bill followed up on was, I think the most important think honestly about actually announcing it publicly and getting people to think about it even though it was done a little prematurely before we could actually talk about this specifics is it's gotten many, many people in this ecosystem really focused on figuring out how to work more closely with merchants.
And if it did nothing other than that and we aided and abetted getting issuers focused on hey, there are things that I can do directly with merchants that I haven't been thinking about before using VisaNet as an important part of that, that's hugely important catalyst which is playing itself out today.
With regards to the earlier question, on expense growth as opposed to answering in dollars, let me offer a perspective on growth rates in the sense that Charlie went back a couple of years to set the base. Remember we went public in ‘08, we had six companies to merge together. And I would say, the bulk of -- that took an enormous amount of the management attention.
And we spent the first two years, not as focused on investing in all the kinds of things that Jim and the panel talked about but instead trying to create a global company, one global company out of six. And as a result, once that was behind us and we had the management been with to really start focusing on the kinds of investments that will make a difference for years to come, you saw a surge of very thoughtfully and deliberately placed investments and our growth rate in percentage terms which shot up which should -- we would expect to moderate.
And so as we go forward we should continue to expect very significant investments in technology and in the strategies that are going to drive growth five and six years out. But in terms of percentage growth at this point, we would expect that to moderate somewhat.
Wayne Johnson - Raymond James
Yeah. Wayne Johnson from Raymond James, questions for Elizabeth. On the emerging markets, could you talk a little bit about CyberSource and the Alibaba relationship. I know that was mentioned earlier but what’s the opportunity to cross sell more services there. What do you think that relationships can look like over time. I’m assuming that's been helpful in terms of keeping a relationship with China UnionPay in the back end some how. And the follow-on is, can you use that as an example perhaps and other countries particularly like India, if you could add some color to that I would appreciate it?
Sure. And I do think that's exactly the right way to think about Alibaba and that is that we can use CyberSource to enable e-commerce broadly in markets where it hasn't worked well or comprehensively. There is benefit to the CyberSource part of our business in that but of course it also particularly outside of China is hugely helpful to our Visa branded business because we benefit disproportionately but because it's online and because we tend to have the privilege of starting with a large share position.
So, Mike made reference to the fact that we have had done similar things in Russia. We’ve done similar things in the Middle East. We haven't yet done that specifically in India but that’s the kind of market, where we could accelerate e-commerce growth in the same way. And it just because it's Alibaba and because it's China it’s a big opportunity but there isn't anything unique about the structure of that relationship and the opportunity that we have via the combination of CyberSource and VisaNet.
Darrin Peller - Barclays
Yeah. Thanks. This is Darrin Peller from Barclays. Just want to start of, I mean you have a great position right now on your U.S. credit card portfolio, obviously having some of the top U.S. banks, in terms of the issuers that are growing faster than merchant as well. And well in 2014, there is not a lot of renewal necessarily, 2015 and ‘16, there probably will be.
Can you give us a little color on should we be expecting the negotiations to be almost entirely around price. And really, what can you do to offset that wave of renewals to come around whether it’s a value added services or merchant pricing to merchants, is there enough power left out that it really offset pricing compression down the road. What is the quick follow-up, I’m going to have on the merchant litigation?
I’ll take a first shot. I think, I’ll the answer these questions the way that I have similar questions in similar forms in the past -- for us in the past. I think you give might be surprised when we’re negotiating sitting down with client around a multiyear, either new business or extension of existing business, the percentage of the time that’s focused on the economics in the pricing is just not as significant as you all think. I don't mean to diminish. We’re talking about large portfolios and significant sums of money it’s there.
But the initial engagement with clients when you look at the fees that we represent as their portfolio and they look at, we look at their objectives to drive activation and usage and ideally pick up share within the category relative to other issuers and AMEX.
I really do think that the investments that we’re making in credit and some of the things I talked about my presentation I wouldn’t deviate any at all from what Byron suggested to you that there’s no question as our business grows with our largest clients, we see a slight uptake in yield -- in incentives, excuse me, slight down tick in yield, increases in the dollars of returns that we get on that business and as I look out to 2015 or beyond, there’s nothing that I see that would change the dynamic than from what we’ve seen in the past.
