Visa Q3 2020 Earnings Call Transcript

Jordan: (00:00) Welcome to Visa's fiscal third quarter 2020 earnings conference call. All participants are in a listen only mode until the question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host, Mr. Mike Milotich, Senior Vice President of Investor Relations. Mr. Milotich, you may now begin. Mike Milotich: (00:22) Thank you Jordan. Good afternoon, everyone and welcome to Visa's fiscal third quarter 2020 earnings call. Joining us today are Al Kelly, Visa's Chairman and Chief Executive Officer and Vasant Prabhu, Visa's Vice Chairman and Chief Financial Officer. This call is being webcast on the investor relations section of our website at www.investor.Visa.com. A replay will be archived on our site for 30 days. A slide deck containing financial and statistical highlights have been posted on our IR website. Mike Milotich: (00:54) Let me also remind you that this presentation includes forward looking statements. These statements are not guarantees of future performance and our actual results could differ materially as a result of many factors. Additional information concerning those factors is available in our most recent reports on form 10K, 10Q, and AK, which you can find on the SCC's website and the investor relations section of our website. For historical non-GAAP financial information disclosed in this call, the related GAAP measures and reconciliation are available in today's earnings release. Mike Milotich: (01:28) With that, let me turn the call over to Al. Al Kelly: (01:31) Mike, thank you very much. The past few months certainly continue to be challenging and our focus has and will always remain on the wellbeing of our employees, clients, and the communities in which we operate. Even with significant impacts to the economies around the world, many aspects of Visa's business have proven to be resilient and we've continued to invest to propel Visa's growth well into the future in consumer payments, new flows, and value added services. Today, after discussing our results, I'll then provide an overview of the ways COVID-19 is shifting the ways consumers, businesses, and governments want to pay and be paid and in turn how Visa is helping them. I will close with some notable deal highlights for the quarter that demonstrate how we continue to enable the movement of money globally. Al Kelly: (02:22) To start, our third quarter results. Net revenues in the fiscal third quarter were 4.8 billion, a decrease of 17% or 16% in constant dollars. All of the business drivers were significantly impacted by the pandemic. Payments volume this quarter declined 10% globally or 9% excluding China. Cross border buying excluding intra-Europe, which drives our international transaction revenues, declined 47% on a constant dollar basis driven primarily by the lack of travels. Including intra-Europe, volume was down 37%. We processed 30.7 billion transactions or over 337 million per day through the quarter on our network, a 13% decrease over the prior year. Al Kelly: (03:13) However, in each case, the business drivers improved each month throughout the quarter meaningfully for payments volume and process transactions and only marginally for cross border volume. In new flows, Visa direct grew global transactions in the mid sixties for year, year over year. And our value added services revenue grew in the mid teens year over year. We also effectively managed our expenses, which declined 5%, but more importantly, this was achieved without affecting investments in our primary growth initiatives. Our non-GAAP EPS declined 23%. Al Kelly: (03:54) While COVID-19 certainly impacted our fiscal third quarter performance, there are many trends that are accelerating the demand for consumer payments, new flows, and value added services, which will help our business as we look ahead. In consumer payments, even with all the success Visa has had electronifying payments, there is still $18 trillion transacted in cash and check globally. In today's environment, people are sensitive to touching surfaces, including cash and check. We are seeing this manifested in interest in usage and tap to pay, which we know helps digitize cash at the low ticket level and has historically increased transactions by an average of 20% over time in mature markets globally. Al Kelly: (04:39) From second quarter to third quarter, we had nearly 50 countries improve tap to pay penetration by more than five percentage points. And over 10 countries increased by 10 percentage points or more. We have helped more than 55 countries to increase the tap to pay limits, reducing the share of transactions that require consumer contact by more than 40% in several of those countries. In the United States, we added more than 80 million contactless cards in the first six months of calendar year 2020 as a number of our financial institution partners accelerated their issuing schedules. Tap to pay is likely to accelerate post-COVID especially as consumers start going back to the office where they tend to conduct smaller transactions for their commute, paying for public transit fares and buying food and drinks. Al Kelly: (05:36) Another positive trend has been a shift to e-commerce. This works in our favor because Visa's share of digital commerce where cash is not an option is approximately three times greater than the physical point of sale. In the United States, Visa credentials active in e-commerce excluding travel were over 12% higher in June than in January. In addition to the total spend per active credential also increased during that time by over 6%, which is notable considering new adopters typically spend less than those used to shopping online. In fact, when you isolate the active credentials who tend to be more significantly engaged in e-commerce, the spend per active credential increased by over 25%. Al Kelly: (06:27) These trends are not unique to the United States. During this period in the UK, active e-commerce credentials increased 16% while spend proactive credential increase 3%. In Brazil, active e-commerce credentials increased 11% while spend proactive credential increased 12%. In markets where e-commerce is not as developed, there are examples of dramatic changes in adoption. Argentina experienced active e-commerce card growth of over 100% and Romania, 70%. Al Kelly: (07:04) In new flows, we continued our focus on addressing the $185 trillion opportunity. In B2B, the opportunity is across card based, accounts payable and receivable, and cross border payments. While B2B volume is down during this work from home and very limited travel period, we are continuing to build out our capabilities and relationships to fuel future growth. Al Kelly: (07:29) A couple of quick points from the quarter. We recently established a global partnership with UK FinTech Conferma Pay, which enables companies to provision virtual Visa commercial cards to employees' digital wallets, enabling tap to pay and simplifying expense reimbursement. For our large ticket cross border B2B solution called Visa B2B Connect, we continue to build the network out. Many banks are in the implementation phase. When they are all live by the end of the year, Visa will be processing cross border transactions in half of the AB markets where Visa's B2B connect capability is available. Al Kelly: (08:09) Let's look at the remainder of new flows. In the United States, P2P is up almost 80%. In Latin America, we saw progress with P2P apps in Peru, where there was nearly a 400% increase in transactions in Q3 versus Q2. Visa is also excited to announce a global partnership with PayPal, including its