debit or credit cards in 2019. More than 60% of those purchases

were made using cards from Visa, a company that has long

dominated the payment card industry.

Not only are the majority of all payment card transactions in the

United States on Visa cards, but there's been lots of litigation

over time, including from the Department of Justice, and the

Department of Justice has had very clear legal decisions that

show Visa has, quote, market power, which is the legal term

as a matter of law, so there's no doubt about this Visa is

dominant.

As payment cards become more essential in our daily lives.

Visa has quickly grown to become one of the most valuable

companies in America. As of October 2021, Visa was valued at

over $480 billion and reported net revenue of 21 point 8

billion for 2020. Shares of the company have also seen an over

170% gain in the past five years.

Really good way to think about Visa's revenue stream is for

every $100 spent on a Visa card anywhere in the world, they make

about a quarter of that meaning 25 cents, an actual quarter,

every time you buy a pair of shoes, that's $100, they get 25

cents of that. As the network has scaled that's very high

incremental margins, and so the profitability of the business

naturally goes up.

But Visa's success hasn't always been great news for merchants

who have no choice but to rely on them for payment.

If I can ask Visa for one thing, it would be for relief in the

swipe fee arena. We are paying way too much. You're making way

too much money off of us. And you know the lack of competition

that you have, with all of your issuing banks, charging the same

swipe fees across all markets across the country. It's really

unfair. We don't do business that way. Other industries don't

do business that way so I don't know how you can get away with

it.

So how exactly does Visa make money? And why does it dominate

the payment card industry.

The Bank of America launched Visa as the nation's first

licensed credit card for middle class consumers and small to

medium size merchants in 1958.

Today, the computer is changing our world the way we do

business.

By 1970, Bank of America gave up its direct control over the

card, passing the control to a group of issuer banks that

continue to manage, promote and develop the new network in the

United States. The company grew quickly after, expanding

internationally by 1974 and introducing its first debit card

in 1975.

Every month British shoppers signed for one and a half

billion pounds worth of goods on a credit card.

In 2007, Visa completed its corporate restructuring with the

formation of Visa Inc, and went public in 2008, raising $17.9

billion in one of the largest US public offerings to date.

Visa was set up to be dominant. They started actually as an

association of 1000s of banks across the country. So all these

banks came together and established Visa to have this

national credit card. But of course they had a dominant

position because it was virtually all the banks.

There are still Class B shares of Visa's stock which are

actually owned still by those original banks.

Today, Visa has grown to become one of the world's largest

payment processing networks, saying it has over 3.4 billion

cards in the market across over 200 countries and territories.

Visa generated over $4 trillion in purchase volume in the United

States, according to the February 2021 Nelson report. In

comparison, MasterCard has over 2.3 billion cards in the market

with a purchase volume of roughly 1.7 trillion.

Visa does have a huge number of cards out there more than

MasterCard, without question. Discover cards a little bit

anomalous, they have more cards than they have transactions. But

visa cards in both credit and debit are the most frequent ones

and Visa dominates the transaction counts in both

markets.

And it's a profitable business since going public, Visa has

rarely had a decline in revenue, and its shares have continued to

outperform the S&P 500 excluding just three years, and although

the year isn't over yet 2021 is on track to see Visa

underperformed the S&P 500. In one of those years, 2020, Visa

still reported net revenue of $21.8 billion with operating

expenses at 7.8 billion, its total net income for the fiscal

year came to roughly 10 point 7 billion.

Their profit margins are huge, the numbers I've seen over time,

but then, gosh, 30 40% profit margins where to give you a

sense in the retail industry, profit margins tend to be in the

two, three, maybe 4% range.

So as a business, the reason it's so profitable is because

it's a primarily fixed cost business is once you've got that

infrastructure all in place, each incremental transaction

that's flowing through that ecosystem comes in at extremely

high incremental margins, because it's just this massive

capacity network. And so, as Visa has scaled their

profitability has gone up dramatically for that reason.

So how exactly does Visa make money? Contrary to popular

belief, Visa doesn't make any profit from credit card interest

fees. Instead, those fees are charged by the card issuer. In

most cases, banks, allowing Visa to face none of the risks that

come with lending money.

So Visa does not have direct relationships with individual

consumers, the banks do the banks issue the cards and so you

may get your card, or I may get my card from Bank of America, or

Wells Fargo or Citibank or any number of these other banks,

including local banks. But while many people think of those as

Visa cards, they're really not, they're the bank's cards that

happen to have Visa on them. And Visa is the network on those

cards.

Visa's business model relies heavily on what is known as the

four party model. When you use a Visa card to make a purchase,

there are usually four entities that come into play you the

customer making the purchase, the bank that holds the

customers money, the merchant selling the product, and Visa

that works as a middleman connecting all three of those

entities together.