And I’d just say on that if we did nothing other than what we’re doing today and the whole industry did nothing other than what we were doing today, as new people develop capabilities and things like that, then you do start to feel like yeah that doesn’t sound like something that can preserve any kind of pricing in the marketplace.
So all the things that we’ve talked about and the slide that Jim put up that showed all those things that had been delivered over the past couple years, all these value-added services we’re talking about those are all things we can argue that they’re either things that are going to generate new sources of revenue or the value-added services which we’re going to support the price you have in the marketplace.
And listen we are not, we understand because as customers grow they’re entitled to a different price in the marketplace. There is competition. That’s a good thing. But the way we’re going to both differentiate ourselves versus our competitors and preserve the value in our pricing is to develop all the things that we’ve talked about so that there’s more value by doing it, having your transactions go over our network than go over someone else’s.
Darrin Peller - Barclays
Thanks. Just one quick follow up on merchant litigation, is it correct that the merchants that have opted out can pursue further monetary damages on their own but not injunctive relief on interchange or anything along those lines?
Darrin Peller - Barclays
Julio Quinteros - Goldman Sachs
Julio Quinteros from Goldman Sachs. I’ve a quick one just on the thought with regards to extending the network you guys have talked about that today, and in thinking about how that translates into additional sources of revenue, a lot of the competitors that are kind of circling around this thing have sort of evolved to this notion that may be getting revenue sources from interchange or merchant discount etcetera is not possible but advertising seems to be the area that they’re kind of evolving to? As you guys think about that and the extension of your own network, do you see advertising opportunities take rates other ways to source revenue beyond just expecting process volume growth to continue to grow?
Yeah. So somewhat Silvio was referring to that the close to loop services, the Sears relationship, I mean speaks just to that. I mean its early days. I mean I think as an ecosystem I think a number of folks are trying to point circle around this. But I really think it’s going to take an ecosystem play. I think I go back to what I talked about in terms of frictionless commerce I think right now unfortunately most of the early thinking on this creates more friction than it actually resolves. I mean you’ve got remember that you are tying it to the payment and at the end of the day the retailers in business to close the transaction not create confusion at the point-of-sale.
That said, I think the work that we’re doing with card-linked offers, the Visa offers platform that bill refer to with ICBA is just that. We can help use the data in conjunction with the issuer to source an offer to the right customer. We can take advantage of their location-based information through the geo-location information we get off of the cell phone on a permission basis to link that offer to the phone or to the card when that card is used at a participating merchant.
The offer is actually redeemed because we see that transaction in real time, we can actually deliver that message either back to the issuer so that they can communicate directly to the consumer that that offer has been redeemed or we can actually do the inline adjustment via point-of-sale redemption and deliver that discount in real-time at the point-of-sale so that the merchant and the consumer see it there.
All of that is an opportunity to not only deepen the relationship in this case with like the ICBA’s consumers from a customer relationship perspective. But there is a million advertising component because there’s absolutely an opportunity for merchants to begin to source offers on a targeted and relevant basis to draw in new customers.
So there is absolutely new revenue stream is there but again I want to be clear that early days, it’s really about growing the ecosystem, but I do think that there is a knock-on effect that is good for all participants in that transaction.
Just to be clear on that when we sit around and we do our own modeling, we don’t have a big advertising line. That’s not the way we’re thinking about. We’re thinking, as we said, over and over and over again here. We are thinking, our -- we believe the biggest opportunity we have is to use the information that we see and flows over our network for the benefit of where that data comes from.
And do we have the ability to go do other things with it? Yeah, absolutely we do but we want the issuers to trust us, we want the merchants to trust us and that us is the most important thing because using it in that kind of way drives the transactions to us again can we charge for it? Probably, but it’s all about driving transactions to network.
Greg Smith - Sterne, Agee
Hi. GREG Smith with Sterne, Agee. My question is what is the long-term future of the acquiring model and just the merchant acquiring model. I’m thinking about it from the perspective that here is Visa trying to add more value at the point of sale, while I would think acquirers want to do the same thing, where does this all shake out for the merchant acquirers?
Bill you can talk about it, but I guess I would just start with and we want to be clear which is when we working with merchants. Nothing that we’re doing in those types of conversations are in any way cutting the acquirer out of where it is the economics flow.