Venmo, Braintree, Xoom, iZettle, and Hyperwallet brands. This is an extension of a long standing regional partnership with PayPal. This new global agreement will allow PayPal and all of its brands to offer fast Visa direct enabled domestic and cross border payments and expand PayPal's real time transfer capabilities globally. Al Kelly: (08:59) In the gig economy, food and grocery delivery category, we have seen a nearly 50% growth in transactions from pre-COVID levels and have continued to add new program launches such as such as Instacart for shopper earnings payouts in Canada. G2C, government to consumer use cases, are gaining momentum, employing both Visa direct and prepaid cards. This quarter, let me highlight some of the card examples. In the US, the treasury distributed nearly four million economic impact payments via Visa prepaid cards. We also work with CaixaBank in Spain on three projects issuing 330,000 prepaid Visa cards with government allocated funds to support vulnerable families across the region. In France, Natixis partnered with Visa to issue 15,000 cards as a thank you to frontline hospital workers financed by the government. In value added services, we've seen more clients turn to us for help. As e-commerce has expanded and new sellers are looking to offer Omni commerce payment capabilities that are safe and secure, our CyberSource and fraud risk capabilities have seen growth. Let me name two recent examples. A recent win in Saudi Arabia with Al-Rajhi Bank, the largest acquiring bank in the country, will leverage CyberSource to enable e-commerce payments platform for all Saudi Arabian government services through a centralized interface with the country's ministry of finance. Al Kelly: (10:44) Buying online, picking up in store has become very popular among consumers and is a key way for sellers to operate in this environment. However, this use case does bring a higher potential for fraud. One home improvement partner chose Decision Manager, a CyberSource fraud offering, to quickly review online orders for fraud risk and meet customer expectations for two hour pickup. This resulted in a massive increase in Decision Manager transactions in May alone at this merchant. Across all CyberSource risk products in Q3, we saw a nearly 50% year over year growth in transactions. Al Kelly: (11:28) Interest also has grown in our authentication products. CardinalCommerce, which provides network agnostic product for sellers and issuers to leverage the 3D secure standard, has seen accelerated growth in transactions this quarter versus last year. [inaudible 00:11:46] Secure is making steady progress in Europe as well where the ecosystem is ramping up in advance of the secure customer authentication mandate beginning in December for most of Europe. We continue to work with the ecosystem participants as the deadline approaches, given that some are not ready for the deadline. EMV 3D secure transactions in Q3 has grown over 100% compared to Q2. Al Kelly: (12:15) Data and consulting continue to be valuable to our clients as they navigate this environment. Clients utilize our consulting services at an accelerated rate with almost 60% more projects completed than the third quarter of last year. [inaudible 00:12:31] plays a critical role in providing data analysis to help clients manage their business through the pandemic and the client activity on our Visa Analytics platform increased 60% just from Q2 alone. Al Kelly: (12:48) Now let me talk to new deals where we've made very good progress this quarter. First, our momentum in Europe continues. We renewed with one of the largest banks in the Nordics, Nordea, to grow debit portfolios across the region. We expanded our partnership with Permanent TSB, a large issuer in Ireland with over 800,000 clients make Visa the primary card in most wallets in Ireland. We recently started a partnership with UVS in Switzerland to debit. And we're winning processing. In Spain, we secured a significant deal to expand our processing capabilities for domestic transactions. Banco Caminos will migrate their issuing and acquiring volumes from their local processor to Visa. Al Kelly: (13:36) Europe was certainly not the exception into helping and renewing partnerships this quarter. In Singapore, we renewed our partnership with the second largest debit issuer, OCBC bank, to remain the preferred debit card issued to OCBC Bank's personal saving and current account customers. In Korea, we recently secured a renewal with South Korea's biggest issuer [inaudible 00:00:14:02]. We renewed our credit and debit partnership with Banco de Bogota, our largest issuer client in Columbia. We recently started an agreement with Kaspi Bank, one of the largest retail banks in Kazakhstan. The bank is moving a hundred percent to Visa over the next few years. Al Kelly: (14:23) And our leadership position and co-brand also continued. This quarter, Visa renewed and expanded the strategic partnership with Best Buy, including extended the My Best Buy co-brand relationship. Ford and Visa will collaborate on Ford's new Ford Pass Rewards, the Visa card available to their four million Ford Pass Rewards members and other Ford customers. Another recent co-brand win was with Verizon to launch a Visa credit card to provide savings on Verizon's industry leading products and services, along with benefits for everyday essential purposes. And we signed a co-brand deal with Tiki, one of the leading eCommerce platforms in Vietnam. Al Kelly: (15:12) A key component to building issuance and acceptance is with fintechs. And this quarter we secured many wallet and neobank wins globally. Let me name a few. Careem, the biggest ride hailing app in the Middle East and Africa will offer driver payouts with Visa Direct as well as credentials to their over 35 million user base. Hong Kong's digital transit card octopus will accept Visa Wallet pop-ups allowing commuters to pay for transport and to pay 35,000 retail outlets. In Saudi Arabia, we signed a strategic partnership with [inaudible 00:15:51], a rising challenger bank that has the potential to penetrate an unbanked population of up to seven million people. Neobank Vivid Money announced its official launch in Germany, offering Visa debit cards in an all in one mobile application, including innovative savings and cash back solutions. And US based Chime, with over eight million accounts, [inaudible 00:16:17] to a new Visa secured credit card, which allows consumers to build it while spending on everyday purchases like groceries and monthly subscriptions. Al Kelly: (16:28) As often said, partnerships are fundamental to Visa's business model and these renewals and new deals will certainly help drive growth into the future. Before I close, I would be remissed if not to comment on the race situation in this country and around the world. For four centuries, black and African American women and men have experienced many forms of social injustice and discrimination. It's offensive. It is frustrating and is unacceptable. It must stop. At Visa, we are committed to do our part. Visa recently announced the next steps in our journey to drive inclusion and diversity across our company. We've announced a number of actions, including- Vasant Prabhu: (21:41) ( silence) ... has also significantly accelerated the secular shift to eCommerce. Card-not-present excluding travel has grown over 25% every week since mid-April. Which is 2X the pre-COVID growth rate. Card present spending improved steadily through the quarter as reopenings went into effect from declining almost 50% in early April to declining in the high single digits by late June. But there has