They're a physical network, not dissimilar from Telecom network

or an internet style network. It's just Telecom, might carry

voice. Internet carries information. Visa's network

carries money, right. So it's a different type of physical

network that connects about 18,000 banks and other types of

financial institutions globally. And every time that you use a

card, a series of messages have to run back and forth between

the cash register or the website or wherever you're making a

purchase. Going back to your bank that issued you that card

to see whether you are who you said you are, and whether you

have the money, right, to do an authorization and then also to

go back and kind of clear and settle the transaction, meaning

actually move the money from your bank's bank account over

into the merchants bank account.

A majority of Visa's gross revenue, about 39% comes from

data processing fees that are required to complete this

practice. Roughly 34% consists of service revenues, a fee that

Visa charges, card issuers like banks for working with Visa

branded payment methods.

They charge a set of fees associated with that kind of

brand network that creates the trust in the ecosystem, the

trust that enables it so that you can just walk into any

merchant anywhere in the world and hand them a piece of

plastic. But if it says Visa on it, and the merchant takes Visa,

then the transaction works. And just imagine if you had a card

that didn't have that audit right, it wouldn't work.

International transaction revenues take up about 22% of

the company's gross revenue. Beyond the three main sources of

revenue. Visa has also been continuously investing in other

types of payment that could bring more sources of revenue

for the company in the near future.

This is like B2B payments, business to business payments.

This is like disbursements. That's when a business pays

think like an Uber driver or Lyft driver or an insurance

payout, things like that there's a lot of person to person

payments to people to individuals exchanging money. If

you're really taking a long term view of Visa like 5 10 20 years,

increasingly other forms of payment are going to be an

increasing part of their business.

Visa's success in the payment processing industry has also led

to a series of legal cases and investigations over the years.

The Department of Justice has sued Visa multiple times has

entered into consent decrees over everything from you know

Visa used to have rules that said any bank that issued their

cards could not issue any cards from Discover or American

Express and that was found to be an antitrust problem. Visa had

rules tying together credit cards and debit cards so that

merchants if you wanted to accept a credit card had to

accept a debit card, and vice versa. Almost it's hard to think

of other industries that have had more antitrust litigation

than this one.

In December 2019. Visa and MasterCard agreed to pay $5.5

billion to settle against merchants who had accused them

of charging excessive fees. The largest ever class action

settlement of an antitrust case, according to the co lead counsel

of the case, Berger Montague. Visa also notably abandoned its

$5.3 billion takeover of Plaid.

Visa and Plaid are terminating their $5 billion merger.

After the Department of Justice filed an antitrust lawsuit on

the grounds that it would limit competition in the payment

industry. Most recently in August 2021, a federal judge

certified a class action lawsuit accusing Visa and MasterCard for

charging excessive ATM fees to consumers and operators. Visa

declined to comment on the matter. Meanwhile, retailers

argue that the swipe fees and incured by Visa are simply too

high for smaller businesses to survive.

I don't think the average consumer thinks about swipe fees

when they're using their credit or debit card. Business owners

certainly do because for me, swipe fees are the second

highest expense line item on my P&L right after right after

labor. And right after our payroll expense ahead of rent.

In 2009. swipe fees collected by Visa and MasterCard sat at $25.6

billion. A decade later, it more than doubled to $67.6 billion in

2019, according to the National Retail Federation. The overall

processing fees paid by us merchants to accept all card

payments totaled $110 billion in 2020.

It tends to be somewhere in the range of 10% of what merchants

pay on a transaction.

I know a lot of business owners and it saddens me because so

many people have come to accept it as it is what it is. And like

No, I mean these these prices are so ridiculous. The amount we

pay in swipe fees is so high that we have to do something

about it, somebody has to do something about it.

This is a central part of the problem with their dominance is

that this is the banks acting collectively, and setting prices

where they should be competing on price like all other American

businesses do.

Meanwhile, those in support argue that Visa stands on the

side of merchants rather than the banks.

The Visa's business structure is very balanced. And if anything

is actually skewed, believe it or not toward the merchants,

they actually get the majority of their revenue from the banks

and the ecosystem that's supporting the merchants. So

they really are pretty agnostic in the ecosystem like they are

there to serve as this central party that facilitates effective

digital payments kind of balancing both sides.

What certain is that visa has effectively changed the world of

commerce forever.

Visa at some level is a victim of their own success in the

sense that they're so ubiquitous and so secure and so easy to use

that people begin to take it for granted. For the consumer, it's

fantastic just enabler of their of their life. I mean, I just

always tell people imagine if you didn't have it, and you

literally had to pay for everything either with cash in

the check what your life would be like. On the merchant side,

though the same thing is true. I mean, cash is expensive for

merchants, they have to have cash drawers, they have to have

armored trucks, they have to have managerial level people

that count the cash and make sure that there's not theft at

the end of every shift. There's always of course debate and

griping about the kind of cost of taking card payments. The