VISA- TIER 1 HOLDING-FY26 Result analysis and a look at possible disruption

 VISA- TIER 1 HOLDING-FY26 Result analysis and a look at possible disruption

Firstly, we look at the numbers, then a run through the now rather long but variable list of potential disruption factors. 

The high-level numbers continue to be outstanding. Revenues were 15% higher (3% better than my numbers), and NPAT +17% (4% above my numbers). My numbers are set months before the result and are not fine-tuned; I am interested in my ability to accurately forecast well in advance when I invest, not to pick a number for the result. EPS growth, revenues, and ROE are all outstanding. 

 

 

 

The legacy business built on global digital transaction volumes continues to grow in a consistent but not spectacular fashion. 

 

 

There is not much to say about these volumes, which tend to show modest cyclicality against a growing secular trend. However, there is an interesting change in the mix embedded in the numbers, which shows that Visa (and MA for that matter) are evolving their businesses. The Data Processing segment above includes the Value-Added Services (VAS) business, which has grown, as the chart below shows, much faster than the core business. VAS now comprises nearly 30% of Visa’s revenues and continues to grow much faster than the base. 

The interesting feature is that VAS can generate revenues across non-Visa networks, such as MA, domestic payment switches, direct bank transfers, or private merchant networks. VAS comprises five businesses: Issuer services are a fast card issuing service that banks, BNPL or others, etc. can deploy to enter the market quickly with new products. The value proposition is fast, cheaper access for the clients' customers, like a customised card for any players’ client subset. Merchant Acceptances is a product for customers dealing with a vast array of payment types, while handling routing and currency conversion. The value proposition to the merchant is consistent and efficient acceptance of various payments and cost-effective routing. The next business is big and growing: Risk and Identity solutions. Merchants/banks face the issue of how tight to set controls between disallowing legitimate customers and being too loose and being vulnerable to fraud. Visa uses its vast data to instantly identify transactions that may be fraudulent. The business has been a big growth driver, and difficult to see that ending. Next is Open banking solutions, where Visa brings instant and verifiable data to allow granting of finance to clients and identification of payments across bank accounts. Finally, a consulting service that allows banks to benchmark their own performance against peers and allows visibility into customer spending outside their own ecosystem. The activities span a broad set of activities but are largely reliant on the banking industry. Growth comes, amongst other things, from banking system fragmentation, growth in fraud, efficient transaction processing, clean data and better conversion. The world of digital transactions is becoming increasingly complex, and Visa is working to further embed itself into the network. The upshot is that incremental growth is profitable and is also diversifying. 

As part of its anti-fraud products, Visa introduced tokenisation. Effectively, this is a customised Visa-generated credential that substitutes sensitive information when a transaction is initiated; the token expires when the transaction is complete. The use of tokens has dramatically reduced fraud and improved conversion rates for customers. However, one does not need much of a stretch to see tokens as an anti-disintermediation moat for Visa. Once in, tokens embed the banks into their use and reduce incentives to leave. 

Overall, VAS appears to be transforming Visa from a proprietary card scheme into a generalised financial operating system. That looks like a positive shift.

 

INCENTIVES

Visa experienced an uptick in incentives this half year. The CFO stated that 20% of the book renewed in FY26 and a further 25% is due in FY27. The renewal of bank accounts allows the banks an opportunity to up their incentives, as the usual length of the contract is 4-5years. Incentives are like a rebate but are customised into many forms. Some have highlighted that Visa offers higher incentives for clients to take up VAS services. That is, banks get a discount on the services they take up by renewing for longer-term contracts, or alternatively banks are paid more incentives to take up more VAS products. That may be beneficial to Visa as it embeds its software into the bank, probably making any change more difficult down the track. The round-robin nature may lead to fake profits, but the net returns on this incremental spend look attractive for Visa. Some evidence of this is that Visa does not experience a large operational leverage; that is, operating margins are fairly flat, as some of those profits are reinvested into client products. Overall, the returns below continue to climb as capex has only averaged 6% of CFO over the last five years, indicating that Visa can invest at scale and easily fund it. Stability in the duopoly is implied in these returns, and there is no sign that MA or V are intent on changing that scenario. The marginal return on equity below is over a three-year roll. Effectively, Visa can grow with next to no new investment. The negative number comes from a decline in capital employed through share buybacks. The strategic financial flywheel seems quite tight and effective.

 

 

 

 

POTENTIAL DISRUPTION REVIEW

The numbers above are quite outstanding, and the growth of the digital economy and the banking system, combined with the stability of the duopoly and its embedded nature, has driven these numbers. What are the areas where change can occur? Can volumes drift outside the rails?

1. NATIONAL RAILS

National rails are where a country introduces a competitor to the traditional V/MA rails. The largest and most successful have been Brazil and India, while the EU is making slow progress. Interestingly, the main reason for establishing these rails appears to be for independence from US-aligned companies and national sovereignty arguments rather than costs. Both India and Brazil schemes have made large headway into both debit and credit card markets, as they are mandatorily backed by the central bank.