been little improvement since. Vasant Prabhu: (22:10) It is too early to tell what all the underlying causes of this recent stabilization are. Recovery trajectories for card present volumes are relatively similar across states. In terms of US spend by category excluding Visa Direct, performance can be summarized in three groups based on COVID impact and the recovery we've seen to date. Each group represents roughly a third of our US payments volume. Vasant Prabhu: (22:37) The first group includes categories such as food and drug stores, home improvement and retail goods. These categories have consistently grown at or above their pre-COVID growth rates in the high teens or even higher every week since mid-April. The second group includes categories that experienced declines between 10 to 15% in April and have all recovered to growth by the end of June. These segments include automotive, retail services, department or apparel stores, healthcare, education, government and business supplies. Vasant Prabhu: (23:13) The third group includes categories that are the hardest hit by this pandemic. Travel, entertainment, fuel and restaurants. These categories declined over 50% in April and are still declining year over year. Although each improved by between 20 to 45 points during the quarter. Travel remains the most impacted category still down over 50%. Fuel gallons purchased are growing again but spend is down more than 15% in July driven by lower prices. Vasant Prabhu: (23:46) Within the restaurant category card present spend is still declining while card-not-present spend continues to grow significantly with quick service restaurants outperforming. Moving onto trends in the rest of the world. International payments volume declined over 12% in constant dollars in the third quarter. Similar to the US, debit significantly outperformed credit with debit down only 3% and credit down 20%. Vasant Prabhu: (24:15) Card present spend improved through the quarter as countries reopened while card-not-present excluding travel spend remained elevated. Performance across categories was broadly similar to the US. Our best performing region continues to be Sonia which declined five percent in constant dollars. Within Sonia, Russia, Eastern Europe and Central Asia had positive growth in the quarter fueled by a rapid recovery after April declines as well as client wins. Vasant Prabhu: (24:48) Europe payments volume declined 10% in constant dollars in the third quarter. Central and South Eastern Europe which include Poland, the Czech Republic and Hungary recovered rapidly to post positive growth in the quarter. The UK returned to growth in June driven by consistently strong card-not-present growth. Italy is almost back to prior levels in June following one of the strictest lockdowns within Europe. Canada declined 15% and Latin America declined 13% in constant dollars. Vasant Prabhu: (25:22) Brazil spend decline early in the quarter was one of the shallowest but the recovery has also been slow. Brazil is not back near 2019 levels of domestic spending fueled by card-not-present growth. Asia Pacific payments volume declines 16% in constant dollars. Reopening of the Asian economies has been gradual with multiple phases depending on the country. Two of the least impacted countries were Korea and New Zealand both of which were close to flat in the quarter. Vasant Prabhu: (25:53) Domestic spending in Japan and Australia was back to 2019 levels by late June. India remains one of the most impacted markets globally. Process transactions declined 13% in the quarter. Although there's large volume growth due to a mix shift, the trajectory of the process transactions recovery is similar improving from a 24% decline in April to a four percent decline in June. Growth in July through the 21st is flat. Vasant Prabhu: (26:23) Domestically, the mix of spend has shifted from low ticket to higher ticket categories. Cross border transactions on the other had are holding up better than volumes due to the mix shift from high ticket, travel related spending to low ticket non travel eCommerce. Constant dollar cross border volume excluding volume within Europe declined 47% in the first quarter. Volumes declined 51% in April and improved marginally in May to decline 45% but there has been little improvement since. Vasant Prabhu: (26:59) For the month of June and in July through the 21st, the rate of decline has stayed at 44%. Constant dollar cross border volume including volume within Europe declined 37% in the quarter. It's important to remind you that cross border volume excluding volume within Europe drives our international fees.As you know, the cross border spend decline is driven by travel. Vasant Prabhu: (27:27) Travel related spend which includes both card present and card-not-present in travel categories represented roughly two thirds of our pre-COVID cross border volume excluding volume within Europe. Travel related spend declined 78% in the quarter and was still declining over 70% at the end of June. To have a recovery incross border travel you have to have a reopening of borders. At this point borders remain largely closed. Vasant Prabhu: (27:58) The world tourism organization reported at the end of June that out of 217 countries 189 or 87% had completely or partially closed their borders to foreign visitors. Of the remaining 28 countries, 10 had completely or partially suspended flights. Several other countries like the UK require quarantines and the rest had imposed visa restrictions or demand medical certificates. As we speak, cross border travel, especially by air is either not possible or very difficult. Vasant Prabhu: (28:37) While no one corridor drives a large portion of our volumes, some of our most important corridors remain closed. Borders have to reopen before we can get a sense of what the cross border recovery trajectory might be. In the few corridors that cross border travel is now possible, we have seen some significant recoveries. For example, Americans are traveling again to Mexico and the Caribbean. Since the April law, these corridors have seen cross border card present volumes recover by 30 to 40 points. Vasant Prabhu: (29:13) Travel to and from Switzerland, to France and Germany is almost back to normal. Russian travel to neighboring countries has picked up. Travel from Europe to the UAE is gaining momentum. It's important to note that the vast majority of cross border travel spend is on personal cards and not for business travel. Consumer travel demand for visits to friends, relatives and for vacations is more likely to remain intact post COVID, perhaps even enhanced. Vasant Prabhu: (29:45) The consumer travel recovery is likely to start with people going to countries within their geographic zone of comfort. This is already evident as we look at short haul cross border travel which we define as less than 3,000 miles. Short haul air travel is recovering faster than longer haul corridors. Similarly, drive through hotels are doing better as are leisure hotels versus business hotels. Growth in cross border eCommerce spend excluding travel has been consistently in the high teens to low 20s since mid-April. Vasant Prabhu: (30:22) The strong growth is fueled by retail spending which is growing about 30% since mid April and drives the majority of non travel eCommerce spend. In most countries we see that once a consumer decides to buy something online rather than go to a local store, there is a higher likelihood the purchase becomes cross border with little regard where the item is shipped from. The phantom retail is offset by declines in entertainment, education and