So what we’re talking about is in these cases sometimes it’s inserting ourselves so we can have the direct conversation so we understand what they want, what their issues are so we can figure out what changes need to get made, if we figure out how we can do something with them working with an issuer none of that has any intend to actually cut the acquirer out. So it’s not a model that we’re going towards. We like the acquiring model.
We do and I’ll add we like our company very much. We’re 8,000 employees and there’re over 35 million merchants around the world ideally a lot more into the future. When you look at our business in U.S., the reason why we have such broad-based ubiquitous acceptance is because of the acquirers, the ISOs, the processors who work on that side of the business that we think about supporting everyday and when we have difficulties in many of the emerging markets that Elizabeth and I referred to is because arguably we haven’t done enough to support those organizations to go out and terminalize and drive the value to the merchants.
So we view the acquiring business as fundamental as on a partnership not something into which we want to get. And as you may know, when we acquired CyberSource we reinforced that point by divesting the acquiring business to send a very clear message to our clients that we are here in support of acquirers.
Well, I even said on the innovation agenda when I talk about point-of-sale redemption, Vantiv is the first partner. So, again we think about the network and the partners and how we serve the capabilities up through them and even in the case of V.me scale will come through acquirer partnerships, so they actually sign the merchants and process the transactions as they do today.
Bill Carache - Nomura
Thank you. Bill Carache with Nomura. There is this notion of disruption particularly in the emerging markets given the opportunity that mobile creates? Can you talk a little bit about comparing the role of the participants in four-party system in developed markets versus how those roles could change in emerging markets? And potentially if you could also give a little bit of color around the economics of mobile in particular what you’re seeing with some of the partnerships with I think you had mentioned the 150 close-loop mobile network operators are out there, what kinds of things are you seeing and I know it’s still early days, with a little bit of color around economics would be great.
Okay. So I’ll start and Jim will add on at least Jim. So number of people Bill, Jim, I talked about the fact that there are all of these closed loop mobile network enabled payment systems. There are 150 of them and there is one that has achieved scale which is obviously M-Pesa Safaricom in Kenya.
The reason that they have not achieved scale is lack of interoperability, lack of network complexity, all of the things that you have heard about repeatedly. And when they start to get to a certain size, the government around the world consistently in emerging markets the government says where is my regulated financial institution in that transactions. So the governments have a huge interest in having banks, the four-party model is alive and well in mobile if it is going to grow to any sort of scale.
So we love the asset that we have, the position that we have with the financial institutions and the mobile network operators see opportunity there as well, and you’re exactly right that is adding people now is to be fed in the value chain.
What we’re seeing again very early days but what we’re seeing in mobile is smaller transactions but more frequent and transaction-based economics. So you have the banks holding the underlying account on both sides of the transactions, you have the mobile network acting as the translation layer, sometimes as the merchant, as the agent, and then of course we play the role that we’ve always played in those transactions.
Yeah. I would just add from the economic perspective of unlike developed markets in lot of these cases is a center pace model because the value and the functionality is so high that it doesn’t impact our underlying economics, actually it’s creative in lot of cases, given the role we play from processing perspective as well in the case of Visa mobile managed service and the gateway capabilities.
And again the theme here is we actually see this as a big opportunity in the slide Elizabeth showed in terms of the growth in mobile wallets that’s a great view, because these will all eventually go open it’s never going to become a scale business like it is in the rest of the world and there is no one better positioned than we believe that we are to help impact that change and bring these together.
Dan Perlin - RBC
Thanks. Dan Perlin with RBC. In the aggregate, I just want to think about all of these new investments in products that you guys have outlined today, should we mindful of something down the road where the way these things are priced to the economics or the strategies are ultimately putting more and more of your network economics to your clients and that’s part of the strategy to become more open and flexible as a company then I have one other quick question. It wasn’t meant to be...
The model that we have used over time is grow the pie, bring more transactions to the network, grow the pie and historically we have disproportionately shared the marginal economics of a larger pie with our partner mindful that there has always been attractive economics remaining to drive double-digit revenue growth for the network and so that that path is one that we see traveling the future on.
Dan Perlin - RBC
Fair enough. And then the next one is just a brief question in terms of Amazon we hear I think increasingly both financial institutions and general retailers and to a certain extent some of the things you have built wanting to look more like what Amazon has created over the years, and I’d just be interested to know your thoughts around that. Thanks.