The EU is already well banked and has high customer satisfaction and saturation. The banks are also conflicted as they benefit from the credit card fees, charging merchants to effectively underwrite the card rewards programs. Previous attempts to establish a Euro-wide network have failed. That remains the base case.

For India and Brazil, the low-value debit and credit transactions look set to be sealed off from V/MA. However, the national rails do suffer from some disadvantages, being a lack of dispute resolution and, with instant settlement, customers run the risk of fraud to a much greater extent than being within the V/MA network. The walled garden of national rails has limited use internationally. Therefore, with loyalty schemes, high-end purchases and travel remain on the duopoly rails. MA/V has also grown the VAS business with the national rails as a client. 

The conclusion is that, at this stage, the global TAM for V/MA is slightly reduced, but there remains a place for their products. 

2. Blockchain, Stablecoins and Alternative rails

Three areas threaten structural rail disintermediation. 

1. Cross-Border Settlement: Cross-border volume is Visa’s most profitable revenue stream (carrying high currency-conversion spreads). High-speed, low-cost blockchains (Solana, Ethereum) paired with fiat-backed stablecoins (USDC, USDT) allow institutions and businesses to settle B2B transactions globally for very low fees in seconds, threatening legacy cross-border tolls. Whether merchants want to handle stablecoin settlement is yet to be determined. There are complexities involved in this. Visa has stated that they have seen stablecoin use increasing well above Bitcoin, for example, but off a small base. However, it is enough for Visa to progress moving stablecoins into the Visa ecosystem. Visa have integrated itself into the settlement process, effectively being a transactor of stablecoins and clearing them for use. The bear case is that if stablecoins do become the default cross-border mechanism for large retail, it may mean lower margins for Visa. The thesis rests with the proposition of whether the value Visa brings through security and clearing is worth the 10-20bp they may charge on these transactions. Will transaction volumes expand once the new rails are settled? Is another consideration. 

2. Merchant-Led Disintermediation via A2A / Pay-by-Bank: Regulatory mandates and merchant consortiums are pushing "Pay-by-Bank" checkout buttons. Direct bank-to-merchant clearing eliminates interchange and scheme fees.

3. Autonomous AI Agent Settlement: AI-driven agentic commerce could default to programmable on-chain micropayments rather than legacy card numbers requiring two-factor SMS authentication, etc.

Visa has been proactive, as has MA, in integrating stablecoins and blockchain-like money movements. Blockchains are push-based, and if something goes wrong, public blockchains offer zero recourse. Visa's true economic moat becomes the rules engine, dispute mediation framework, zero-liability guarantee, and trust infrastructure. If volumes move this way, will Visa’s value proposition be worth paying for and how much is yet to be determined? Clearly, Visa is working to build a solution for clients in this world. 

Visa Direct has grown into a major global push-payment network (~15 billion annual transactions across 18 billion endpoints). Although not a blockchain, it seeks to replicate the experience for clients. How this plays out over time is yet to be determined, but clearly Visa is being aggressive in its solutions, with the integrity of Visa rails playing a large part in this. 

The below is an AI-generated Comparative Disruption Matrix

There is no doubt that, theoretically, some of these pose a significant risk to Visa's income flows. The outcome, at this stage, and it is early, will depend on how successful the various products and integrations Visa is undergoing to establish different payment methods within the Visa ecosystem. Some of this will rest on how security and trust are valued, whether players are willing to outsource them to Visa, margin and volume trade-offs, and whether Visa offers attractive solutions. 

My base case is that Visa will continue to roll in this new world; there are KPIs to monitor regarding volumes and margins. The value Visa brings is probably not yet efficiently priced in the new environment. 

SUMMARY

Visa is transforming in plain sight. The change is attractive to a more sustainable model as long as the duopoly is successful in keeping the predominant share and healthy margins in the ecosystem. There is no doubt that management is aware and is actively moving to meet the challenge, and progress here has been positive but will have to be closely monitored. 

My base case is MSD/HSD payment volumes continuing, with VAS adding +20% volumes resulting in low double-digit profit growth. The excess cash generation, due to low below-the-line reinvestment, can be applied to share buybacks to enhance eps growth. Assuming 13% eps growth CAGR over 5 years and a 27X exit multiple results in a 10% return CAGR at $411. If PE compression of 15% occurs with the higher current cost of capital, a 10% return is generated at a $350 share price. Valuations do not look stretched around these levels, and a reasonable margin of safety exists not far below current share price levels.

Points to monitor are that the incentive giveback does not undermine positive economics, VAS continues to grow, and that alternative rails do not move outside the duopoly ecosystem in huge quantities. The high-margin cross-border volumes are of particular interest in this regard.