government, some of which are tied to travel and represent a meaningful portion of card-not-present non travel spend. Much of the color I just provided excludes volume within Europe. Within the EU, models have largely reopened. Intra Europe cross border card present spend is up 40 points from the 12 in April through three weeks in July. Another indication of the possible trajectory of the cross border recovery when borders do reopen. A quick review of our third quarter financial results. Net revenues declined 17% in the quarter or 16% in constant dollars. Third quarter service revenues were flat as per year and reflect last quarter's volumes. Vasant Prabhu: (31:43) Data processing revenues declined five percent supported by strong value added services growth as well as acquisition related revenue. International transaction revenues decreased 44% in line with the decline in cross border volumes excluding volume within Europe. Other revenues declined eight percent over the prior year due to value added services impacted by the pandemic. Value added services impacted by the pandemic include lower use of travel related card benefits, lower marketing related services for clients as many slowed marketing activities and fees we waived on certain services which surges at the outset of the pandemic. Vasant Prabhu: (32:27) We should note that had we reported service fees without a lag, our service fees would have declined 11% and reported net revenues would have dropped an additional four and a half points to approximately 21.5%. These low service fees will impact our reported revenues next quarter. Before I move on, let me provide some more detail on where value added services revenues are captured in the PNL. In the third quarter, total value added services revenue grew in the mid teens including acquisitions. Vasant Prabhu: (33:03) Approximately two thirds of our value added service revenues are included in data processing as many of the are transaction based revenue streams. These value added services grew in the mid teens driven by the strength in US debit and prepaid issuer processing, cyber source as well as authentication and fraud services as Al highlighted. The remaining value added services revenue is split roughly evenly between service fees and other revenue. Vasant Prabhu: (33:32) Value added services and service fees also grew in the mid teens. Value added services recorded in other avenues grew in the mid single digits due to acquisitions, increased use of our data products and consulting offset by declines in the usage of card benefits and marketing services I described earlier. Client incentives declined two percent versus last year and were 23% of gross revenue. As we've indicated before, the vast majority of incentives are tied to payment volumes. Vasant Prabhu: (34:06) However, incentives declined less than gross revenue pushing up incentives as a percent of gross revenue. Let me explain why. First, incentives are generally tied to total payments volumes and only selectively to cross border volumes. As declines in cross border volumes have been deeper than total payments volumes and cross border volumes at higher yields, incentive declines lag gross revenue declines. Second, heavy renewal activity like we had in fiscal year of '19 causes incentives to grow faster than gross revenue. Vasant Prabhu: (34:42) As a result, the decline in incentive lags gross revenue on the way down. Offsetting these factors to some degree is a service fee lag. As I mentioned earlier, the service fee lag mitigated the gross revenue decline reported this quarter. This will impact us negatively next quarter. Third quarter gap and non gap operating expenses declined five percent as we were able to execute additional cost management initiatives particularly in the areas of marketing and GNA. Vasant Prabhu: (35:13) These expense reductions were achieved while sustaining investments in our longer term growth initiatives. Acting early and decisively has helped us to reduce expenses fast. Non gap non operating expense was 118 million for the fiscal third quarter. Interest income was lower due to the sharp drop in interest rates. Interest expense was higher from our $4 billion debt issue. The non gap tax rate was 19%. Finally some perspective on the fourth quarter. Focusing revenues remains a challenge in this environment. Vasant Prabhu: (35:52) It is difficult to predict when borders will reopen and what the trajectory of the cross border travel recovery will be post reopenings. Domestic volumes have bounced back nicely in most countries and inevitably the rate of recovery will slow. Other uncertainties include the impact of the recent spike in infections and the economic impact of stimulus payments tapering off or ending altogether around the world. A few points to note as you model revenue growth for the next quarter. Vasant Prabhu: (36:23) As I indicated earlier, had we reported services revenues without a lag, third quarter net revenue would have declined an additional four and a half points. This will cause fourth quarter reported net revenue growth to be lower than the third quarter as for the change in trend on key business rivals. Continued recovery and domestic payment volumes and transactions will improve the data processing revenue trend but not reported service revenues. Vasant Prabhu: (36:51) This will be partially offset by higher incentives related to the increasing volumes. As such, the most important variable that would improve the fourth quarter net revenue growth rate is cross border volume excluding intra Euro. One other point to note driven by these turbulent times. If the cross border recovery remains sluggish through the fourth quarter, the revenue mix shift away from cross border will persist. Vasant Prabhu: (37:19) Adding in the impact of the service fee lag, incentives as a percent of gross revenues are likely to increase by two to three points over the third quarter levels. This percentage should normalize as cross border volumes improve and the domestic volume recovery stabilizes. Non gap operating expenses in the fourth quarter are expected to decline roughly in line with the reductions we delivered in the third quarter. Vasant Prabhu: (37:46) Non gap non operating expenses are expected to be around 140 million. Even with the significant COVID 19 impact, we expect to generate a very healthy level of free cashflow this year. We ended the quarter with over $17 billion of- Vasant Prabhu: (38:02) We ended the quarter with over $17 billion of cash, cash equivalents, and investment securities on hand. With access to the commercial paper market on favorable terms and a $5 billion revolver, our liquidity position remains strong. In the third quarter, we bought back 5.2 million shares for almost $900 million at an average price of $180.47. Year to date, we have bought back 36 million shares for $6.5 billion at an average price of approximately $180. Our dividend policy remains unchanged. Vasant Prabhu: (38:41) Crises create both risks and opportunities. We have moved fast to mitigate risks by ensuring strong liquidity, reducing expenses while sustaining creaky growth investments, and closely monitoring network performance, security, daily settlement, fraud, and other key metrics. The crisis accelerated many favorable secular trend, the digitalization of cash, the shift to e-commerce, and the penetration of tap to pay. Vasant Prabhu: (39:10) Visa's direct momentum has remained very strong and value-added services have continued to grow in the mid-teens. Our focus remains on helping all our stakeholders, cardholders, clients, government regulators, and