Well, I think generally speaking and I think the recognition is that you’ve got to go Omni channel I think the whole pointer on capability as you’re seeing a lot of retailers beginning to think about their brick and mortar shop is it basically a distribution center, a lot of the things we’re investing in that you’ve heard about today really are trying to enable the retailer compete more effectively in this again increasingly Omni channel connected environment.
With respect to Amazon, I mean a lot of retailers wake up every day very afraid of what Amazon is doing to their business but I think in the long run as always our view is I mean electronifications inevitable, the retailing environment is changing and again what we’re trying to do collectively is bring the tools available so we can compete in the space, both in an online and mobile fashion.
In my view it’s good for everybody because merchants can sell 24x7 they’re connected, they can be more personalized as micro-merchant or the retailer down the street, and I think the connectivity again to the acquirer, the ability to use data to inform my business as well as in this offer space the ability to source offers to local customers, as well as those that are across the country and around the globe, I think really creates a very competitive and healthy environment, and again we’re trying to do our part to make it easy certainly the integration of payment into that space.
And they have a simple effective payment solution that works so it should be unveiled to people, but they also have the scale where they can build not everyone has got that very few people have that.
Bryan Keane - Deutsche Bank
Just go, go ahead.
Bryan Keane - Deutsche Bank
Hi. It’s Bryan Keane, Deutsche Bank. I just want to follow up on the pricing question. I mean it feels like some of your competitors are still raising price, adding fees, adding different ways to add fees to acquirers or to the aggregate them all, it feels like Visa is doing the opposite almost want to take fees down to be more appeasing and to add volume that way. I just want is that the correct strategy the way to phrase it.
No. I wouldn’t say that. I would say again I think what we keep consistently saying is that we don’t feel like we have to raise price to get the revenue growth that we think we should be getting at the same time don’t at all think that we want to compete on price, we want to compete on capabilities.
And so depending on what the marketplace says that pricing is we always look at that we always make a decision. We’re not saying we’re not going to change the price either up or down but we want to build the business so pricing doesn’t have to be the lever to grow but we also don’t want to be the ones leading it down either.
Bryan Keane - Deutsche Bank
And then just a quick follow up for Bryon and on client incentives I know the Chase deal was more direct pricing and so that changed the incentives actually went lower. I would assume if there are more deals like Chase in the future, I was of the impression that incentives could come down again if there were similar economics but you’re suggesting that incentives are likely to keep growing. I just want to make sure I understand that.
Yeah. So too early to comment on whether other deals, whether there would be a trend to direct pricing but we have at least two phenomena to work through and the guidance range we’ll give on the fourth quarter call will make the assumptions clearer.
But, we have incentives that are now established and particularly in U.S. merchants we had a partial year in ‘12 where we’re still signing deals, we’re still establishing relationships with U.S. merchants particularly on that as it relates to our U.S. debit strategy and so you have that lever that is pushing incentives north, where I know 80% sounds like a large number under multiyear contract but we have further to go.
The more payment volume we put under contract that also pushes incentives north for very good reason. And then working the other way you have the situation you just described so the direct pricing. So that was a big deal where we had more direct pricing but it’s too early to say that that’s a trend.
James Faucette - Pacific Crest
Thanks. This is James Faucette from Pacific Crest. I wanted to go back to kind of the Omni channel related to question for retailers, et cetera. One of the concerns that retailers have expressed in terms of trying to pursue Omni channel is the distinction between card present and card-not-present rates?
And Jim in your presentation today, it seem like a lot of what we talk about was technology that could start to enable at least harmonization of those two or eliminating the distinction between card present and card-not-present? Can you talk a little about what has to happen from a technology perspective, so that that Visa can really start or other networks can start to be in different?
And then for Byron or whomever, what is that imply for pricing, I mean would -- should we be anticipating ultimately when the technology is ready, a change in pricing models around card present and card-not-present transactions? Thanks.
I’ll begin the second part. As it relates to Omni channel, again from our point of view it’s a great business for us and quiet frankly for the issuers and acquires, I mean, it’s more electronic transactions. When a customer again walks into the Apple store here in Union Square and pulls out their iPhone and uses the easy pay application and they don’t need to get in line so they can pull an iPhone of the shelf, scan the skew and walk out the door.