of course our own associates as they navigate through these unusual times. With that, I'll turn this back to Mike. Al Kelly: (39:46) Mike, I think you're on mute. Mike, you're on mute. Vasant Prabhu: (39:59) Al, maybe we should turn to questions? Operator one, we move to questions. Al Kelly: (40:06) So, Vassan, I also understand that we had a technical issue that some people might not have heard the end of mine and the beginning of yours. I was hoping Mike would give us a little direction, whether we should summarize those points. Vasant Prabhu: (40:28) Mike is suggesting we keep going. Al Kelly: (40:30) Okay. So maybe what I would suggest is that, let me just quickly summarize what I said at the end, and maybe you could talk a little bit about U.S. debit before we open it up to questions. Vasant Prabhu: (40:43) Okay. Al Kelly: (40:44) So, what I said is that certainly the future is going to have uncertainty associated with it, but we continue to believe in our strategy and our growth prospects. Certainly, there were things that declined in the quarter, net revenue, EPS, overall payment volume, cross border volume, and process transactions. But we did see growth in a number of important areas, growth in debit, growth in e-commerce volumes, growth in Visa direct transactions, growth in tap-to-pay, advances in quick-to-pay enablement, and growth in value added services revenue. Al Kelly: (41:20) We also demonstrated our ability to reduce our expenses while continuing to invest in the future and we return capital to shareholders at a start levels and retained our dividend. So net net, we believe that our business model is resilient and we have a lot of competence in the efficacy of our global network of network strategies. I think it would be helpful for you, Vassan, to just comment on U.S. debit because I think a lot of people might not have heard of it from what I understand. Vasant Prabhu: (41:49) Okay, Al. Yes, I talked about why debit was outperforming credit. As you may have heard, debit has bounced back about 30 points and is now growing at about 25% in the first few weeks in July, whereas credit recovered by less than that and is still declining 9% through the first three weeks of July. I went through six reasons for that. I'll do those quickly. Economic impact payments going directly into checking accounts helps debit. Vasant Prabhu: (42:24) In times of economic uncertainty, consumers do shift spending away from money they have borrowed to money they have in the bank. Third reason, the shift to online has caused a lot of everyday spend categories to move to e-commerce, which has favor debit because normally debit is used for everyday purchases. Affluent customers, reason number four, tend to use credit for discretionary purposes like travel, entertainment, and restaurants, which have been especially hard hit in times like these. Vasant Prabhu: (42:54) The economic impact payments, this is reason number five, were distributed using Visa prepaid cards in 20 states, including the unemployment benefits, which lifted our debit growth in May and June. And then finally, Visa direct, which helps our debit numbers, was up over 75% this quarter, as a whole bunch of use cases performed really well. So I think, we'll probably stop there, Al, and take questions. I think we might have lost Mike, so we can do questions. Al Kelly: (43:23) Jordan, are you there? Jordan: (43:25) Yes, I'm here, Mike. Al Kelly: (43:26) Jordan, if we can go into Q and A, that'd be great. Jordan: (43:30) If you would like to ask a question, please press star one and clearly record your name. You will be announced prior to asking your question. To ensure all questioners are heard, we ask that you please limit yourself to one question. Once again, to ask a question, please press star one. To withdraw your question, press star two. Our first question comes from Lisa Ellis from Moffitt [Nasenson 00:43:50]. Your line is now open. Lisa Ellis: (43:53) All right, good afternoon, guys. Hopefully you can hear me, I guess. Vasant Prabhu: (44:00) Yes, we can. Lisa Ellis: (44:01) I'm going to hit a topic you did not cover on the call. Al, question for you about big tech. The big tech companies are now facing elevated regulatory pressure. Obviously, very present right now in the U.S., also in Europe, related to some of their competitive practices. Can you comment on how this regulatory scrutiny you see effecting one, those firms initiatives in payments? Like in particular, are there anything, any practices, that they're doing that you at Visa or Visa would view should be scrutinized? And then also, do you view this sort of regulatory scrutiny on big tech as a plus for the payments ecosystem and for Visa, or as potentially a negative? Thank you. Al Kelly: (44:45) Well Lisa, as you might imagine, we have relationships with all of their companies that you would consider big tech. Some are a bit more extensive than others, but we certainly have relationships with all of them. I certainly can't comment and wouldn't comment, on regulatory scrutiny that they are experiencing, but, if it involves payments and we can be helpful to them or helpful to the government in either advocating or explaining what's going on, we will jump into that. Al Kelly: (45:22) There was a case with a payment initiative that we had going with Facebook in Brazil in the last month where we did just that as an example. I think that the big techs certainly have attracted lots and lots of users and have developed relationships with them, and in some of those relationships are going to require money movement or payments capability, and we certainly want to be there and be the partner to work with them on those particular things. And we'll leave it to them to figure out and deal with any of the regulatory issues that they're facing, and we're a phone call away if we could be helpful. But I think in most cases, it's kind of up to them to resolve them. Jordan, next question. Jordan: (46:13) Our next question comes from Matt O'Neil from Goldman Sachs. Your line is open. Matt O'Neil: (46:19) Yes, hi. Thank you for taking my question. I was hoping you could provide some anecdotal views on what I think is probably the next leg of this sort of secular catalyst here, the sort of silver lining of this pandemic, if there is one, which is obviously, the e-comm growth has been robust. But how are the bank partners and merchant partners sort of thinking about the move back into brick and mortar commerce and what will inevitably be a significantly greater demand for contactless payments? And then if I could just have a quick, unrelated follow-up, I was just wondering if there's any update on the Plaid acquisition and any comments around the lawsuit there. Thank you very much. Al Kelly: (47:03) Well, interestingly enough, as you probably could see in some of our charts as card not present has started to work its way back, it lagged, obviously card not present, it was impacted much more greatly by the pandemic. Card not present volumes have held up. So we're not seeing any declines there. And I think that what all issuers and anybody who's rooting for economies around the world to come back, we'd love to see a situation where both card not present and card present, both bounce back, and that bricks and mortar commerce on main streets and communities around the world continue to grow. Al Kelly: (47:47) I think the case for contactless, Matt, has been made. We have seen consumers and governments and merchants voting through their actions and tap-to-pay had tremendous momentum kind of going into COVID. And if anything, COVID has accelerated the momentum on tap-to-pay, even in the United States, which we know has been further behind, but as I cited, our issuers have added 80 million credentials that are tap-to=pay enabled in the first six months of the year. Al Kelly: (48:26) Something like 80% of the merchant volume that is occurring in the face-to-face world is occurring at terminals that are enabled for tap-to-pay. So I think it's going to just continue to grow everywhere around the world, and I believe that the COVID situation will help accelerate the growth here in the United States at a perhaps faster pace than it might've happened otherwise. As for Plaid- Vasant Prabhu: (48:54) Al, I might add a thing. Crisis fosters innovation, as you know, and if anything, this has made more and more merchants focus on omni-channel commerce, which CyberSource is very much in the middle of, and increasingly merchants are getting better and better at serving customers seamlessly across bricks and mortar, as well as e-commerce. Vasant Prabhu: (49:18) It has also made a lot of categories that never used e-commerce become a lot better at e-commerce. You've seen that in a lot of everyday spend categories. You've seen that with restaurants. And more broadly across retail, people have come now with more innovative ways like curbside delivery has been perfected in many ways. And that, we think, is going to be here with us, which is really a way where you order online, but you may pick up physically. So you have one more delivery option. You can get it delivered after a day or two delay, or you can get it right away by going and picking it up. Vasant Prabhu: (49:52) So there's a lot going on. And I think the most important point that Al made was that, even as we've seen card present improve from minus 50 to minus high single digits, Card not present has stayed very robust, continuing to grow at those mid-20s levels for quite a while now. So lots of changes underway. Al Kelly: (50:17) Matt, let me address your Plaid question. It's still pending regulatory approval and we certainly are expecting to close by the end of the calendar year and are doing everything we can to comply with any requests from the regulators that are looking at it. Al Kelly: (50:34) We are as excited about the Plaid acquisition today as we were back in January, when we made the announcement, and we really believe we got the asset we wanted and all of the various benefits that we have articulated in prior calls we believe are still there, everything from the depths of their integration with vin techs, the fact that they are most attracted to a lot of vin techs, that their position in terms of how far along they are, we believe they have the best team, and we see it as the best way to integrate into Visa. So we remain very excited about Plaid and hopeful to close by the end of the year. Mike Milotich: (51:32) Next question, please, Jordan. Matt O'Neil: (51:33) Great, thank you. Jordan: (51:33) Our next question comes from Darren Teller from Wolf Research. Your line is now open. Darren Teller: (51:39) All right. Hey guys, thanks. Just a couple of quick ones. First on the fourth quarter, fiscal fourth quarter, comments, just to clarify, I think you guys are saying that just the lag effect of services, versus prior quarter volume would impact that line by four points, but I guess we're just wondering if just given the trends we're seeing on transactions processed, flattening out, shouldn't those trends be enough to offset that when it comes to growth in fiscal Q4? Darren Teller: (52:08) And then, Al, just bigger picture, when we think about the services, all these other value added services you guys are doing well with, I mean, do you see these sticking around post-COVID in terms of the demand you're seeing for analytics, and potentially the card not present service fees or CyberSource? Al Kelly: (52:27) So why don't I let the Vassan answer the first piece, and I'll come back and address the second piece? Vasant Prabhu: (52:29) Sure. If you look at the various lines on the revenue line, service fees, as you indicated, and as we told you in the comments, are known already. They're going to report service fees based on our volumes in the third quarter, and the volumes in the third quarter was hopefully the low point. And as we said, had we not done a lag, our services would have been down 11% and total net revenue would have been down, as you said, in that four, four and a half range. Vasant Prabhu: (52:59) So that is going to happen. That's a known fact. And even if volumes improve on the domestic front and transactions improve, the service fee number isn't going to change next quarter. So that's locked in. So when volumes do improve, which we expect will be the case on domestic volumes and transactions, transactions revenues will definitely go up, value added services revenues will definitely go up. Vasant Prabhu: (53:21) But the other thing that goes up is the contra revenue line incentives. Incentives will go up to reflect the higher volumes because we don't book incentives with a lag. Incentives will go up, but the benefit of that revenue from the higher incentives we won't get on the services line, service fee line. We will definitely get on the processing line. So there's something of an offset there. Just want you to be aware of that. Vasant Prabhu: (53:44) But the biggest variable is going to be cross border. If there's a change in trend in cross border and it improves, then that will be the single biggest reason to expect Q4 trends to be better than Q3, recognizing that you've got pressure going in the other direction from the service fee lag. So there's some complexity created by these things because of the turbulent times we're in. We've tried to help you with it, and hopefully we can help you some more if you like, on some more questions later on. Al Kelly: (54:21) And Darren, on your second question, I'm very bullish on what's going to happen with value added services in a post-COVID world. First of all, two thirds of our value added services are platform type services, CyberSource, issuer processing, risk and fraud. The need for those is going to continue, and if anything, the volumes of transactions that will run through those will go up. Al Kelly: (54:45) Where we've seen some declines are in travel-related card benefits, which is going to get better as travel comes back. We've also waived some fees because of the pandemic, and once we're past the pandemic, we won't waive those fees as readily. So that volume will go up. Travel-related benefits will go up, as I said, as travel comes back. So I see value added services being very well positioned coming out out of COVID, and feel very good about the contribution they'll make and how they'll continue to diversify our revenue profile over time. Vasant Prabhu: (55:23) Yeah, I think the other things to add there, three of our largest value added services we think are going to sustain their growth, which has already accelerated. Our issuer processing business, which is directed towards debit, debit has become the engine for cash conversion right now. Debit growth rates, as you saw, 25% in the first three weeks of July. So as long as debit growth rates are at an accelerated level, the issuer processing business will clearly have high growth rates. Vasant Prabhu: (55:50) CyberSource always benefits from the shift to e-commerce, and now with their focus on omni-commerce, CyberSource clearly is benefiting from the shift. And then finally, our risk and fraud services certainly benefit as things move more to e-commerce. Fraud is an area that we can really help a lot on. So there