In theory that’s good for everybody. It’s good for us because again we have a relatively good position in the wallet. It’s good for Apple because they are obviously are selling more goods. It’s good for their acquirers. It’s good for their issuers because again we are converting transactions.
The challenge is as you described our historical point-of-view has always been that credential that was handed over to the sales clerk was a form factor that use the data that was on card is the way to more less authenticate the form factor, I mean the mag-stripe or EMV Chip whether was tapped or dipped, sending information back to our network, back to the issuer, where they only, they we are able to with integrity say, yes, it was my card and as a result we built an economic construct around that.
Certainly, card-not-present divorced those two as key entered and so again there was a gap. We find ourselves in an interesting place with Omni channel. The customer is there, but card isn’t being presented.
But the difference is going back to easy pay application. There is a lot of other data that can be use and so the challenge for us and then, and Charlie refer to this in the discussions and Sam talked about tokenization is, a token in the broadest sense was that plastic piece of -- to the piece of plastic that are not going to extract and then issuer issues the underlying financial account was really the most important piece of that relationship, meaning whether it was a debit prepaid or credit account. The bank issued me something that initiated that transaction that across -- came across VisaNet.
Well, we are at an inflection point in the business with these mobile devices where we need to think about what this new form factor looks like and how we pass new pieces of the data, device fingerprint information, geo-location information, a payment related information, potentially cardholder authentication back to the service that Silvio talked about.
And in aggregate pass that information back to our network with integrity, with transparency such that the issuer can make an authorization decision much like they do today when that plastic form factor is presented. So, we’re early stages…
So let me just keep it like for my own Lehman terms here which is that there are -- there is new category in reality that exist which as Jim said is person present and card-not-present transactions which didn't exist several years ago. And if we can figure out which we think we can and we are actively working on how to authenticate that in the way which is safe and secure then that's a reason to have a different category of transaction that exist today, and that’s something that we’re actively working through and that will be good for everyone.
Tom McCrohan - Janney Capital Markets
Hi. Tom McCrohan with Janney Capital Markets. How should be thinking about the current level of debit card interchange fees in the GlidePath. I mean the $0.21 you really considering that kind of fixed for the foreseeable future, given you talked about some of the schemes outside United States, I believe Interac is one of them…
Can you just repeat that, I’m sorry…
Tom McCrohan - Janney Capital Markets
… take a line, I’m trying to get a read on the GlidePath, the debit card interchange fees so the $0.21 is that something we should consider will be fixed and held steady for the foreseeable future or given some of these schemes outside United States rates, I think well below that, are those going to be drifting higher or you are going to be drifting lower to meet those rates to kind of penetrate those markets? Thanks?
I’m not going to speculate as we sit here today on the trajectory of interchange fees in U.S. or internationally. I will tell that, the fed I think over the past months produce a study showing sort of what’s transpired post the Durbin amendment.
Look the interchange fee continues to be a function. Even if the regulated cap, within that regulated cap in the U.S. and the more competitive markets, unfortunately in most markets around the world continues to be a function of competing for issuance and competing for routing on the acquirer or processing merchant side of the business.
So, we are going to continue to respond as we always have to sort of market pressures and market conditions and opportunity to grow the business in support both side of the value change with how we manage the interchange fee and it ends up being driven by competition.
So I think we’ve managed it pretty well thus far. I think that the more important dynamic which you touched on, which is to try to reinforce in any markets where the prospect of regulation comes up, which need to engage differently and more effectively then we did in the U.S. to make sure that is the market for us that are driving those rates since I described in that legislation and regulation.
And our final question back here.
Matt O'Neill - CLSA
Sure. It’s Matt O'Neill from CLSA. I understand Visa Europe is obviously a separate entity. I was wondering if you guys could just discuss from what you said how you see market share having shifted over the past say five years in the European region?
I don’t think we feel qualify to answer the question. None of us qualify to answer the question.
Matt O'Neill - CLSA
No problem. Thanks.
And on that note I would like to extend our thank you to all of you for making the trip out here. Those of you on the internet on behalf of the management team here at Visa and the analyst feel free to join us for luncheon down the hall. We appoint yourselves with innovation apparatus and we’ll take it from there. Thank you.