are reasons to believe that higher growth rates can sustain post-COVID. Mike Milotich: (56:15) Next question, Jordan. Jordan: (56:21) Our next question comes from James Friedman from Susquehanna. Your line is now open. James Friedman: (56:26) Hi. Thank you. Al, in your prepared remarks, you shared some P-to-P growth characteristics. You were going kind of quick there. That disclosure was new, at least to me, but I was wondering if you could repeat what you said, and also, at the same time, share some use cases about how you're seeing the P-to-P applications develop. Thank you. Al Kelly: (56:56) Well, what I said in my remarks, was that P-to-P is up almost 80% in third ... Al Kelly: (57:03) ... is up about 80% in third quarter. That was in the United States. I'm sorry. Up 80% in the third quarter. In Latin America, we saw progress with two different P2P apps in Peru, where we saw a nearly 400% increase in transaction rate over the prior quarter, Q2. Al Kelly: (57:25) We've got this tremendous track record of working with P2P providers. As we said in the past, we were heavily skewed toward the United States and Russia where we have relationships with most of the big P2P providers, Square cash, Venmo, Zelle, et cetera. I think that now we're seeing our P2P capability through our Visa Direct platform become something that people are looking to us for as P2P applications are developing in other countries around the world. Speaker 1: (58:05) Thank you. Mike Milotich: (58:05) Next question. Vasant Prabhu: (58:08) Actually [inaudible 00:58:08] earlier, we'll run longer, so we'll probably go for at least 10 minutes past the hour. Jordan: (58:17) Our next question comes from Craig Moore from Autonomous Research. Your line is open. Craig Moore: (58:21) Yes. Hi. Thanks. I was hoping, Vasant, you could comment on if we see the cross border recovery continue to stagnate into next year and domestic volume continued to pick up, intra Europe cross border, continued to pick up. Where should we be thinking about incentives as a percentage of gross revenue going? What's the risk to next year in terms of upside from that percentage, and then perhaps Al, maybe a comment or two on the renewal of the Durbin Amendment version two or three, whatever we're at at this point and EPI in Europe. Thanks. Vasant Prabhu: (59:09) In times like these, I think it's not easy to make longterm projections clearly. In terms of cross border and its recovery, yeah, it's possible I suppose that it remains sluggish. It all depends on borders reopening. Whatever borders has been open or the restrictions have not been significant, we've seen some pretty quick recoveries. So to the extent that there are borders reopening, it may not be globally, but there could be corridors opening up as we are already hearing. Australia, New Zealand. We've seen that it's mostly open across the EU. It's starting to open in other geographies within regions. So it's not black and white, I think, in terms of the cross border recovery. You could see some changes in travel patterns because of how countries open up. But if cross border remains depressed, certainly the mix won't help us, and that will cause the percentage of incentives to gross revenue to stay higher than what might've been the normalized mix of revenues. Vasant Prabhu: (01:00:19) The other factor that's influencing it is probably most acute in the fourth quarter, which is the service fee LAD. Normally our service fees from one quarter to another don't have such significant swings because our business tends to be quite stable. So that service fee LAD effect will moderate. I think the best way to describe it is it'll probably normalize from the levels we see in the fourth quarter. It'll certainly normalize because the service fees stabilizing. It'll probably normalize some because the cross border business will recover in corridors, but we'll wait and see how fast cross border normalizes. Al Kelly: (01:00:57) Let me address your other two questions. You asked about Durbin. Visa is fully compliant with all the requirements of the Durbin Amendment and we don't have any rules or requirements or other restrictions that inhibit a merchant's ability to select their routing decisions, take the routing decision of their choice. And merchants are free and often do route to various unaffiliated networks enabled on a debit card. I think we're in good shape as it relates to Durbin. EPI, we have a history of dealing with either regions or groups of countries or countries developing their own scheme or intra market network. It's something that we're very, very used to dealing with. We do know though that developing a network is not an inexpensive thing to do, and it's not a one time investment. You have to continue to push and invest and innovate and be creative to stay ahead as it relates to all the elements of security, fraud prevention, risk authentication, et cetera. So we will continue to monitor and engage constructively with regulators and banks in Europe on EPI. But on the other hand, we're going to continue to invest heavily behind our various networks to make them as good as they could possibly be. We will be continuing to focus on making sure that our clients know the benefits that they can obtain by doing business with us and running on our networks. Mike Milotich: (01:02:51) Next question, please, Jordan. Jordan: (01:02:54) Our next question comes Tim [inaudible 01:02:56] from JP Morgan. Your line is open. Tim: (01:02:59) Hey. Thanks so much. Hi. [inaudible 01:03:01]. I just want to ask on the spread in US debit and credit. I know you went through it a couple of times. But it's wider than what we saw in '08, '09. So is there a way to try and quantify how much of the debit out performance we can attribute to secular versus stimulus benefits? Curious also, just want to make sure, any impact on yield differences between the two products? I don't think so, but just wanted to make sure. Vasant Prabhu: (01:03:31) Yeah, there's some modest few differences depending on parts of the world and so on. I don't think you should view that as a huge factor. In terms of the reasons that might stick as we go ahead, I think we went through five reasons. One, the economic impact payments and unemployment benefits being distributed on Visa prepaid cards, clearly that's linked to the crisis and probably is not something that will continue. Affluent customers putting off some discretionary items like travel, entertainment, and restaurants, which hit credit in particular, that probably normalizes over time. So that you can attribute to COVID. The propensity for people to spend the money they have versus borrowed money, that is something you do see in times of uncertainty. Vasant Prabhu: (01:04:35) Then some of the economic incentive and impact payments going into checking accounts clearly has helped debit, but there's a few others that are clearly sticking. The fact that Visa Direct is still going very strong, and that has been helping debit for a long time. It will continue to do that. The fact that debit has become the mechanism for cash conversion to digital in everyday spend categories and in most categories, which have seen a big increase in eCommerce has benefited debit. I think some of that sticks. I think the best way to describe it is that the acceleration of cash conversion has disproportionately helped debit and that is most likely going to stick. Al Kelly: (01:05:16) [inaudible 00:08:19], I would only add that I think if I look back at the same observation you do about the 2008, 2009 timeframe, but eCommerce is just much, much bigger and it just appeared that people who are doing [inaudible 01:05:35] at e-comm non-travel are using their debit cards much more than their credit cards. Mike Milotich: (01:05:44) Next question, please. Jordan: (01:05:48) Our next question comes from David Togut from Evercore. Your line is open. David Togut: (01:05:52) Thank you. Good afternoon. Could you parse out some of the drivers of the 36% decline in international transaction revenue yield? I imagine a lot of that's just the big drop in cross border travel, but if you could help us think through the drivers in terms of how much might be intra European versus debit. And how should we think about international transaction revenue yield going forward? Vasant Prabhu: (01:06:20) Yeah, I think it's very important to continue to point people to the decline of cross border volumes, excluding intra Europe volumes. The decline was 47% in cross border constant dollar volumes excluding intra Europe. So the revenue decline is roughly, as you can see, in line with that. The reason being that if you look at total cross border volumes, that includes intra Europe. Intra Europe looks more like a domestic transaction. In fact, in our international revenue line, the contribution from intra Europe transactions is very small. The international revenue line is driven almost entirely by volume, excluding intra Europe. Vasant Prabhu: (01:07:06) Now there's a few other things that can have an impact. Exchange rate shifts can, changes in currency volatility can. So that explains... And then some small changes in mix in terms of which corridors are doing better than others because there's some yield differences across corridors. But that explains the 44% decline in revenues versus the 47% decline in volumes ex intra Europe. But as you can see, watching that volume line ex intra Europe is the best indicator and that's what you should focus on. David Togut: (01:07:42) Got it. Just as a quick followup, could you just comment on the 10% growth and processing transaction yield year over year and thoughts going forward? Vasant Prabhu: (01:07:55) Right. There's two factors driving it. One is that cross border transactions have held up a little better than cross border volumes. So the mix has helped a bit with those cross border transactions for processing have a higher yield. The second is we have value added services in some acquisitions in that line. And as you heard, value added services are growing in the mid teens in that line. So those two things have helped data processing yields go up. David Togut: (01:08:30) Much appreciated. Mike Milotich: (01:08:32) Next question, please. Jordan: (01:08:35) Our next question comes from Dave Coning from Baird. Your line is open. Matt O'Neil: (01:08:40) Oh yeah. Hey, thanks guys. I guess following up on that last question, you said that the ex intra Europe volume down 47, but 44% revenue decline. Is that gap going to change much? I know FX volatility probably helped a little bit in Q3 to make revenue a little better than the volume decline, but are there any other kind of yield factors in there other than FX volatility to think about? Vasant Prabhu: (01:09:09) The variables that can make a difference... First of all, the 44 to 47 is a relatively small delta. There'll always be some differences between the two. They won't match each other precisely, but you're right. Currency volatility is one factor. Another factor would be certain corridors can have better yields than others. So if the recovery of cross-border favors higher yielding corridors, you can have something of a difference. But other than that, it should track pretty closely to ex intra Europe volumes. Matt O'Neil: (01:09:46) Okay. Well thank you. Mike Milotich: (01:09:49) Jordan, we'll take one last question. Jordan: (01:09:52) Our last question comes from Harshita Rawat from Bernstein. Your line is open. Harshita Rawat: (01:09:58) Hi, thank you for taking my question. Al, can you expand upon your recent conversations with regulators and governments? Now in Manhattan, some merchants are lobbying for lower fees in this crisis, and I understand that's not a new phenomena. But then there are valuable benefits of digital payments, especially in this kind of environment. Can you just talk about how your conversations with regulators and government are evolving in this crisis? Thanks. Al Kelly: (01:10:26) Look, I think like many people, governments are finding themselves in uncharted territory here. They're all well-intentioned trying to figure out the right things to do. Our biggest piece of advice to governments as it relates to core payments is to do no harm at the moment. I mean, right now, I think the less amount of moving parts as we're fighting through this pandemic is the best answer for everybody. This is not a time for any kind of changes. Governments are also increasingly talking to us in terms of looking for information that we have in terms of trends because they're trying to understand what's happening in their economies. In many ways we could get them real time, a picture of what's going on faster than they can get it themselves. Al Kelly: (01:11:24) The last thing I would say is that there's a lot of interest in the form of governments to become more role models in terms of what they want to see in their countries from a digital adoption point of view. As they have genned up stimulus programs, unemployment programs, thank you programs and all kinds of other things, they're looking to Visa to help advise them on how they could distribute funds digitally as opposed to cutting checks. I think my view at the moment is that governments are being very, very thoughtful and reasonable in terms of what they're saying, and they're also being good listeners. So we're going to continue to do our job to provide them with whatever information they need and to provide them with whatever advice and counsel we can provide to be helpful to them, both in their role as governments and setters of laws, as well as in their role as potential clients for various Visa services. Al Kelly: (01:12:37) Before we close out, one of the things I gathered that did not... When we had the little blackout in terms of the transmission was I did before I closed make a comment about the race situation in the country and around the world. I'd like to just recite that again. For four centuries, black and African American women and men have experienced incredible forms of social injustice and discrimination, and it's offensive, it's frustrating and it's unacceptable, and it has to stop. At Visa, we've committed to do our part. We recently announced the next steps in our journey to drive inclusion and diversity across our company. We announced a number of actions, including the establishment of a Visa Scholars and Jobs Program. But very importantly, last week, we announced that we're committing to increase the number of underrepresented US vice presidents and above by 50% in the next three years and increased the number of underrepresented US colleagues within Visa overall by 50% in the next five years. We want to do our part to eradicate this social injustice in the world. It's way past time that that has to be the case. Al Kelly: (01:13:54) With that, thank you to everybody. Mike, did you want to... Mike Milotich: (01:13:59) Yes. Thank you, Al. So yes, once again, apologize for the technical challenges. We will make sure that the replay that's on our website as well as the transcript reflect everything. If you have additional questions, of course, feel free to reach out to us here on the investor relations team and we're happy to help you. Thanks so much and have a great day.